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Guest Comment: The Next Big Step For Islamic Banking
Fifteen years ago, Muslims wishing to take out a home loan,
use a credit
card or deposit money into a current account would have been
hard pushed to do
so and stay compliant with Shariah law. Today, in many
markets, such
compromise is no longer necessary. Wasim
Saifi, global head, consumer banking at Standard Chartered
Saadiq, talks about
the development of the sector.
Islamic banking is
becoming a part of the mainstream, widely available across
financial products
and geographies. In 2012, Islamic banking assets are expected
to reach $1.1
trillion globally, up 33 per cent on 2010, according to Ernst &
Young.
Within just a few years, Islamic banking has transformed into a
global
industry.
There are three
major drivers behind this extraordinary journey.
First, increased
competition has resulted in a widening of the Islamic product
offering,
bringing it within scope for larger numbers of Muslims. In the
early 2000s, a
move by Islamic banks to make Shariah-compliant products more
commercially
compelling was a real game changer in the industry. For the
first time, Islamic
Banks were reaching customers for whom the commercial aspects
of banking were
just as important as Shariah compliance. Conventional banks,
keen to retain their
Muslim customers and make the most of the Islamic opportunity,
have
subsequently joined the fray, helping to grow the total market
around the
world.
Second, as the
Islamic banking proposition has become more attractive, Muslims
have converted
from conventional banking at a pace, spurring the industry to
make the product
offering even more sophisticated. Muslims who have been
accustomed to using
credit cards, for example, will not want to lose this benefit
when switching to
Islamic banking. Whether in terms of access, technology,
products or services,
they expect nothing less than they have been getting from
conventional banks,
and Islamic banks are responding. Muslims now have a choice: to
bank in a
Shariah-compliant way, they no longer need to sacrifice the
convenience,
products and services they have been used to in the past.
Third, the industry
is receiving increasing regulatory support with governments in
many markets
actively encouraging the development of a healthy Islamic
banking ecosystem. In
the UAE, all new banking licences granted in the last 15 years
have been for
Islamic banks. Countries such as Oman, Uganda and Nigeria are
opening up their
markets. Issuance of Sukuk, or Islamic bonds, has become
widespread, and
Islamic finance is used increasingly for government support
programmes. In
Bahrain for example, Standard Chartered Saadiq now works with
independent
employment authority Tamkeen to provide Shariah-compliant
financing for small
and medium-sized enterprises.
Islamic banking market – shows what can be achieved. Here, concerted government
action has pushed Islamic banking past the tipping point to represent around a
quarter of total banking assets.
The next big step
for the global Islamic banking industry will be to close the
remaining gap with
conventional banking when it comes to the range of products and
services on
offer. Islamic wealth management, for example, is clearly lagging
behind, with
Shariah-compliant funds comprising less than 0.25 per cent of
total assets
under management. It is a classic chicken and egg story. To
attract wealthy
Muslim clients, you need a competitive range of products and
services, but to
get this, you need scale. However, with the strong growth in
Islamic assets and
Islamic banking providers putting increased pressure on fund
managers to
respond, there is a good chance Islamic wealth management will
catch on within the
next few years.
For all the industry’s
recent growth, Islamic banking still represents a fraction of
total banking
assets globally, and the vast majority of Muslims still bank
conventionally.
Penetration remains low in some of the world’s largest Muslim
countries, such
as Pakistan and Indonesia at 9 and 4 per cent respectively. There
are several
reasons for this, the most obvious being a simple lack of
awareness of what
Shariah banking has to offer.
Regulatory barriers
also persist in many countries. While different markets will
develop at
different speeds, support from governments and regulators will
help keep up the
pace of change. Opening markets to international Islamic banks
will help, too.
International providers tend to accelerate development in
individual markets
with their ability to migrate best practice, product
sophistication and banking
expertise between geographies. At Standard Chartered, for
example, we work with
regulators in a number of countries to help develop their
framework for Islamic
banking, using our experience from other markets.
Clearly, by tapping
into their global networks, international Islamic banks also play
a role in
facilitating cross-border banking for Islamic customers. This is
essential if
the industry is to attract more fast-growing SME customers as
well as high
net-worth individuals who wish to stay Shariah-compliant without
missing out on
growth opportunities in foreign markets.
The purpose of all
banking, Islamic or conventional, is to help people to reach
their aspirations.
It is about connecting with customers and meeting their financial
needs in a
way that fits with how they live their lives. In the last few
years, Islamic
banking has caught up fast to meet this core requirement.
It is still very early days for Shariah banking, but one
thing is clear: with around 1.6 billion Muslims in the world, the
upside for
Islamic banking is huge, and the best is yet to come.
