Better product segmentation and a focus on deeply underbanked markets in the Muslim world is the best way for Islamic banks to continue to expand in the context of a slower global economy.

Investors from Morocco to Malaysia

are changing their risk appetite by focusing on wealth preservation rather than wealth creation. One strategy sharia-compliant investors are employing is to diversify their portfolios with a wide range of investments. During 2009 these investors endeavoured to shift away from traditional asset classes (real estate and equities) towards new products such as sharia-compliant hedge funds and exchange-traded funds.

However, most investors have been experiencing a rising sense of dissatisfaction at the limited number of investment products and asset classes made available to them by sharia-compliant banks. Current market conditions have seen cautious Muslim investors prefer fixed income and cash over equity investments. This evolution in investor attitudes presents a host of new opportunities for sharia-compliant financial services institutions.

Senior management teams in Islamic financial institutions must develop a comprehensive strategic agenda to capitalise on new opportunities as they present themselves. A strategic agenda is a comprehensive framework to engage the organisation toward growth and performance objectives.

A number of opportunities for Islamic banks can be categorised across two clear dimensions: the expansion of the customer base and the diversification of the product portfolio. This is basic banking, but it is easy to forget how complicated it can be to capitalise on either when a crisis is in full swing. Senior managers must devise an approach to engage these opportunities by first assessing their ambitions for the institution - do we want to be big, high quality, a boutique, a universal bank, a family bank or a special purpose institution? With the overall goals in mind, several approaches can be explored using the unique opportunities offered by Islamic banking to customers of all faiths.

Organic growth

Perhaps the easiest approach to put in motion with the least amount of investment is to target organic growth or to increase the number of products used by customers to facilitate their lifestyles (retail banking) or business activities (commercial banking). The cross-sell ratio (not measured in most banks) of product to existing customers is low. Customers are becoming more sophisticated in their need for financial services and, as economies change, they are increasingly comfortable to demand lower cost for banking services while they search for higher returns on their investments.

Customer service levels in many Islamic institutions have mirrored their conventional counterparts as customer service representatives are set to work selling products with limited training on how to be effective bankers. There is a proportional relationship between improvements to service quality and an increase in the cross-sell ratio.

The opportunity for Islamic banks is to better serve the customer while simultaneously reducing all operating costs. The key thing to remember is that it is less costly to retain a customer than to attract a new one, and educating a customer builds profitability and loyalty.

Portfolio expansion

Investors and customers of sharia-compliant financing across the world have expressed their disappointment in the diversity of banking and investment products. Increasing the product portfolio was traditionally an expensive proposition consisting of research and development, product structuring, sharia-board approval, educating the organisation, marketing, branding and final distribution. Islamic financial institutions are learning from their conventional counterparts and experimenting with white-labelling products developed by other institutions and offered to the existing customer base.

There is a growing interest among Islamic banks to package product offerings to specific customer segments by identifying unique lifestyles and life stages. Innovation is needed to expand the portfolio beyond the initial suite of products that have emulated conventional banking services. Product expansion must also include increasing a bank's channel strategy and rethinking distribution by leveraging investments in technology. One strategic advantage Islamic banks have over many of their conventional counterparts is a relative lack of legacy systems onto which new technology must be grafted. The opportunity exists to leapfrog older conventional institutions with a new wave of services that are more tightly coupled to the key drivers of customer satisfaction.

Customer rise

Islamic banks often make insufficient use of customer segmentation to target banking services and achieve market differentiation and a competitive advantage. In many cases, segmentation consists of two economic groupings: premium services for the upper income segment and all the rest of the population. Customers (Muslim and non-Muslim) have diverse lifestyles that change according to life events and at various life stages. All of these customers need banking products and offerings that are not 'one size fits all'.

Customers for Islamic finance specifically can be segmented into nine to 12 distinct lifestyles that present Islamic banks with opportunities to package their products to facilitate the day-to-day transactions as well as long-term financial goals. Strategically gathering, surveying and understanding lifestyle metrics provides a framework for Islamic bankers to target their marketing campaigns more effectively, attract specific types of customers, identify customer behaviours (payments, savings), customer preferences (branch, ATM, mobile, internet) and recognise customer profitability. Perhaps the most important aspect of lifestyle banking is to know what opportunities not to pursue as resources are limited; knowing what customers the bank does not want to attract conserves resources that can be channelled toward increasing profitability per customer.

Thinking smaller

Two key growth opportunities for providers of sharia-compliant financial services are moving down the economic pyramid to engage a wider range of customers, and providing more services to small and medium-sized enterprises (SMEs). Recent studies have revealed that a high percentage of people in the bottom half of local economies develop significant loyalties to an institution, which in turn is reflected in low default rates. Estimates on the percentage of Muslims banked worldwide range from 8% to 17%, conservatively translating to 1.3 billion new customer opportunities.

For SMEs, banks such as Standard Chartered Saadiq (Malaysia) have expanded their offering to include cash management and other working capital needs. Noor Islamic Bank now provides SME profiling and a rating service to assist SMEs in building creditworthiness. Abu Dhabi Islamic Bank offers a wide range of sharia-compliant payment services to SMEs to control expenses and manage working capital more effectively.

Like their conventional counterparts, many Islamic banks have curtailed their expansion plans as they wait to see how the global financial crisis will play out. Islamic banks seeking opportunities are anticipating a change in economic activity by diversifying their customer base across geographic boundaries. Qatar Islamic Bank has developed a global network of partner organisations such as Qinvest, Arab Finance House, Asian Finance Bank and QIB UK (formerly European Finance House) to provide domestic services in multiple countries, as well as transnational services to clients with international needs.

Creating new products for the changing needs of customers is, by default, the establishment of a new market. For example, several banks are realising there is large profit potential in providing financial services specifically designed for women. But perhaps the biggest opportunity for Islamic financial institutions is to help rebuild trust in the world's financial systems by demonstrating how sharia-compliant finance is held to a higher standard that transcends cultural boundaries.

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