During 2008, the Islamic banking industry had another tumultuous year, lurching forward from 500.5 to 638.3 representing a 27.5% growth across the industry. The market experienced growth across three dimensions:
The essence of this market growth is threefold:
As the markets for Islamic finance continue to mature and the conventional markets continue to experience unprecedented levels of volatility, sharia-compliant institutions are focusing their attention on product development and how to engage greater portions of global populations with Islamic finance.
As Islamic banks change their focus to product development, one fact becomes evident: there is a lack of clarity between product invention, market innovation and implementation. Invention is the creation of a new product or service, whereas innovation is how one applies an invention to customers’ needs. Implementation is how an institution capitalises on an opportunity brought forth by innovation.
Invention and the Product Development Process
Mohammed Reza Meskarian, chief executive of Persia International Bank, has a fundamental observation on the invention of new sharia-based financial instruments: “Needs make the instruments,” he says. As more Muslims and non-Muslims move to use Islamic finance, new instruments and hybrid instruments will continually be invented. In Mr Meskarian’s view, Islamic banks need to adapt to market demands and gradually evolve into service providers and financial facilitators, moving away from deposit-taking and lending.
Market growth from Islamic product invention crosses two dimensions: new products to existing customer markets and new products as an entrée into new geographic markets or targeted new customer segments.
Industry beacon
Humphrey Percy, CEO of the Bank of London and the Middle East, says: “Islamic finance is acting as an industry beacon with growth opportunities in the development of a corporate sukuk market in the UK and Europe and other growth areas in Islamic treasury.”
New products which need new markets and customers provide an avenue for sharia-based products to engage Muslims where Islamic banking is not readily available, by creating an initial relationship with customers. Russia’s Express Bank recently introduced an Islamic bank card, which has met with great popularity in targeted market segments.
Innovation
Innovation is the key to growth in the upcoming years, says Ebrahim Fayez Al Shamsi, CEO of Emirates Islamic Bank.
“Top management must search for a distinguishing feature to place an institution apart from the competition,” he says. In the case of Emirates Islamic Bank, this is an impeccable sharia compliance record, coupled with an ability to seek out and capitalise on market opportunities.
“Relationships are the key to Islamic banking,” says Omar Kalair, president and CEO of Canada’s UM Financial, because innovation centres on connecting invention with educated customers.
Islamic institutions are capitalising on the investments made in developing new products by using trained customer service representatives to educate and inform customers on how to apply sharia-based products to their everyday lives.
“Market differentiation will not be in terms of the product offered or end solution to customers,” says Abdel Hamid Shoman, CEO of Arab Bank, “but it will be more in the terms of the approach followed.”
With Islamic finance focusing on ethical investments, the appeal to global investors is rising as a source of diversifying their portfolios into financial instruments that reflect a higher moral or ethical code.
Innovation is not limited to products, it can also be found in the process of developing new products.
“Having access to a sharia scholar engaged full-time in the product development process shaves weeks off the time to market for new products,” says Ahmed Moola, managing director of South Africa’s ABSA Islamic Bank.
The concept of engaging sharia scholars in all aspects of the product development process is a growing trend among Islamic institutions. David Testa, chief executive of the UK-based Gatehouse Bank, notes: “Having a sharia scholar utilised throughout the development process solves numerous problems, such as the need for sufficient information for sharia scholars to make proper rulings on proposed products.”
Incorporating sharia scholars into a rapid product development cycle solves half of the competitive equation. The other half of competing with the innovation equation is “to establish market differentiation by having highly qualified people with in-depth knowledge of products and service offerings providing customers with applied knowledge”, adds Mr Testa.
A shift to the east
As the epicentre of western capitalism continues to shift from the US toward eastern financial centres, Islamic finance is gaining ground as a viable alternative source of finance to both Muslim and non-Muslim businesses, consumers and governments.
The UK government and other European nations are considering issuing sovereign sukuk. Towards the end of 2007, Standard Chartered Bank, Malaysia and CIMB Investment Bank arranged Tesco Group’s (Malaysia) first sukuk ($210m) and Toyota Motor Corp’s issue of a corporate sukuk ($311m).
What is clear is that Islamic finance is entering a new stage of development as global markets are slowly learning about the application of Islamic finance to local Muslim populations.
“It is a matter of when, not if, a conventional bank sets up an Islamic window in Australia,” says Nail Aykan, of Muslim Community Co-Operative Australia. “As Islamic finance grows in Australia, two trends are predicted to emerge: less of a focus on interest and less of a focus on Muslims,” he adds.
So what is hampering Islamic finance innovation? “The downside of the current state of Islamic finance is that there are few established secondary markets for many of the finance and capital market products,” says Mohamed Hussain, CEO of Ithmaar Banking Group.
He adds that Islamic capital market development will be the next focus for innovation in the upcoming years.
Ironically, perhaps the biggest hurdle for Islamic finance is a lack of awareness in Muslim communities on Islamic financial instruments and how they can be used in the facilitation of Muslim lifestyles.
Nasser Al Shaali, CEO of the United Arab Emirates’ Dubai International Finance Centre Authority, believes that higher degrees of standardisation in products among Islamic financial institutions are needed to address the issues of transparency, governance and other legal weaknesses that are found across nations allowing Islamic finance.
What next?
Therefore, the outlook for Islamic finance, as indicated by this year’s Top 500 Islamic Banks, is continued growth in acquiring new customers and higher volumes. Although the rate of growth maybe difficult to predict when one considers the context of the global crisis, the forecast for the industry is still extraordinarily optimistic.
Industry maturity curve of worldwide Islamic finance
