Going against convention

While the reputation of conventional banking has taken a nosedive in recent years, Islamic finance has been gaining popularity. We celebrate the outstanding performers across the industry in the World Finance Islamic Finance Awards 2015


Just over a decade ago, most people would have given a perplexed look if the phrase Islamic banking was uttered, but in a relatively short space of time proponents of this unique form of finance have forced the world to take notice. One of the key components that has led to a rise in global recognition of the sharia-compliant form of finance is due to the remarkable levels of growth that the sector has generated, with the global consultancy and accounting firm, Ernst and Young calculating that Islamic banking assets with commercial banks would exceed $778bn by the end of 2014, and that the global profit pool of Islamic banks is set to triple over the next four years. Much of this impressive growth emanates from seven rapid-growth markets (RGMs) – Bahrain, Indonesia, Malaysia, Saudi Arabia, Turkey, UAE and Qatar – which will no doubt continue to be crucial players in increasing the internationalisation of Islamic banking in the coming years.

But probably one of the most obvious indicators of Islamic banking’s proliferation into international markets has to be its rebranding. Financial institutions that adhere to the practices laid out in accordance with sharia law are now more commonly referred to as engaging in what is known as participation banking – most likely to take the emphasis off the religious element and helping to attract a wider audience. Those less familiar with participation banking may also have misconceptions about the composition of its members. For example, you would be wrong in thinking that the majority of those subscribers to Islamic banking do so for strictly religious motives. In fact, in Saudi Arabia, a country with a particularly high Muslim population, the total assets of Islamic banks represent just 48.9 percent of the overall market. What are of greater importance to consumers are the products and services on offer.

Sukuk’s success
One of the biggest success stories of the last decade for Islamic finance has been the substantial growth it has seen in the sukuk market (the Islamic equivalent of bonds). Rating agency Moody’s contended that the strong growth in the sovereign sukuk market that was seen in 2014 should be sustained into the next, as a result of Islamic and non-Islamic governments eager to make the most out of the high levels of demand for the sharia-compliant financial assets. Such sentiments are likely to help drive the market further, by increasing investor confidence that will no doubt bring increased volumes and, therefore, greater liquidity.

Increased global acceptance of Islamic financial products is crucial if it wishes to maintain its impressive growth figures. But that should not be a problem, at least that is the opinion of Khalid Howladar, Moody’s Global Head for Islamic finance who saw 2014 as a “landmark year” for the soverign sukuk and Islamic finance in general. His sentiments came in a year where the UK became one of the first non-Islamic countries to issue sharia-compliant bonds. Britain’s endorsement of Islamic financial products helped in attracting a lot of interest from global investors from other non-Islamic states and brought orders of over $3bn in sukuk bonds. Hong Kong and South Africa also concluded sales of sharia-compliant bonds in the same year. “All three are major non-Islamic countries, and the transactions indicate a significant change in the potential size, depth and liquidity of this market”, said Howladar.

Moody’s predicts that we will see many more new Islamic and non-Islamic sovereign issuers begin to enter into the sukuk market in 2015. Since 2001, 16 governments have issued sukuk instruments, a trend that is set to continue, with Luxembourg, Morocco, Tunisia, Egypt, Jordan, Oman, Bangladesh and Kenya all making their intentions known to begin issuing sukuk bonds in the short term and medium term. Australia, the Philippines, Russia, Azerbaijan, and South Korea have also shown considerable interest in the sector too, which will provide growth for the industry in years to come.

New initiatives
A key development in conventional banking in recent history has been the implementation of new digital technologies, particularly the increased sophistication of online banking. Participation banking is no different. In order to engage with a wider range of potential customers and keep pace with its competitors engaged in traditional banking practices, many institutions have focused towards a technology based, service-driven value propositions. This digital transformation within participation banks is aimed at tackling a larger trend within the banking sector: the shift from cash to digital payment economies. Presently, there is a drive by Islamic banks to expand their range of digital products, with the intention of improving their customers over experience, as well as hopefully having the added benefit of coaxing new customers looking for an alternative to orthodox institutions.

Social media is another avenue that has been employed by institutions engaged in Islamic finance, as it is a great way to communicate with customers, both prospective and existing. Social media analytics have proven extremely useful for leading banks in the industry, acting as an effective method for identifying client expectations, levels of satisfaction with the products on offer, as well as assisting participation banks in fine-tuning the experience in order to better accommodate customers’ needs.

Capitalism’s saviour
Since the financial crisis, conventional banking has seen its public image take a nosedive. Many consumers have lost faith in traditional banking, a sentiment that has been exacerbated by those institutions seemingly unable to stay out of the press, with many of the biggest conventional banks receiving record fines for the part they played in fixing foreign exchange markets.

Unsurprisingly, it has many people questioning if there is any room for morality in a sector seemingly obsessed purely with profits. But where conventional banks have made mistakes, participation banks have the opportunity to prosper. Interest-free banking that ensures bank loans are limited to the financing of physical assets, which offer a safer alternative should buyers default, as well as Islamic finance’s prohibition of speculative investment, offer a breath of fresh air for consumers who have grown tired of traditional banking practices.

There has never been a better time for an alternative to the economic model and business practices of conventional banks. Consumers are looking for institutions that promote a more ethical version of capitalism and Islamic finance could be the answer to banking’s current PR nightmare. Increased international issuance is only going to help attract larger numbers of global investors to the Islamic brand of finance and assist in deepening this relatively new sector. As more and more investors become comfortable with sharia-compliant products, spurred on by non-Islamic governments’ acceptance, it will improve overall liquidity, assisting in making Islamic finance a viable contender for conventional banking.