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Survey of Global Islamic Finance

By: VRL
Published: September 2009

Survey of Global Islamic Finance

Although the Shar'iah-compliant retail financial services industry is still in the early stages of development in many markets, there are some lessons and best practice issues emerging in the industry

This report looks at the likely trends within this market and assesses the future potential for growth in mortgage finance, credit cards and wealth management. 

 

 

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Success in Shar'iah-compliant financial services 

The expansion of the Shar'iah-compliant financial services industry has been largely due to the growth in its consumer finance and retail banking products

One of the major requirements for a player to succeed in the Shar'iah-compliant financial services industry is to gain a thorough understanding of the concepts underpinning these activities.  

Furthermore, there has to be a long-term commitment to the industry.

The knowledge of Shar'iah requirements as well as the unique features and attributes of Shar'iah-compliant products needs to be disseminated to all staff members and departments dealing with those products. Previously marketing these products fail to understand and communicate the benefits to the customer. This can create major doubts in the mind of the customer on the desirability of Shar'iah-compliant products. 

Any conventional financial services player exploring the possibility of offering Shar'iah-compliant products also needs to be aware of the cannibalisation issue, whereby sales of Shar'iah-compliant products potentially substitute for sales of conventional products, rather than increasing the sales base overall. This could result in internal conflict as well less than optimum performance of Shar'iah-compliant business, as it competes against conventional products. 

Future prospects 

Currently, Shar'iah-compliant financial services activities are dominated by the GCC countries and Malaysia. However there remains huge potential for substantial long-term growth in Islamic financial services in markets including: Indonesia, Pakistan and the UK. 

Highlights: 

Growth in Islamic Banking

Success in Shar'iah-compliant financial services

Future prospects

    - Key considerations in Shar'iah-compliant financial services

    - Approaches towards Shar'iah compliance in Southeast Asia and the Middle East

    - Corporate structures in Islamic banking and finance

    - Growth drivers in the Islamic consumer finance and retail banking industry

    - Shar'iah-compliant retail finance products

Case studies include: Bank Aljazira, Bank Islam Malaysia, Bank Niaga, Dubai Islamic Bank, Julius Baer, LaRiba, RHB Islamic Bank and Takaful Tawuni 

Islamic banking and finance typically refers to those financial activities compliant with the rules of Islamic law.

In Shar'iah, all business activities are allowed except those which are expressly prohibited. The four major sources of Shariah are:

 Quran (Holy Book);

-  Sunnah (traditions and instructions of Prophet Mohammad)

-  Ijmah (consensus opinion of majority of Islamic Shar'iah scholars); and

-  Qiyas (individual opinion of Shar'iah scholars in the absence of consensus). These broadly prohibit four types of business activities:

The presence  of  illegal activities (such  as  trade  in  pork,  gambling, intoxicants,  and pornography);

- The earning and paying of interest (Riba);

- The presence of Gharar (uncertainty) in any transaction;

- The presence of Maisar (speculation) in any transaction.

To comply with these rules and offer modern financial products, independent institutions, subsidiary companies or separate business divisions have been established by financial services companies. These entities ensure Shariah compliance by appointing boards of independent (Islamic) Shariah scholars, which review and approve the various products, operations and services provided. Shariah-compliant financial services businesses offer modern financial products to clients by constructing transaction structures that comply with Shariah rules and can be closely identified with conventional banking and finance products.

Growth in Islamic Banking

Islamic banking has witnessed significant growth since they were formally launched and has since been boosted by the repatriation of Middle Eastern funds and economic development in that region. Given the favourable demographic trends within core markets, growth is set to continue. In addition, major international financial services firms have launched Shariah-compliant businesses; The UK, US and Singapore all witnessed the establishment of independent Shariah-compliant financial institutions; and regulators of major Islamic banking markets agreed on regulatory standards governing Islamic banking activities.

As the re-structuring of the global financial services continues,  and  previously well established financial players attempt to re-position themselves with core audiences, many are arguing that Islamic banking practices have shielded institutions and their customers from the consequences of the credit crunch. As a result, shariah models have gained favour with non Muslim customers looking for an alternative financial model with a prominent moral foundation. At the same time industry observers feel that the continued expansion of product lines, has the potential to blur the lines between Islamic and other ‘more mainstream’ types of finance.

The expansion of the Shariah-compliant financial services industry has been largely due to the growth in its consumer finance and retail banking products. This result looks at the likely trends within this market and assesses the future potential for growth in areas:

  - Mortgage finance

   - Credit cards

   - Wealth management

Success in Shariah-compliant financial services

Although the Shariah-compliant retail financial services industry is still in the early stages of development in many markets, there are some lessons and best practice issues emerging in the industry. One of the major requirements for a player to succeed in the Shariah-compliant financial services industry is to gain a thorough understanding of the concepts underpinning these activities. Furthermore, there has to be a long-term commitment to the industry.

The knowledge of Shariah requirements as well as the unique features and attributes of Shariah-compliant products needs to be disseminated to all staff members and departments dealing with those products. Previously marketing these products fail to understand and communicate the benefits to the customer. This can create major doubts in the mind of the customer on the desirability of Shariah-compliant products.

Any conventional financial services player exploring the possibility of offering Shariah- compliant products also needs to be aware of the cannibalisation issue, whereby sales of Shariah-compliant products potentially substitute for sales of conventional products, rather than increasing the sales base overall. This could result in internal conflict as well less than optimum performance of Shariah-compliant business, as it competes against conventional products.

Future prospects

Currently, Shariah-compliant financial services activities are dominated by the GCC countries and Malaysia. However there remains huge potential for substantial long-term growth in Islamic financial services in markets including: Indonesia, Pakistan and the UK.

 

Chapter 1 Introduction to Islamic retail banking and consumer finance

Chapter 2 Shariah-compliant retail finance products

Chapter 3 Islamic motor financing

Chapter 4 Islamic credit cards

Chapter 5 Shariah-compliant insurance products

Chapter 6 Key considerations in Islamic financial services

Chapter 7 Case studies

Chapter 8 Wealth Management: Islamic Market

Chapter 9 The Indonesian wealth market

Chapter 10 Malaysia

View full Summary Report

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Retail Banking Products:

Publications:

Retail Banker International
Banking and Payments Asia

Conferences:

Retail Banking and Cards Forum, September 2010, Bahrain (TBC)  
Retail Banking/Payments Innovation, Kuala Lumpur, 11-12 May 2010

Roundtables:

Retail Banking/Payments Asia Roundtable, detailed subject matter TBC, Hosted by Titien Ahmad, VRL Asia-Pacific, and Hugh Fasken, Editor, Retail Banker International, August 2010

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