Sharia success

by ArabianBusiness.com staff writer on Monday, 19 November 2007

According to analyst firm Standard and Poor, Sharia-compliant assets worldwide are worth an estimated US$500bn and have been growing 10% year on year.

There is little or no differentiation in terms of what an Islamic banking product offers versus what a conventional banking product offers.

The firm claims that in the Gulf and Muslim Asian countries, 20% of banking customers would now choose an Islamic financial product over a conventional one and to gain a foothold in the market many conventional banks, including HSBC have launched Islamic versions of their traditional products including Islamic loans and credit cards.

According to banking experts, an increasing number of non-Muslim customers are taking up these products as opposed to conventional offerings.

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Islamic home finance firm Amlak for instance, has on its database of customers, 70% non-Muslims which it believes is down to the way its products are structured compared to conventional mortgage loans.

So what makes Islamic finance products so appealing and what differentiates them from equivalent mainstream products?

Islamic finance: the basics

The main difference between conventional and Islamic products, and the fundamental principle of Islamic banking is the absence of interest. Under Sharia law, interest, whether nominal or excessive, simple or compound, fixed or variable, is forbidden.

Instead of interest a profit rate is charged on loans and a monthly charge is usually applied to credit cards.

Sharia-banking also favours asset-based transactions and prohibits involvement in the financing of activities such as gambling, pornography and the arms trade.

Explaining the principles behind it Dr Taha El Tayeb, head of products development and Sharia documentation at Mashreq, says: "Islamic finance and Sharia law would always recommend people to go for asset-based transactions.

"If you need to buy a car for instance, instead of borrowing money from a bank that bank should take the risk, buy the car and sell it to you at a profit rate."

Experts insist that the end product that an Islamic banking customer receives in terms of a loan, or credit card, is no different to a conventional banking product.

The profit rate on an Islamic loan for instance, will equate to roughly the same as the rate of interest on a conventional loan.

"We have come to a point now where the products and services that are Sharia-compliant are no longer offered at a premium in their structure and in their servicing," says Asif Mumtaz, regional head of HSBC Amanah, HSBC's Islamic banking arm.

"There is little or no differentiation in terms of what an Islamic banking product offers versus what a conventional banking product offers," he goes on to say.

However, it is the ways in which the products are actually structured, and the ethics behind them that make them different.

"The way a product works, the underlying structure, is very different," says Mumtaz.

"It is this that makes a difference, not whether one is cheaper than the other," he adds.

Islamic loans

There are three main Islamic financial instruments, which are used to structure Islamic loans.

Ijara works as a leasing agreement whereby the bank buys an item such as a house or a car for a customer then leases it back to them until they have paid off the full amount and taken over ownership of the item.

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