By Neil King
Increasing numbers of people are turning to Islamic finance. Tooran Asif of Mashreq Bank, explains how it has grown to become one of the banking world’s most important topics.
Earlier this year Sheikh Mohammed bin Rashid Al Maktoum, the UAE’s vice president and prime minister, and ruler of Dubai, claimed that the country has what it takes to become a world hub for Islamic finance.
Indeed, Dubai has launched a drive to develop its Islamic business sector, while Qatar looks to establish an international Islamic Bank, Oman has raised the operating standards of its own Islamic banking rules, and world renowned Saudi investment firm Kingdom Holding has formed its own sharia board of scholars in a bid to raise more of its funds through Islamic finance.
Islamic banking is on the rise, gaining in popularity among Muslims and non-Muslims at a rapid rate with an Ernst & Young report estimating that Islamic banks now command a 25 percent share of the banking market in the Gulf Cooperation Council (GCC) countries.
But for many people Islamic finance is still a concept which is mired in unfamiliar terms and principles, leading to confusion and hesitancy.
To those without an Islamic or banking education, concepts such as riba, mudarabah and sukuk require a lot of explanation, but more and more people are taking the time to understand their meaning. The same Ernst & Young report projects that by 2015 the MENA Islamic banking industry will be worth US$990bn as the take up of Islamic banking surges, more than double the 2010 figure of US$416bn.
Islamic banking is set up in accordance with the principles of sharia – the moral code and religious law of Islam – and many of its rules have been particularly laid out with business and trade in mind, something which attracts many small and medium sized enterprises.
Tooran Asif, senior vice president, head of personal banking at Mashreq Bank explains the main concepts of Islamic banking.
“The basic principle which differs between Islamic finance and conventional finance is that there’s no element of riba – which is interest.
“The other differing principle is that is that it works on asset backed transactions, and then there are other things related to the element of trade. Some sectors are a definite no-no. There’s also a profit and loss sharing aspect between the two parties as well.”
Mashreq Al Islami, the Islamic banking division of Mashreq, recently underlined its commitment towards its Islamic offering by announcing the launch of Islamic Gold – a new product which offers a full range of retail banking services.
Asif explains the growth in the bank’s services mirrors that of the sector itself, and that people from outside Islam are signing up thanks to the comprehensive range of services now on offer.
“Islamic finance has grown in the past 30 years,” he says.
“Different sorts and groups of people have taken it either on their beliefs or because they find it competitive. We’ve reached a point where it’s not just about the ethical side of things. It’s also competitive in rates, returns, and services. It’s moved beyond what it used to be.
“If you look at Islamic banking ten years back it was all about basic deposit accounts. Now we’re offering everything. It’s well developed now.”
Advocates of Islamic banking cite the notion that the strict structure and rules make it fairer for those who use it as one of the main attractions, particularly the ban on riba.
Riba can be translated as interest, usury, excess, increase or addition, and is seen in Islam as unjust and exploitative.
Other principles which are viewed as beneficial to the individuals and businesses rather than to the bank include mudarabah, which is profit sharing between partners, and musharakah, which is a relationship between two or more parties that divides the profit and loss fairly depending on each party’s contribution.
Another term which has been seen much more frequently in the press in recent months is sukuk – the Islamic equivalent of bonds – which have become more widely used by governments and large companies in the region.
But with so much terminology to get to grips with, how can people be expected to understand exactly what Islamic finance is all about?
Asif says: “We are doing different things to advocate and raise awareness around the products and finances. When we launched Gold we had our scholar explain the terms and principles of Islamic banking at various seminars around the UAE.
“People need to self educate to a degree, but we also need to reach them through different forums. It’s a journey that’s going to continue and we’re all learning and developing along the way.”
The scholar he mentions is one of three sheikhs who are vital to the bank’s Islamic offerings.
The Mashreq Islamic proposition is overseen by a highly qualified and reputed Sharia Supervisory Board comprising off chairman Sheikh Abdulla Suleman Al Manaei, who advises the government of Saudi Arabia, Sheikh Nizam Yaquby, and Sheikh Dr Mohammed Ali El Gari.
For a bank to offer Islamic finance it needs to go through an approval process, which ensures the system adheres to Sharia rules and doesn’t allow banks to take advantage of its customers.
“We need to get Sharia Board approval before we can do anything at all,” says Asif. “With conventional banking it’s the central bank which needs to approve what you’re doing, but with Islamic finance you need both Sharia Board and Central Bank approval.
“It definitely helps that people know where they stand because of the structure. It gives a certain level of comfort. It also means that when it comes to presenting Islamic finance to the customer, it’s not hard to explain things.”
And it’s clear to see that this comfort continues to draw more people to Islamic banking, something which Asif is pleased to see as it is in line with both the bank’s and the UAE government’s future plans.
“Islamic finance is one of the top five strategies for the bank. The Islamic banking product penetration is on the rise, and our own focus on it has multiplied. The growth we’d seen in terms of take up is substantial.
“This will continue to rise and it all ties into what the government wants and what the economy wants. Banks are moving forward very aggressively with it.”
So, what is the next development for Islamic finance?
Asif adds: “The question now is can Islamic finance lead the market? It’s not been able to crack it quite yet. Islamic banks so far have emulated conventional banks, but the next step is finding things that can lead the way.
“Some of the things we’re doing is looking at an Islamic credit card, and introducing Islamic Salaam points – a rewards points system. We need to look at the unique things that conventional banking can follow.
“Islamic finance will definitely grow. Not just here but in other parst of the world too, although regulations will need to support it. If the regulator does not give approval then you can’t practice, and then you also have to see whether the customer interest is there.
“Some markets will have to go through an evolution, but Islamic finance will definitely grow”.
- Money is a commodity besides being medium of exchange and s store of value. Therefore, it can be sold at a price higher than its face value and it can also be rented out.
- Time value is the basis for charging interest on capital.
- Interest is charged even if the organisation suffers losses by using bank’s funds. Therefore, it is not based on profit and loss sharing.
- While disbursing cash finance, running finance or working capital finance, no agreement for exchange of goods and services is made.
- All sorts of economic sectors can be financed.
- The savings accounts operate on a pure interest model.
- The compounding interest principles are common across various transactions.
- The penal fees, late payment fee are taken into bank’s income.
- Money is not a commodity though it is used as a medium of exchange and store of value. Therefore, it cannot be sold at a price higher than its face value or rented out.
- Profit on trade of goods or charging on providing service is the basis for earning profit.
- Islamic bank operates on the basis of profit and loss sharing. If the businessman has suffered losses, the bank will share these losses based on the mode of finance used (Musharakah).
- The execution of agreements for the exchange of goods and services is a must, while disbursing funds under Murabaha, Salam contracts (commodity/metal trading).
- Islamic Finance doesn’t allow financing or engagement of certain sectors which are prohibited such as liquor, tobacco, gambling.
- The savings accounts are on a Mudaraba model where bank is the Mudarib and Customer is the Rab-bul-Maal and Bank and customers share profits in a pre-agreed ratio, banks are liable to disclose the ratios and the weightages used to declare profits.
- It works on a flat profit rate basis. Compounding of interest is strictly prohibited and no compounding is allowed.
- Though Sharia Boards have allowed charging the penal fee should there be a delay is payment commitments, Islamic Banks are not allowed to take those into their incomes and such income is payable to charity.
Dear Mr. Tooran,
Indeed an excellent article and very informative. Thank you.
Islamic banking is also growing in Pakistan with very fast pace. 1st complete sharia based bank was launched 2004 within just 9 years Islamic banking now covering 10 % of market in the country as compared to conventional banking.