COMMENT

June 2006
NewHorizon
The rate of growth of Islamic finan­cial products and the instruments for capital investments continues to impress and is set to be even greater. As the banking sector is expanding and with the emergence of Islamic insurance, the Islamic capital mar­kets are developing and strengthen­ing in the global market place. Separate Islamic finance legislation and banking regulations now exist in many countries side-by-side with those for the conventional banking system.

With the revival of Islamic banking and finance the large conventional banks like HSBC have also begun to tap the huge market potential and are increasingly seeking to become global players offering a whole range of new products based on Shariah principles across different countries. To compete with the large conventional banks that are already household names worldwide, the long-term success of Islamic finan­cial institutions will depend on agreeing a collective approach to take up the challenge. A major shortcoming among the Islamic financial institutions is not yet hav­ing a global brand that consumers can readily identify and trust and for this reason the conventional banks have an immediate advantage over the smaller Islamic financial institu­tions operating in their respective regions. For example, the Lloyds TSB Bank with its large branch net­work in the U.K. is able to offer Islamic mortgages (home loans) and have announced recently that it will also offer accounts with no interest or overdraft facilities for British Muslims who want banking services that fit with their faith.

The long-term objective of the Islamic financial services industry must be to create a global Islamic banking system operating success­fully in parallel with the convention­al banking system. The Islamic banking system must also reflect the socio-economic values in Islam and faithfully follow the Shariah princi­ples. All this will require selfless leadership with vision and willing­ness among the smaller Islamic financial institutions to integrate if they wish to become a global player and challenge the conventional banks in the Islamic financial sector. It may also require Islamic financial institutions to consider global alliances with leading conventional banks and balance the need for prof­it with meeting the needs of the cus­tomers. It will certainly also require large investments from the Islamic financial institutions into unbiased education, training and research as well as developing a robust market­ing strategy aimed at encompassing the community as a whole including non-Muslims.

There are enormous benefits to be achieved by building a global brand in Islamic Banking Industry through integration. First and foremost, it will provide recognition to the industry and build trust in the Islamic financial system. it will facilitate the pooling of resources and provide a well structured and coherent marketing and distribution strategies for Islamic banking prod­ucts. There will be fewer barriers to entry into new markets and due to high volume of transactions that will be generated, per unit cost will decrease providing grounds for competing with conventional banks. it will also provide impetus to standarised practices and products, sup­porting the convergence in the Islamic Finance Industry. Currently even major Islamic Banks are restricted to particular region for their operations. Any major change in macro economic environment will have significant impact on their profitability and growth. On the other hand, there are global brands in the conventional sector, which have standarised practices, and operations in almost all countries of the world. This diversification of operations and marketing strategies reduced the risks relating to macro economic environment of a particu­lar region or country, helping these conventional banks to increase return for their shareholders. Diversifying across different regions and markets will certainly provide better return to stakeholders in Islamic Banks as it will reduce risk and synergies will be achieved through joint ventures, mergers and acquisitions.

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