COMMENT

September 2006
NewHorizon
Today more than 250 Islamic Financial Institutions (IFFs) are operating all over the world, manag­ing funds of over 300 billion US dollars. The concept of Islamic financial system is fully understood worldwide. Its parameters are no longer in doubt though, there are some fundamental issues that still need to be addressed and would pro­vide greater clarity before it can stand alongside with well-estab­lished conventional financial struc­tures and claim to have become part of the mainstream financial system. Until recent times, there was greater emphasis on institutional banking and on investing their surplus funds. Now far bigger and profitable opportunities are emerging in the consumer market where IFI's have to play a significant role and have yet to meet the needs of the ordinary Muslim and non-Muslim customers. This is just a tip of the iceberg.

While Islamic banking is the fastest growing financial markets segment, competition is becoming increasing­ly fierce in this sector. Today, IFI’s face a variety of challenges, includ­ing the need of becoming customer driven through competitive Shariah­ compliant products and services. With conventional banks in the west opening Islamic windows to retain their Muslim customers, the estab­lishment of the first Islamic retail bank, Islamic Bank of Britain, in Europe and the conversion of entire retail banking functions to Islamic retail banking alternatives in the Middle East, Far East and Asia, Islamic retail products are increas­ingly moving to the mainstream, providing greater customer choice from consumer loans to even credit cards as well as attracting deposits of individual clients Offerings of Islamic mortgages, savings, insur­ance and retail investment products are now part of a global expansion of the financial industry, which is increasingly competitive with con­ventional financial products.

With all these market dynamics, competition in the retail and con­sumer finance services market is toughening up, even though the cake is getting bigger all the time as, given the geopolitical realities, more and more Muslims feel the desire to also apply their religious code in their financial affairs. The emer­gence of foreign competition in the Islamic financial sector in some jurisdictions will have both a bene­ficial effect and a possible dampen­er in the domestic level, where large conventional banks are already well entrenched.

Local Islamic banks will be forced to refine and improve their services and products - in pricing, flexibility, delivery, and after-sales services - to meet the standards especially of the banking majors such as HSBC and others. Over time the consolidation of the sector may force the smaller banks to consider mergers and strategic alliances to form a number of large “anchor” banks, as in Malaysia, to withstand competition from global majors.

For the long haul, many manage­ment concepts in the Islamic finan­cial institutions will have to be re­examined to encourage the services to be customer-oriented. Organisational success in future will need focusing all strategies, decisions, collective energy and activity on maximising customers' benefit. The marketing processes will also have to be a rigorous process to understand customers needs, struc­turing products and offering servic­es to meet these needs effectively. Marketing plays an important role in service industries, including bank­ing services, because it is extremely important for a financial institution to know what, when and how to do its operations, provide customers with quality products and services and to know how its customers per­ceive those products and services.

Thus, an excellent marketing pro­gram is not an optional strategy for an Islamic financial institution to be adopted, but an essential to its cor­porate profitability and survival. Therefore, Islamic financial institu­tions should encourage more research and development and invest heavily in these programmes. They must be able to compete with the highly sophisticated convention­al banks, who have spent time and money in developing modem instru­ments in response to customer needs.

Islamic insurance ("takaful") is set to also increase dramatically over the next few years; the global “takaful” market is projected to grow at 15 percent annually. The lesson that Islamic financial institutions can learn from their conventional count­er parts is that the sale of retail banking products can be boosted by offering Islamic insurance side by side. This strategy, known as Bancassurance, has already proved to be very successful in Malaysia.

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