OPINION - Identity banking : a new Islamic paradigm ?

Identity banking : a new Islamic paradigm ?

Source : http://islamicfinancenews.com/

Introduction

Islamic finance is – build upon the Shariah – a viable alternative to conventional finance.

For the individual Muslim, it offers a compliant financial product at a price that is competitive with the products from the regular interest-based deposit banks.  

Islamic banking indeed is not “for free”.  It is a business activity that is supposed to make maximal profits to guarantee its’ own sustainability, be it compliant to the standards as set forth in the Shariah. 

Slogans as “interest free” and the birth of the industry that is associated with low-cost microfinance (Grameen),  combined with the basic tenets of Islam that for instance comprise of  Zakah and Sadaqah sometimes wrongfully give the impression and expectation (followed by disillusion, empty critics and rejection) to outsiders that it should be a charitable activity.  Whilst Islam expressly addresses the needs of the less fortunate in society and Islamic banks have a responsibility in assisting very active in those efforts, their finality per definition is not oriented towards charity, but towards sustainable business and wealth creation.

On the macro-economic level, the product structuring leads to a more sustainable financial model and to a more just economy and society.  Certain excesses of conventional finance simply are non-permissible and excluded.

The financial products that meet the standards of the individual Muslim, however also meet the standards of most human beings.  As Monzer Khaf put it before: “ Islamic finance is not Islamic, it belongs to all of humanity”[i].

Nothing in the structuring of the products that appeals to Muslim customers alienates the potential non-Muslim customer.  Ethical and sustainable finance is in demand, the products are competitive, and Islamic finance is open –both on the deposit as on the borrowing side – to both Muslim and non-Muslim alike and against the same conditions.

There are two important notions in this position:

- at the offer side : the finality of Islamic finance is not to address only the needs of the Islamic community, but to address the needs of the global community

- at the demand side : the products at offer do not only appeal to Muslim, but also appeal to non-Muslim

This  should by necessity lead to an important “AHA-Erlebnis”  that has been experienced by different business models over time.  It may be a very simplistic analogy, but the biggest discovery for the Nike-people was that their sportswear – designed to meet the standards of demanding athletes – did also appeal to university students, housewives etc, and then subsequently targeted that market actively with the known results.

In other words, any businessman in conventional business models that develops a commodity product and does not target the biggest possible audience in the way that is preferred to them (without giving in to his quality standards that made him relevant in the first place), will manage a business that is non-sustainable and that will be out-competed by the market.

The biggest mistake that such brands could have made, would have been to target their seemingly primary clientele only and to not try to “conquer the world”.

This simple truth applies to all contemporary business and Islamic banking does not make an exception.

Islamic bank accounts

People can have different reasons to open a bank account at an Islamic bank, the most important probably being:

1.       To comply with the Shariah

2.       Because it leads to a better economic / financial model and supports ethical values

3.       Because the availability of required products

4.       Because of the pricing of these products

5.       Because of convenience  (close to home, job … internet accessibility … ATM nearby …)

6.        

Whilst an important portion of Muslim do not ask for other reasons than to comply with the Shariah, experience learns that for an important part it will be a beneficial mix of all those reasons.  And there is nothing wrong with that.  The optimal product indeed should be compliant, competitive, address the needs and be easy to obtain.

Abundance of conventional banking alternatives and unfamiliarity with the Islamic product offerings are reasons for the still lower – however rapid growing – penetration of Islamic banks.  And for some Muslim – probably the poorest segment – pricing and convenience are the unlucky criteria.

The first item will probably not convince non-Muslim, but it will be clear that all other reasons are valid to the global community.

Asked about the prospects towards non-Muslim clientele, one however often meets stances of non-interest.  The product offerings are apparently primarily geared towards the community.

Different market compositions create different points of view and different challenges

Islamic banking appears to be a homogenous service when it comes to the potential customers and marketing.  It offers Islamic compliant financial services to a Muslim population.

At least, one gets that impression looking at the overall image of Islamic banking services in the different jurisdictions.

For those living in a Shariah compliant environment, with a 100 % Muslim domestic population, marketing the generic client whilst convincing him that opening an Islamic bank account and targeting him specifically because he is a Muslim, appears to be a no-brainer, certainly when the non-Muslim market is non-existing or at least statistically not relevant.

In other jurisdictions. secular regulations might prohibit the Islamic banks to call themselves that way, to address the public with terns as “Islamic” or “Shariah”, prevent them from having the necessary Shariah Boards and so forth.  They can solicit the market only with financial arguments, product structuring and convenience, next to a more general “this is good for you” feeling.  They however may address a domestic market comprising out nearly exclusively Muslim that – secular or not – are receptive to the implicit ethical offer.  But apparently unconscious, they still target mainly the Muslim population only.  Venturing outside the country, they assist the outbound/incoming business of their existing Muslim clientele and they primarily target Muslim expats and emigrants.

In even other jurisdictions, one sees the same enthusiasm to convince the Muslim community to opt for the compliant product and what looks like a neglect of the rest of the market. Clients can show that they are a good Muslim, by – amongst others – opening a bank account at an Islamic Bank of their choice.  The industry does not exclude non-Muslim individual clients and business, but also does not appear to be targeting them sufficiently.   I f such a client shows up, that is much appreciated, but there is no visible interest to go solicit and convince him or her.  In most emerging markets that have  an economy that has a very important non-Muslim side (Chinese,  foreign multinationals, …) that could be a businesswise wrong stance.  In mature markets that have a dominant non-Muslim population, it definitely is the wrong way to go.  Confronted with questions, the answer often is that this form of identity banking (showing you are a good Muslim by having the good bank account) for the time being works nice.

Internal targeting may lead to internal growth – both in hard cash and in market share - but looses out in the big picture and could lead to alienation and even aggression by the non users.   People indeed usually are learned to be scared of the unknown.  It also leads to a non optimal use and spread of sustainable finance what – next to being compliant – should be universal goal of Islamic finance, as Monzer Khaf rightfully said.  If one believes in the product, one should sell  it to like-minded consumers (easy sales) but also to the market as a whole (more challenging).

Malaysia appears to be able to strike a good balance, given the fact that a large portion of the Islamic banking clients (both individual as business) are non-Muslim.  It suggests a positive dedication to target and convince such clients, without compromising the own internal standards.  Though it is a model to be replicated, it  is by no means a global phenomenon.

Questions have to be asked

Who stands for clear ethical rules and  who has cleansed his life from impure elements, tends to retract within his own boundaries and to seek contact with like-minded people only.  Whilst that might make sense from a spiritual point of view, it probably is (unless one intends to be small and regional only) in the long run a non-sustainable business behavior.

It is highly commendable to bring Islamic compliant financial products and services to the community and one should be clear about the true nature of offering.   This is not only ethical finance, but very specific Islamic compliant finance.   This should however be done in such a way as to also convince the vast majority of global citizens that will be open to the ethical and sustainable aspects thereof or simply by pricing or convenience.

Sustainable  growth indeed does not lie in striving for a 10 % market penetration amongst the Muslim population of say France, the UK or Germany.    The present development of Islamic banking in those jurisdictions underscores this.  It lies in striving for an overall market share across the whole population. 

Once Islamic ethical banking has been established and people are sufficiently aware of its’ foundations, it becomes a commodity  that should compete on the very economic rules and market truths: clearly ethically based business in the purest sense of the word.

Strong internal growth for the Islamic banks (starting from 1 Dinar and growing to 2 Dinar means 100 % …), the present economical boom in countries that host large majorities of Muslim and the enthusiasm to bring good to the community may blind some for the fact that such limited business model in the long run handicaps profoundly in the global world of finance.

One could ask if here only lies a challenge or a mission.   On the table lies a product that could change the world and the way people see finance.  It may be that the responsibility is bigger than imagined at first.

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[i] Monzer Khaf in “Experts pitch for Islamic banking in India” – 04-02-2010 - http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=6785&Cat=0