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sector report
Retail banking & Islamic finance
Islamic banking has been growing for the past 30 years, reaching over
US$1 trillion as an industry, and achieving an annual growth of 10-15%,
despite a distressed global economy.
With approximately 70% of the Muslim population currently
away from mainstream financial activity, there is a chance
for financial institutions to enter into Islamic banking and
bridge the gap.
Growth in banking services and products leads to development
of other financial industries like insurance, capital markets and
stockbroking. Islamic banking has increased its presence but still
has to increase penetration not only amongst Muslims but also
non-Muslims seeking ethical financial services and products.
Islamic banking can be utilized to cater to the unbanked members
of society globally and provide a platform for companies offering
Takaful, Shariah compliant mutual funds etc.
The rapid expansion of Islamic banks in recent years has
demonstrated the viability and feasibility of non-interest-based
financial operations. This must be surprising to those who
believed that banks and financial systems could not operate in a
modern economy without interest-bearing financial instruments.
2012 saw many Muslim countries taking steps towards the
establishment of the Islamic banking and finance industry.
However, it is unfortunate that even in OIC member countries
the infrastructure for Islamic finance is abysmally low. The global
economic crisis also provided a growth opportunity for Islamic
banking to grow and maximize its reach for people seeking
alternatives to conventional finance.
2012: A review
Despite all the growth in the Islamic banking industry, its
geographical reach is limited to a few predominantly Muslim
countries. The year 2012 saw increased interest in socially
responsible financial institutions, resulting in increased interest
in Islamic banking.
Islamic retail banking reached some new geographical locations
spreading the reach of Islamic finance industry. There was a
serious move towards standardization of various rules and
regulations across the Islamic finance industry, which helped in
furthering the reach to the customers as one alternative solution.
A standardization effort from regulatory bodies is a major step
which has helped in the consolidation and growth of the industry.
The global economic turmoil has led to the growth of Islamic
retail banking as an alternative customer-centric approach, which
encourages banks and financial institutions to make profits in a
socially responsible manner. The retail Islamic banking approach
of being customer-centric along with high liquidity in these banks
makes them more safe - even above the global standards set for
conventional banks.
The sector saw some operational challenges being overcome in
2012, setting the stage for future expansion across territories.
Retail Islamic banking concentration in MENA and Malaysia
increased and this will help in developing Islamic banking in
other non-Muslim territories. Retail banking across the globe
is undergoing change; with customer interests, protection and
growth of customer money being the main focus for all the
banks. The year also saw Islamic banks utilizing IT solutions
to increase efficiency and reach for its customers with 24/7
banking order of the day. One more aspect that drew attention
during 2012 was a non-availability of trained and well-qualified
manpower for the growing Islamic retail banking industry.
Despite the global economic turmoil, the Islamic finance rndustry
and in particular Retail Islamic banking achieved growth and
moved towards standardizing processes and procedures,
thus reducing the confusion which plagues customers about
the various interpretations of the provisions of Shariah law in
Islamic finance.
2013: A preview
Islamic retail banking will have to play a crucial role in the
development of the global Islamic finance industry as this will help
the growth of other arms of Islamic finance. All the growth numbers
have not been able to develop a very large Islamic retail bank which
can help in mediating between financial resources globally and
channelizing them in Muslim countries and vice-versa.
The growth of the retail banking industry will depend on its
adoption of technology, and it must offer more internet and
mobile banking services to its customers. In recent times we
have seen the emergence of online banks offering services to
their customers through internet and mobile only with very little
branch level services. The adoption of this model by Islamic
banks will help reduce capital expenditure while growing the
banking network.
The growth of Islamic retail banking will also depend on the
quality of value-added services banks provide to their customers.
The products also need to be designed and marketed not only to
Muslims but also to other community members to ensure Islamic
banking reach is increased.
The human resource shortage for Islamic banks will also need
to be addressed and regulators need to ensure that quality
institutions are allowed to impart training and education on
Islamic finance.
Above all the legal framework required in each country to
facilitate the growth of Islamic banking must be in place and
act as a facilitator. The regulators of established Islamic finance
markets can share their expertise with regulators of new markets
to ensure standardized products and services are available.
The most important issues that will attract attention are resolving
Fiqh issues, establishing a legal framework in each country
for better legal infrastructure, investment in training human
resources to reduce the shortage of trained personnel and above
all the adoption of technology to grow and provide better services
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Ali M Shervani is the country head at Fin8. He can be contacted
at ali.shervani@fin8.com.
February 2013 11