Islamic Finance At A Crossroads
Monday, May 17, 2010

The Islamic banking industry has a lot of catching up to do if it is to compete with the conventional finance industry, according to one prominent banker.

Harris Irfan, the head of Islamic finance products at Barclays Capital and Barclays Wealth in Dubai suggested in a recent interview with Bloomerg that Islamic banking is in fact in the "stone ages" and has a lot more evolving to do if the full potential of the industry is to be realized.

“A Shariah-compliant customer only gets a fraction of what a conventional customer has access to,” Irfan told Bloomberg. “We’re almost at that stone age phase of sticking your money under the mattress.”

While the Islamic finance industry has undoubtedly progressed in leaps and bounds over the last decade or so, Irfan said that in terms of serving the average saver or investor, the industry offers little beyond simple savings products, loans and debit card facilities.

According to Moody's Investors Service, the Islamic finance industry's total assets scaled new heights in 2009, rising to just under USD1 trillion despite the gloomy economic landscape. However, the ratings agency urged the industry to continue to innovate, if Islamic finance is to really thrive.

Moody's estimates that the market's potential is worth at least USD5 trillion and the industry is continuing to expand globally. But a lack of sophistication in the industry so far, such as in the development of hedging products and mechanisms, may hold back future growth.

Islamic investors must abide by Shari'ah laws, under which 'unethical' investments, such as in companies involved in alcohol, tobacco, gambling or weapons for example, are banned. Interest is also forbidden under Islamic strictures, meaning that many common conventional finance products such as mortgages are off limits to Islamic investors, although the industry has devised some innovative schemes to get around this problem.

But while many western governments have introduced new laws so that Islamic finance transactions aren't unfairly penalized in the area of tax and regulation, it seems that a lack of standardization around the world is masking the industry's true potential.

For one thing, the validity of many Islamic finance transactions are open to interpretation, and financial institutions look to guidelines set by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) for guidance. Nonetheless, there is no definitive and binding set of rules saying that banks must stick to these rulings.

One Middle Eastern banker told Reuters recently that there was "real concern" among the conventional banks over the absence of an authoritative centralized body to frame rules. "Islamic finance was originally about establishing an Islamic economy but we don't even have synergy between banks in Malaysia and the GCC (Gulf Cooperation Council)," he told the news agency.

Afaq Khan, chief executive of Dubai-based Standard Chartered Saadiq, countered in the same report, however, that of the 6,500 rulings, or fatwas, already issued by Islamic scholars, there is a consensus on the overwhelming majority.

"The 5 per cent where the difference lies gives us hope that there will be more innovation," he said. "That 5 per cent is very important for change and evolution in the industry."