A Growing Challenge for Islamic Banking Industry
Islamic banking has recently attracted significant attention from the public as it has grown much faster than the conventional banking sector. Many global companies, including McDonald's and Tesco, financed some of their operations through Islamic finance. Moreover, UK Prime Minister David Cameron recently announced that Britain wants to position itself as an Islamic finance hub. One of the reasons behind this strong growth has been that the usefulness of the Islamic capital markets has been increasingly recognized during and after the financial crisis. Islamic financial institutions, whose transactions must be supported by tangible assets, have managed to weather the financial crisis rather well than their conventional counterparts in the developed world that suffered from their exposures to more opaque securities.
Despite the positive signs, there is a growing sense of frustration felt across the industry as the Islamic finance moves on from the nascent stage. Although the industry has grown rapidly over the years, the development has rather focused on the Middle East and North Africa region. As of 2012, almost 80% of the global Shariah-compliant assets have been invested in the MENA region and half of the investments took place in the GCC countries. As shown in the recent study by Deloitte, this indicates that the development of Islamic finance in general has been significantly correlated with the general state and stage of development of the financial sector in the region. This mean that except for the large public, energy sector and real estate markets, there has been not enough room for Islamic financial institutions to play a role. This is largely because the Islamic financial industry has followed the general economic trends in the region. Apart from its compliance with the Shariah law, there is little difference between the Islamic financial products and conventional ones. Most of the products offered by the Islamic financial institutions have resembled what the conventional financial services providers have.
The competitive landscape for the Islamic finance industry will only get tougher. We have seen that the financial services sector in these regions are allowed to introduce more sophisticated financial products as the legal framework has been increasingly improved to promote investment and economic development. For example, the GCC private equity industry has now grown to providing institutional platforms financing high profile investments from only a few small to midsize outlets in the early 2000s. Such trends are expected to continue as the GCC capital markets will cover more industry sectors and asset classes. In this circumstance, not only will clients with Islamic financial institutions ask for Shariah compliant financial products and services that does what conventional financial produces do, they will also increasingly expect that Islamic financial institutions help them facilitate their lifestyle by providing uniquely Islamic products and services.
In order to really compete with the conventional financial services providers and develop a sustainable business model, the Islamic financial institutions should be able to move beyond the current stage of copying the conventional products and services. They need to understand what their customers want. They also need to have adequate skills and capabilities to develop products and services that address what customers need.