Islamic banking . We continue with our series on islamic banking in association with Acerfi and Aidimm, in order to clear common misconceptions. Today, Anass Patel, the president of Aidimm is going to clear the misconception that islamic banking isn’t meant for regular people.
Misconception Number Three
Islamic Banking is Only Meant for the Wealthy and Wholesale Market
That’s untrue. French islamic banking is first and foremost known for the tremendous amount of funds coming from Gulf countries. The figures show the power and growth potential of petrodollar. Experts say world islamic banking represents $840 billion and grows by 15% each year.
It could reach $1.000 billion in 2010, and much higher figures, experts say. But what exactly are those funds composed of and what are islamic banks’ practices (may their clients be individuals or institutions)?
Statistics clearly state: more than half of this market is held by commercial banks, which shows the important role played by islamic banks as financial intermediates. The rest of the market is owned by pure merchant banks – which offer private equity or real estate funds –, islamic windows of conventional international banks and islamic products such as takaful (insurance) and sukuk (islamic bonds).
Retail banking, a driver for the wave of development
Moreover, the countries with important islamic banking assets are for the most part countries where the islamic banking system is very much developed. This shows that it is the retail market which allows the islamic bank to settle better. The history of development of islamic banking also shows that one of this industry’s growth factors in the 80s was the significant increase of mainstream clients.
In fact, the islamic bank model has managed to convince individuals to whom it offers specific services for deposits (qard hassan or wadî’ah), as well as investment accounts (PSIA, Profit Sharing Investment Account). But if Islamic banking is not reserved for the wholesale market (investments, big companies, big infrastructure projects), how come from the six islamic banking institutions approved in the UK, four are islamic merchant banks, positioned on the institutional market?
The British Model to be Improved
The British market kind of gave birth to European islamic banking. The first British islamic bank was created in 2004, whose initial capitals were brought by Gulf investors, but then opened itself up to anyone on London Stock Exchange.
The Islamic Bank of Britain (IBB, now Al Rayan Bank) – which positioned itself as a retail bank from the start – is standing out in this international investment market, looking for merchant bank products which are easier to structure and generate more profit in a short amount of time. In fact, all other islamic merchant banks in Great Britain are dedicated to their Gulf business clients, big investors from Qatar, Bahrain or Kuwait, in order to help them direct their investments in Europe, and from the London Stock Exchange, which corresponds more to the way they work.
Today, the IBB model is experiencing a comeback, in a depressed banking system where banks are mistrusted. Clients – not only Muslim clients – would rather have their account in banks with simple and clear products, which are not over-priced and have ethic principles that protect them from any toxic product.
Commercial Banks… For All
The authentic islamic banks isn’t meant just for wealthy clients. It’s just a matter of positioning strategy and marketing policy. The islamic bank, as stated in previous articles, operates in order to make profits.
But not only that, it also has a social goal behind, which is promoting ethics of social responsibility for charity, through shareholder advocacy and redistribution policy for zakah (purifying taxation of wealth and a pillar of Islam).
Other than predominantly Muslim countries, we can say that islamic banks are having a hard time entering the mass market, because existing conventional banks were already present and the cost for developing a sufficient network in order to cover the wide range of these new clients is quite important.
In a nutshell, the islamic bank isn’t exclusively meant for institutional and wealthy clients, however, its model of development yet has to be improved in non-Muslim countries, dealing with the reputation of banks that offer loans only to the wealthy and aim at making quick profits.
[Translated from French ‘Idée reçue n°3 : la finance islamique est réservée aux riches et aux marchés de gros ’ by Mouna M. ]