The global Muslim community at a staggering 1.57 billion people is a very large market segment that’s intriguing marketers, across product categories, for a variety of reasons. With a rising demand for products and services, fulfilling needs of day-to-day life to aspirational requirements and armed with strong purchasing power, the global Muslim community is a very attractive consumer segment to businesses.
From the perspective of market entry planning for a brand, it’s no different from entering any other market or segment.
- Identifying the key markets,
- Researching the impact of the existing product portfolio on the market segment,
- Evaluating the competitions’ actions to benchmark and obtain best practices and
- Doing an opportunity cost analysis to obtain earnings and brand sustainability are all part of the basic market entry planning.
But this is where the conformity changes!
Unlike other cultural consumer segments the global Muslim consumer segment is made up of a myriad of sociocultural sets that have been influenced by emigration (of the community) and adaptation to social and environmental norms of current place of residence and livelihood. Thus producing today’s Muslim consumer who has a strong , individual value system and identity that is based and governed by the core values of “Halal”(Halal is an Arabic term meaning “lawful or permissible” and not only encompasses food and drink, but all matters of daily life. Ref: isahalal).
An article in the Marketing Week highlighted that “Muslim consumers are a growing, influential and extremely loyal group, making them a desirable market for mainstream brands. But reaching them requires more than launching Sharia-compliant products. Making inroads to this sector takes a deep understanding of the values of this community and building the brand from there. They’re young, ambitious and worth at least $2 trillion globally”. The key words being “deep understanding of the values of this community and building the brand from there”.
Thus, simply communicating and delivering a fulfilling brand experience based on product or service innovations would not suffice for this segment.In order to win the loyalty of this segment the brand has to approach the relationship (with the Muslim consumer from a totally different paradigm). In order to gain the trust of this consumer, adherence to the required standards (halal guidelines) and transparency in (the brands’) operations and activities is a must.
Building a brand in this segment differs (from other consumer segments) in terms of risk and organisational demands.The risks should not be underestimated. They should be thoroughly studied and evaluated on two levels:
- Product/Brand level– A product and brand risk analysis will consider the impact that targeting the Muslim consumers might have on the organisation’s core global brand if the product is sold in non-Islamic markets.
- Corporate level– A corporate level risk analysis will take into account a wider view of potential transnational consumer activism, thereby, enabling the organisation to be ready to deal with at least three potential threats— social, political and financial.
- Social Risk: by virtue of their numerical strength and purchasing power the Muslim consumer can choose “not to buy”. Such “not to buy” acts are not uncommon. Recall the indignation and subsequently the impact the global Muslim community had over the publication of cartoons of our beloved Prophet (P.B.U.H) in a Danish newspaper. The subsequent lack of political and cultural empathy led to a widespread boycott of Danish products to the extent that even western retailers removed Danish products from their shelves due to fear of negative repercussions.
- Political Risk: Given the rising awareness of Islam, and a new-found resurgence of the Muslim identity, governments across Muslim countries have responded with regulatory changes. Malaysia, for example, has created its competitive advantage by promoting halal foods, Islamic Finance and halal tourism. Kuwait, had its first women ministers a year ago (ref:www.guardian.co.uk).
- Financial Risk: An existing organisation has to evaluate the potential ‘fallout’ that may occur through alienating the existing consumer base by entering the Muslim consumer segment AND also has to check potential revenue loss from not correctly serving the Muslim consumer. This needs to be balanced out versus the projected revenue growth expected from serving the Muslim segment.
Lastly, there is a risk of a “backlash” if the organisations are seen to be exploiting the Muslim consumer. With the rise of social media, and “interest based communities” being online 24/7, blurring geographical and cultural distinctions, a backlash (on a brand) can spread like bushfire through the global Muslim community in a matter of hours. Thus affecting the brand not in just one specific region but globally across the markets it’s present in. One way to minimise this risk is to ensure that the brands’ and the organisations’ activities benefit the community .
The Muslim consumers seek reassurance that any brand offer from an organisation is not just a “marketing ploy”. They want to feel that the brand genuinely understands and empathise with Islamic values in all aspects of their operations. Towards this, communicating transparently and providing a beneficial and meaningful brand experience will enable a brand to reduce and control risk to a great extent in marketing to the Global Muslim Community.
- The Value Benefit of Convergence (benefitpoint.wordpress.com)
- Halal & Shari’ah Compliance.. A Process or A Value? (benefitpoint.wordpress.com)
In the midst of preparing for an interview (on the topic of Islamic Marketing) I came across this interview of mine on the “new Muslim consumer” which was published last year. I felt, it might be helpful reading for many who are operating businesses in this sector as well as working in the Halal & Islamic Finance industries.
Comments, thoughts and opinions welcome.
With 23% or 1.57 billion people constituting the global Muslim community, a whole lot has already been written and said about the ever-increasing business opportunities in the (and for the) Halal industry. With the industry’s global annual meet coming up (in Kuala Lumpur in April) more of these opportunities would get highlighted.
This question came up whilst in a discussion with a very learned friend of mine (in Islamic finance) on the key issue of– “Is Halal & Shari’ah a Process or are they Value concepts”.
Whilst the (current) issues of convergence (of the Islamic Finance and Halal industries) and its potential (or should one say explosive!) growth and emergence of new product and service segments (fashion, cosmetics, hospitality) are being thrashed out, the key issues of consumer intelligence (and insight for business growth planning), comprehension (of the terms Halal and Shari’ah by the consumers) and understanding of the latent emotional need (of the consumer) for a specific value system from commercial enterprises still remains unanswered.
A lot of consumer and corporate research has been done (and is available), by highly experienced and professional organisations, covering specific areas of information that’s extremely helpful in business planning.
Yet on-ground activties by Halal and Islamic Finance organisations still show a high extent of “head-in-the-clouds” type of business approach. The consumer world has changed. Within that the global muslim community (as the mainstay for both Halal and Islamic Finance has undergone a paradigm shift in their attitudes, perceptions and behaviour)!
Isn’t it time we left the cool comforts of our air-conditioned offices and actually spoke to end-users of our products and services and understood how, by delivering a value-benefit can we (as commercial businesses) be sustainable, profitable and respected?
For starters the two industries could get consumer-centric and undertake market education on the two basic terms–
Halal & Shari’ah compliant– and establish if they are processes or values.
Let’s take a quick look at some basic definations:
Halal–”as per Wikipedia”–> Halal (Arabic:حلال, ḥalāl, Halaal; means lawful or legal) is an Arabic term designating any object or an action which is permissible to use or engage in, according to Islamic law. It is the opposite of haraam. The term is widely used to designate food seen as permissible according to Islamic law (Sharia, الشريعة الإسلامية).
Usage of the term:
The use of the term varies between Arabic-speaking communities and non-Arabic-speaking ones.
In Arabic-speaking countries, the term is used to describe anything permissible under Islamic law, in contrast to haraam, that which is forbidden. This includes human behavior, speech communication, clothing, conduct, manner and dietary laws.
In non-Arabic-speaking countries, the term is most commonly used in the narrower context of just Muslim dietary laws, especially where meat and poultry are concerned, though it can be used for the more general meaning, as well.
Shariah Compliant–>Shariah (Arabic: ‘شريعة Šarīʿa; [ʃɑˈriːɑ]) is an Arabic word meaning ‘way’ or ‘path’. It is used to refer both to the Islamic system of law and the totality of the Islamic way of life. Sharia deals with many things, including politics, economics, banking, business, contracts, family, sexuality, hygiene, and social issues.
Usage of the term:
Came about from Islamic banking–(as per Wikipedia)–Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics.
I looked into how these words/terms are actually comprehended and, surprisingly, I came across a few references of how often “halal” is not understood clearly, and is associated only with food and how Muslims consumers themselves are, a bit in the dark due to lack of transparent information.
A dipstick study in UK (in this context) reveals:
The word ‘halal’ is used mainly in the food context, as being clean and pure. Shariah is understood as Islamic law.
Here’s some published references:
- Consumers Need More Info on Halal Issues
KUALA LUMPUR, (Bernama) — There is a dearth of information regarding the halal status on many of the products consumed or used by Muslims. Therefore, it is only appropriate that that Muslims are provided with the information that they need and one of the easiest way to provide the required information is through the details on the packaging.
- Halal Is Not A Simple Matter
On and off Muslims in the nation are startled by claims that the Halal status for some of the products that they consume were doubtful, and the immediate reaction is Muslim consumers become more circumspect in buying the related products.
- It’s Not The Halal You Expected
As debate and discussion on the meaning of halal grows, mainstream supermarkets, food producers, and restaurants are finding that there is plenty of overlap between traditional definitions of halal food and Western standards of quality and ethics.
These few bytes of news reports and feedback from some Muslim friends and associates (of various nationalities) clearly brings forth, that the common man’s usage of the terms and their comprehension are not the same all over. Infact, the perception is that, “Halal is the process of meat and poultry products, slaughtered as per the process and packed/processed according to the country’s halal certification process”.
Shari’ah, on the other hand, is associated with Islamic financial products that adhere to the principles of Islamic law.
But Halal and Shari’ah are much more than this current comprehension!
The questions that arise are:
- Are Halal & Shari’ah compliance only processes then?
- Or are they “value concepts” that can be used to develop sustainable business strategies that deliver benefits?
Intriguing questions,as in the spirit of Shari’ah, a business is deemed halal if it is, end to end, adhering to certain principles and not just the manufacturing or slaughtering process.For eg: if a food brand, marketing canned beef obtains the halal certification, but its business operations like financing is using conventional finance and its organisational culture is not based on Islamic ethics and its governance is more regulatory than civic responsibility oriented–Is it truly Halal?
Similarly, if a financial product re-words, re-processes the ‘interest’ component in its product make up and ‘complies’ with known Islamic financial legalities and becomes ‘shariah-compliant’ does that make the product halal?
Questions to which,perhaps, there will be clear answers once organisations (in these two industries) undergo a cultural shift and look at Halal and Shari’ah as (critically needed) ethical values and focus on being consumer-centric in their business planning in order to be sustainably competitive across time. Such a change will provide organisations a new business model that would be fully value centric than the current practice of being stakeholder profit centric.
Post By Michael Damian Billy
While there has been formal discussions held within the Islamic Finance community over the past year, regarding product development; acceptable investment practices and execution applications, several key issues remain primary topics for exploration. The most critical is who will take on the leadership role and for what purpose.
One prominent international Shariah advisor to the Islamic finance industry that is providing a catalytic perspective is Muhammed Elgari of Saudi Arabia.
Excepted from a recent Arabnews.com article, Elgari is the first prominent scholar to emphatically call for a scientific approach to Shariah compliance. This follows a similar call by another prominent Shariah scholar; Sheikh Esam Ishaq of Bahrain, those Shariah advisories serving the Islamic finance industry should be regulated.
He advises fellow Shariah advisories to adopt a scientific method in reaching their deliberations on Islamic finance. “To be respected,” said Elgari, “Shariah scholars should follow scientific methods to reach their conclusions. We have seen many mistakes where declarations have been issued. Only the correct resolutions will prevail. Shariah is not a group of infallible people. It is a science. It requires methodology, and resolutions require peer review and market consultation.”
Of equal importance regarding momentum and innovation is what component, or participant of Islamic Finance, will build upon his foundational guidance to create an “idea system” to exist and flourish?
As a prolusion, I want to refer to a quote made by John Cleese, the well-known English actor, film producer, comedian and writer who is now Provost’s Visiting Professor at Cornell University.
He stated “we all operate in two contrasting modes, which might be called open and closed. The open mode is more relaxed, more receptive, more exploratory, more democratic, more playful and more humorous. The closed mode is the tighter, more rigid, more hierarchical, more tunnel-visioned.”
Most people unfortunately spend most of their time in the closed mode.
Cleese further states “we must return to the “open” mode, because in that mode we are the most aware, most receptive, most creative, and therefore at our most intelligent level.”
His perspective is aligned with the task before every conventional, investment and development bank. The “idea system” is also integral to serving the progressive goals and objectives of holding and takaful companies. Inclusive are all of the various tangential participants, factions and governance authorities.
No matter what global culture or facet is involved, creativity and innovation are crucial to business sustainability and growth. And therefore supports and nourishes modern civilizations.
Where does the momentum come from and who takes the lead?
At the crossroads, Islamic Finance asset/cash managers must decide on whether existing rules and financial oversight allow it to enter the new decade with a progressive perspective.
Simply stated, Shariah law compliance and its role within the IF banking industry has become generationally rooted.
When managed by the present generation, priorities focus on creating and innovating current products, service, processes and paradigms. When companies become preoccupied with their present business, they diminish the contributions from those who look to the future.
The next generation understands that its current portfolio of products, services and processes will eventually mature and decline due to client/customer dissatisfaction linked to benefits or rewards.
Asset/cash managers need to start seeding and feeding ideas into the governing authority process, whereby their contributions that can be monetized and tied to newer and greater asset class diversification. Hence, a new revenue stream is borne that has greater profit potential and a wider acceptance.
If the goal of Islamic Finance is growth over the next decades, a full pipeline of ideas must be present and be encouraged. To sustain the momentum, replenishment must outpace products that become less attractive due to a lack of originality; market responsiveness and client reward.
Excerpted from an article written by Clifford Chance in Euromoney’s ‘Islamic Finance Review 2009–2010’, “Shariah scholars are increasingly taking the view that as Islamic finance is getting more sophisticated, investors should be able to enter into hedging arrangements. “
For a long time, the lack of acceptability was due to fact that speculation was a broad brush categorization. Interest rate swaps, Murabaha-based products as well as Wa’ad-structured products, such as currency swaps or FX options, all form part of the Islamic financial landscape. Those types of innovative Islamic financial risk management products represent Islamic Finance’s entrée in 2011 and growth beyond.
At the core of implementation should be the crystallization of principles and scope. Who better to foster this evolution than the asset managers who have the daily responsibility for undertaking the enlightened process?
Why Islamic Golden Age sciences need to be embedded into the “idea system”?
The Islamic Golden Age, or as it is often referred to as The Islamic (Abbasid) Caliphate, is traditionally dated from 622 to 1600 A.D. During this period, artists, engineers, scholars, poets, philosophers, geographers and traders in the Islamic world contributed to agriculture, the arts, economics, industry, law, literature, navigation, philosophy, sciences, sociology, and technology, both by preserving earlier traditions and by adding inventions and innovations of their own.
The works of Aristotle, Archimedes, Galen, Ptolemy, Euclid, and others were the wellspring of science during the Medieval Period. Islamic scholars translated them into Arabic, the lingua franca of this period.
Islamic scholarship also inherited Aristotelian physics from the Greeks and during the Islamic Golden Age developed it further, especially placing emphasis on observation and a priori reasoning, formulating crude forms of the scientific method.
It is unfortunate and defeating that advances in statistics, physics and other forms of mathematics are not being utilized in todays Islamic Finance banking environment. Refined, they can comply with non-riba transaction and non-speculative execution standards. Why these methodologies are not being used to thwart a myriad of risks is another question that remains unanswered.
Setting those financial and beneficial advancements aside, international, regional and secular banks cannot ignore the fact they an escalating inflation environment will challenge all product purveyors. The foremost challenge is to design offerings that combat interest rate risk.
A global issue confronting all countries, banks must counter its negative economic impact.
For Western banks, the assets float with income assets, whereby the liabilities are fixed income liabilities. The risk comes from lower rates. Conversely, Islamic banks have fixed income assets whereby the liabilities are profit-sharing liabilities (not fixed.) Therefore, risk comes from higher rates.
Asset managers need to remain steadfast to the principles of product creation, i.e. creating a value proposition. Bells and whistles not required, but liquidity, interest rate and event-risk safeguards are mandatory.
What is the intent behind the tasking – symbolic or meaningful?
According to Harvard Business School Professor Teresa Amabile in ‘How to Kill Creativity’ (1998), she affirms that “In business, originality isn’t enough. To be creative, an idea must also be appropriate – useful and actionable. It must somehow influence the way business gets done – by improving a product, for instance, or by opening up a new way to approach a process.
No matter how minimal or massive the undertaking, the same principle applies, it has to equate to a value. While individuals can affiliate with symbolism, they nonetheless live in the real world. If no value is perceived, they will seek it out through alternative channels.
If economic principles are applicable to each component and contributor, why are Islamic Finance banks reticent to apply complimentary analysis that are derived from the Islamic Golden Age, when mathematics, physics and other sciences were integral for Islamic Finance to evolve its competencies?
Economic models could be greatly aided by quantitative risk management techniques. Their integration can redefine risk vs. profit opportunities that serve both the institutional and consumer markets. Profit and loss events becomes a more exacting outcome when the model allows for a higher level of scientific contribution that was acceptable during the Islamic Golden Age which is traditionally dated from the mid-7th century to the 13th century AD.
With optimism, the second generation of scholars and contributors to the “idea system” will accept the responsibility for allowing quantitative-orientated analysis and application to be utilized for the creation of a myriad of diversified asset class opportunities.
For those desiring to plant seeds and ideas that advance IF asset and cash management, I encourage each one of you to pursue an attempt wherein cultural, economic and social benefits are escalated. Likewise, all contributions should embrace the adaptation of advanced technology to produce an elevated product emergence that will generate a more widespread client appreciation and participation.
M. Damian Billy is the founder and Managing Director of Econophy Capital Advisors, a U.S-based asset manager that specializes in forward observation risk analytics focused on delivering global macro absolute return outcomes. To contact, please email firstname.lastname@example.org .
The above article was published in Islamic Finance News 2 Feb 2011 issue and reproduced here with permission.
Post By David Vicary
I am not going to start this article by trying to define “Perception”. Suffice it to say that one person’s perception is likely to be another’s reality and vice-versa. In the world of Islamic Finance and Islam there are multiple misperceptions, many of which are based on a lack of education and a genuine unwillingness of many people to stop and think.
All too often it is easier to tune in to the media and have a nicely packaged solution for your questions, than to stop and think about what the real facts are and to draw your own conclusions! I GUESS WE ARE ALL GUILTY OF THIS BEHAVIOUR FROM TIME TO TIME.
Let me give you some examples of misperceptions regarding Islamic Finance, which are based on recent personal experience.
Last year, at the request of the bank Negara Malaysia, I was invited to meet with several US State Department and White House officials, who were visiting Malaysia to find out more about Islamic Finance. I was given their names and asked to meet them at the lobby of a well known hotel. They were given my name as Daud Vicary Abdullah.
At the appointed time I arrived and had no problem spotting the US officials. I went over, attired in one of my best bespoke pin-stripe suits and introduced myself as “Daud Vicary Abdullah and are you the representatives from the State Department?”
The response from the senior official took me somewhat by surprise “You don’t look like an Islamic Banker!” he said.
To which I responded “Who were you expecting. Osama bin Laden?”
To be fair there were peels of laughter and we did have a very engaging couple of hours to follow, but it was that initial reaction that lingers in the memory. Perceptions are interesting.
I would also like to share with you another recent example.
At the end of a one hour phone interview with an Australian Financial Journalist, which had gone well, as he had demonstrated that he grasped the subject, and was asking the right questions. He suddenly moved into “perception territory”.
“What if an Australian woman wanted to open an Islamic Bank Account? Would she be allowed to?”
“Why do you ask that?” I responded.
“ Because we hear so much about negative behavior towards women in Islam”
On investigation, much of this negative behaviour was actually more to do with local tribal customs than Islam itself, but it was the association with Islam that was interesting and the fact that a seemingly intelligent reporter had not thought the whole thing through. I wrapped up the conversation by mentioning that women’s rights to property were embedded in the Koran and also in the behavior of the Prophet (pbuh). In my own country, the UK, these rights were not given to women until the 1920’s with the passing of the Married Women’s Property Act.
So what do we do to help change these perceptions?
The solution is relatively easy.
Firstly we need to be sure of our facts. That means more education and a deeper understanding.
Secondly, we must be prepared to stand up for what is right and defend the facts.
We cannot sit on the fence. If we hear of something that is wrong and that demonstrates a poor perception of Islam and Islamic Finance, we should do our best to explain and correct in a non-confrontational way. We need to explain by speaking to people’s listening. If they are not prepared to listen face to face then we need to seize every opportunity that we have in the media to explain the value proposition and demonstrate that Islamic Finance is for everyone.
Those of us who have the capability to explain should explain. Those of us who do not yet feel capable to explain should study and debate in order to improve. This is not going to be either an easy or a soon to be completed task. It will require dedication and effort coupled with much persistence.
There is much to do and not a moment to lose.
- E.P.L. in Islamic Finance: EDUCATION – How & What (benefitpoint.wordpress.com)
Post by Daniela Olivier
More and more institutions around the world are offering degree programs and diplomas in Islamic Finance and banking. This is regarded to be a good sign, showing that the sector is growing and that there is big demand in well-educated and trained individuals. However the medal has two sides: Every year more and more students are graduating and also it seems that Islamic banks are growing globally.
However, we don’t see fresh graduates entering the job market yet. There are some, but not too many, job openings in different fields of Islamic Finance. Nevertheless most times banks look for more senior employees with at least 5 years of work experience, preferably in the Islamic Finance and banking sector. Another major issue which makes it hard for fresh graduates entering jobs is the spreading nationalization in many countries. For example in the United Arab Emirates, certain jobs are only open for Emirati nationals. In the Kingdom of Saudi Arabia and Malaysia people with Saudi or Malaysian (Bumiputera) background are encouraged to apply for the positions available.
The Islamic Finance markets in Europe still need to develop and currently are only existent in the United Kingdom. One therefore asks where all the fresh graduates should work and be able to gain experience. It is clear that Universities are also institutions which want to generate money. There are currently no quotas for Islamic banking degree courses as for example we have for medicine or other overrun disciplines like psychology and business administration.
The INCEIF University in Kuala Lumpur Malaysia is providing their students the ability to get internships with the Islamic banks operating there. This is a first step to provide students with a practical insight into the field. Nevertheless to provide the graduates with the ability to join an Islamic bank and learn about the practical side from scratch they should take advantage from trainee programs which are already operated by every conventional bank. This would be also of benefit for the banks because they will be able to oblige the young bankers to work for them at least for three years due to several training programs.
In fact we already see a high number of former Islamic Finance students, sometimes with even more than one degree, not finding a job in the field. Some individuals are currently working “off the job” in conventional banking or Islamic Finance journalism due to the lack of offered jobs.
On the other side there are certain Shariah scholars who are on more than 50 Shariah boards of Islamic banks or Islamic institutions. This leads to problems regarding conflicts of interest. Currently the top 20 scholars are serving on 621 boards globally. The top scholars in this field are Sheikh Nazim Yaqubi, Mohammed Elgari, Mohammad Daud Bakar and Abdul Sattar Abu Ghuddah. Due to the need of an interdisciplinary background of finance, Shariah law and banking law it is hard to find qualified scholars in this field.
One notices that on the one hand the Universities and institutes are producing graduates with a broad knowledge of Islamic finance the lack in human capital however can be found in the roles of Shariah scholars. It would be only honest from Universities and institutes to inform students before commencing studies about the current outlook in the job market. Of course it is also the task of the future students to make research if studying Islamic Finance or banking will lead to a job afterwards.
The biggest problem currently faced by a lot of graduates is to be not able to practice their theoretical background. To fight this pool of unused potentials universities could set up a graduate’s information portal which should be available to all Islamic banks and institutions, providing information like grades, major study fields, language of the students and more. Through this tool, banks would easily be able to find the right candidates in a short period of time.
Major issues that need to be addressed:
- Educational offers from the EU and Australia are too promising because right now there are no job openings for graduates. When the Islamic finance sector will start operating the companies will ask for people with experience in IF. People with previous background in conventionalbanking/insurance will not be considered.
- Competition should be healthy. Therefore any kind of nationalization is only minimizing the field of people with a broad multinational background and if you just cross people out because they are not Saudi, Emirati, Malaysian, Australian, and British… it will not help the economy to develop to its best.
- Qualifications like CFA, CAIA, and CIFP are no guarantees for a job. Also they are very high in cost. Also graduates are not the adressees of such qualification programmes but practitioners with some years of experience. It would be better to get fresh graduates to work for a company and try to tie them for some years with the outlook of receiving the opportunity to get the courses paid by them.
 As it is practiced in Austria
- E.P.L. in Islamic Finance: EDUCATION – How & What (benefitpoint.wordpress.com)
- What if the world had been following Islamic financial practices? | Imaduddin Ahmed (guardian.co.uk)
Post By:Beata Paxford PhD is a senior lawyer in Warsaw law firm. She is responsible for banking and corporate matters. She specialises also in Islamic finance, being the author of many articles devoted to the issue, and being the speaker at banking conferences.
2010 has proved to be a year of changes in the banking and finance industry. The propositions of the so-called Basel III were announced as well as the need for common European supervision. Furthermore, the Larosiere Report confirmed the necessity to create a more-unified financial market that will – its authors hope – lead to greater industry stability.
Looking at it on global level, though, it’s worth asking if there is a need for common global Islamic supervision and changes in the regulatory area.
The proposed amendments to the hitherto banking regulatory policies have come as a result of the credit crunch and the crisis on the market of financial instruments. It was said that the breakdown on the housing market connected with complicated derivate structures led to a decrease in public trust in financial companies and thus regulatory institutions. Hence, the need for a European and global common regulatory policy appeared. A policy that would not only strengthen the national regulator but would also create a demand for a common regulatory institution. However, one should ruminate over the real need for such a legalised solution and should ask whether another bunch of provisions will solve the problem.
Many articles devoted to the issue of Islamic finance have addressed the problem of ethics, citing the concept as long forgotten in conventional banking. Some authors arguing that not adhering to moral principles along with the ever-present greed would lead to a crisis. Nevertheless, such opinions could be seen as oversimplified and lacking in deeper analysis. What should be looked into, though, is the issue of a common regulatory institution for the global banking and finance industry and the place of Islamic finance in the global regulatory policy, and the possibility to connect the regulatory provisions and the ethical values of Islamic finance for the institutions that deal in this industry.
Islamic finance boasts three regulatory bodies. There is the Islamic Financial Services Board, the Accounting and Auditing Islamic Finance Institution and the International Islamic Rating Agency. These institutions aim to create a set of unified standards in Islamic finance. Each one has a Sharia board to verify compliance issues. However, none of them has legal capacity to bind the institutions into complying with its standards. These bodies exist on an international level. They are composed of financial institutions, such as private banks, and also organisations such as the World bank. Thanks to such a wide array of members, the regulatory bodies for IF can tackle chosen issues both from a global and a domestic perspective. They can also analyse and compare the functioning of certain types of financial instruments in global banking and in Islamic one.
What should be taken into account is the need to set such regulatory standards that would be both Sharia-compliant and modern in light of the ever-changing banking sector.
First of all, the standards should be unified. That means that the Islamic Finance regulatory bodies should set the same standards for the same type of financial instruments (e.g. tawarruq, istisna etc.). Likewise, the fatwas issued by Sharia scholars employed by the Islamic Finance institutions or engaged in Islamic Finance transactions should not be contradictory to the standards set by the respective bodies. Otherwise, the Islamic finance & banking sector will be seen as not credible and, therefore, not competitive.
However, one should not forget that there are different schools of Sharia, each one with a different approach towards the Holy tenets of the religion. This might influence opinions issued by scholars employed on Sharia boards of Islamic Finance institutions. The same refers to members of Sharia boards working in non-Islamic states, such as the UK or France. The interpretation of a given transaction in respect of its Sharia compliance should not contradict the general standards issued by regulatory bodies. Furthermore, it should not differ to far from the standards and fatwas applied by Islamic Finance institutions that operate in Islamic countries.
Islamic finance & banking is a growing sector, on its way to becoming a constant fixture in global banking. It cannot afford to lose its credibility, particularly in terms of Sharia compliance. The situation, where, in a non-Islamic country, a certain transaction is deemed as a Sharia complaint one, while the same transaction is viewed as haram in an Islamic country, should not happen. The industry must speak with one voice, with the same set of rules and prohibitions. This will give Islamic finance & banking the strength and appeal it needs.
For instance, AAOIFI issued the Sharia Standards concerning Sukuk. It explicitly states that Sharia Supervisory Boards should, prior to issuing a fatwa in respect of a transaction, carefully review all relevant contracts and documents related to the transaction. A halal transaction should comply with Sharia on all levels, including the purpose of the transaction, its participants and the transfer of assets. Sukuk has to be owned by Sukuk holders with all the rights and obligations of ownership in real assets. Hence, short sales in terms of Sukuk would be not permissible. The question of ownership and its transfer is a crucial one. Sukuk transactions must be both Sharia compliant and reliable, not allowing for derivative-backed transactions or naked short sales.
Likewise, the Islamic International Rational Agency intends to provide credible ranking for Islamic Finance institutions. It offers a Sharia Quality Rating, which aims to give an unbiased assessment of the Sharia-compliance operation of an institution or a transaction. Contrary to standard rating agencies, which verify solvency and debt-management issues, the IIRA wishes to provide measurement tools that check the observance of Sharia according to Fiqh. This includes a check-up on the capital, mixing of capitals (in the case of Islamic Windows), procedures and transactions conducted by the institution.
Following the AAOIFI standard, an Islamic Finance institution can provide its clients with the best service – satisfying their religious and economic needs. One must remember that pious Muslims want to use Islamic Finance institutions and want to conduct their business. They want to make sure, though, that the Islamic Finance institution complies with the rules. They also want to have the same standards for the same transactions regardless of the country in which it is taking place.
Discussing regulatory issues, one should look at European changes in banking- and finance-compliance policy. The latest global crisis badly hit certain European Union member states. Losses stemming from uncontrolled banking operations undermined the trustworthiness of European financial institutions. New policies were needed. The EU issued the MIFID directive in respect of financial instruments, addressing the issue of derivatives. There has been a PSD directive, issued to increase the safety of payment. Moreover, new proposals on risk management were prepared by the Basel Banking Supervisory Committee, known as Basel III. IF institutions that operate on the EU market have to comply with EU law. Nevertheless, are these European regulations of any help to the global Islamic finance industry?
In the author’s opinion, the Islamic finance & banking sector needs to be aware of the legal and economic tendencies taking place in Europe. This, however, does not mean that the Islamic Finance industry should implement all the rules. The banking and finance sector operates on different levels in Islamic states – from poorer countries such as Pakistan to affluent Saudi Arabia. This includes the level of cash payments, non-cash transactions, project finance and PPP projects. There are also economic differences to be taken into consideration when comparing Islamic countries with Europe. Furthermore, the Islamic Finance industry has not been struck so deeply by the financial crises, hence it does not need to undertake such measures, in particular in respect of risk management and liquidity.
However, the author believes there should be co-operation between the Islamic regulatory bodies and those in the EU. It could benefit the whole community, and the clients of financial institutions.
The need for one voice for Islamic finance compliance is not to be undermined. It should be the first aim for the Islamic Finance regulatory bodies in the upcoming years. Islamic Finance should become an immanent part of global banking, and setting equal measures for its participants should be of utmost importance.