Islamic finance is no longer just an all-Muslim affair. The industry’s appeal grows, attracting the non-Muslim market as well, writes RADHIKA MADANA MOHAN

There’s no denying it. The global stampede to embrace Islamic finance is pushing the industry into the mainstream of financial activities. The system is sounding more and more appealing. In this economic downturn, what sounds better than a banking system that prohibits interest charge?

But be warned. Dr Yahia Abdul-Rahman, chairman and CEO of US-based Lariba and Bank of Whittier, said to imply that there’s a spike in the numbers of Islamic financiers because of the meltdown, may not be entirely accurate. “Islamic banking is a very small part of the total global financial system. For example: Lehman Brothers, which was not a large investment bank, was a US$600 billion institution. The whole Islamic banking business is estimated at between US$700 billion and US$1 trillion.”

However, in reality, there has been a huge demand for Islamic finance. Financial centers such as London, France, Hong Kong and Singapore are increasing their efforts to enhance the development of Islamic finance.

Booming
But, why Islamic financing, a system that conforms to the strict laws of Islam that says no to alcohol, pornography or anything deemed immoral and, most of all, prohibits the imposition of interest on funds? For Muslims, it’s about applying religion to economics. Many Muslims are keen to stay on the religious ethical path when it comes to banking and financing. Muslims make up about 1.6 billion of the global population.

Given that Shariah compliant financing only makes up a small percentage of the total value of the world’s stocks, bonds and bank deposits, you can’t help but wonder how come this industry is rapidly expanding? To understand why, Abdul-Rahman explains that there are three levels for the Islamic banking business.
The first relates to investing or “recycling” petrodollars into other economies. The large players insist on Islamic banking. “Many Muslim and non-Muslim countries are willing to accommodate these needs in order to facilitate this huge capital transfer and reinvestment process. This segment will continue to thrive as long as there is money to recycle and will eventually reverse when these oil-producing countries become borrowers and get to mortgage their future – interestingly – using Islamic finance and instruments like Sukuk,” Abdul-Rahman said.

Secondly, there is demand from Muslims and other faith-based communities. According to his research, more than 75 % of Islamic bankers come from the Indo-Pakistan subcontinent. Why? Because of upbringing. “Mothers trained and repeatedly taught their children not to eat non-halal food and never to participate in ‘sood’ or riba. We found that other ethnic groups in the Muslim world have been penetrated culturally by the West and the mothers no longer teach that.

“The first group produces the Islamic bankers of the world, which may answer the question that many ask: Why do Islamic bankers mostly come from India and Pakistan? This segment will continue to thrive as long as the Muslim cultures are not diluted and compromised by cultural penetration and/or compromises justified by scholars,” explained Abdul-Rahman.

Finally, the markets are simply seeking the best financing deals. “In Malaysia, my friends told me that the Malaysian Chinese community is a big user of Islamic finance. After researching why, we found that it was because of the many benefits, cost breaks and discounts.”

Real economy
There are approximately 300 Islamic banks and financial institutions worldwide and the industry is growing some 20%-25% annually. However, the industry will not grow at the rate of conventional finance because Islamic banks only fund the real economy — only tangible assets can be financed. The idea is simple, says Abdul-Rahman: one cannot sell what one doesn’t own. Everything involves an underlying assets or service; to trade you need to own it first. Put simply, making money from money is a no-no. Islamic financial institutions are prohibited from lending or borrowing on money markets as interest is forbidden.

Competitive edge
There’s more to Islamic financing than savings accounts and home financing. Many banks now offer Islamic charge and debit cards which are linked to personal lines of credit. Islamic financing can still be very competitive with conventional banks, says Ibrahim Warde, author of “Islamic Finance in the Global Economy” in response to the misconception regarding Islamic financing in terms of making money. “Although the Islamic products are not structured in terms of generating interest, they do generate profits, various forms of profits,” he explains.

Warde feels that Islamic finance could help with governments’ fiscal crises. “Countries like France and Ireland have been recently promoting Islamic finance and talking about the possibility of issuing Sukuk. They reflected on their debt positions and were not quite so sure about how they were going to repay them. So there’s a view that a new class investors be brought in to perhaps provide some kind of relief from the financial crisis. I think this is another very significant factor in terms of Islamic finance.”

Non-Muslim market response
Faith isn’t the only thing driving this market. As time progresses, this market is progressively reaching the non-Muslim population. “The non-Muslim customers are attracted … it is easier for them to know their cost of finance than in conventional finance where it can be increased,” says the vice president and manager of the Islamic banking department in Riyad Bank, Sami Fahad Al-Othman.

Echoing Al-Othman, Islamic finance user David Ong-Yeoh says the terms are simply better. The Malaysian sought a 30-year fixed loan from an Islamic financial institution about 15-years ago. “My reasons for choosing an Islamic based financing package were very simple — to save money or at the very least protect myself from fluctuating rates.

“In Islamic banking, the lending rate is fixed, so there are no surprises in the future,” adds Ong-Yeoh, who has also taken another Islamic financing facility to buy a car.
For another Malaysian, it’s not so much about being appealing as mere convenience. Mun Yee’s only reason was a promotion for a 5% fixed deposit for three-months, offered by a bank close to home. “Other than that I wouldn’t personally be interested in Islamic finance as I don’t think it offers any more than conventional banking does. If anything, I think there are more restrictions on Islamic banking, for instance credit cards that can’t be used in non-halal places.”

Even in terms of interest, Mun Yee says: “It works out to be the same. Banks are basically buying the property off the customer and selling it back to them at a higher price. Their profit works out to be the same as interest, if interest were to be built into the loan. It’s just the same product, but packaged differently to suit that market sector, making it Shariah compliant.”

Non-Muslims make up about 90% of Lariba and Bank of Whittier’s customer base. However, Abdul-Rahman insists that “calling what we do as Islamic banking is in fact limiting, unwise and lacks sensitivity. We are advocating a new banking brand which describes what we do: RF Banking. R stands for Riba and F stands for free.”

Likewise, OCBC Al-Amin director and CEO Syed Abdull Aziz Syed Kechik says his bank believes in offering banking for everyone purely on the basis on Shariah principles. “We go by the tagline: Islamic Banking for Everyone. And we truly believe in promoting this; the principles embraced in our products and services are universal enough to be meaningful to everyone.”

His measure of success: attracting a high number of non-Muslim customers. “It’s ample evidence that the value is clearly seen beyond just Muslims.”