Reflections from the pensieve

Today’s customer is a very cautious, apprehensive being. Post the crisis where he saw a multitude of banks failing and watched his money sink; he feared about his money and any investments. Financial institutions are trying hard to regain this trust. Flawed strategies, lack of foresightedness and immediate returns were some of the reasons why financial institutions faced hell. But in these crisis times, one segment was weathering the storm better than its counterparts. Islamic Banking differs from its counterpart in terms of its core fundamentals which prohibit interest and prohibit investing in speculations which primarily have been the reason why top financial behemoths have failed. Slated to reach 1 trillion dollar worth assets and growing at 20% yoy, it has gained tremendous interest from conventional bankers as well. Though the adoption of Islamic banking is growing in Muslim populated countries such as Malaysia, Saudi Arabia, Qatar, Kuwait, Iran there is a growing interest in European countries such as London, France. A trend validated by the fact that the number of Sukuk issuances (Islamic bond) in London has increased. Another reason for its stupendous growth has been the need to invest the accumulated wealth created from oil trade in a Sharia compliant way. The banking model that Islamic banking presents is somewhat similar to that of conventional banking. Profit replaces interest in Islamic banking. Most of the transactions are backed up with some assets. The commonly known products in Islamic Banking are Murabaha (cost plus), Mudarabah (profit sharing), Mushrakha (profit and risk sharing), Ijarah (leasing), Sukuk (bonds) and Takaful. Its scope is continually increasing and is spreading into private equity, structured products etc growing beyond the normal consumer and corporate finance and insurance.
Banks offering Islamic banking face a number of problems and issues. One of the major issues is its overreliance on assets or property used as a security. The second problem is the varied interpretation of Sharia in different countries which inhibits innovation and development of products and makes it more rigid if the need to modify the product comes by. Malaysia as a country is more open to innovation whereas in Saudi Arabia sticking to fundamentals of Sharia makes innovation a distant reality.
Bankers all around the world would be keeping a close watch on how Islamic banking evolves in the coming years.