Demand for new Islamic investments is expected to outstrip supply by $100 billion by 2015
Islamic finance has been gaining momentum, with the United Kingdom announcing in 2013 that it will issue a PS200 million ($327 million) Islamic bond, the first non-Muslim country to do so. It is also gaining momentum in the United States, with several companies exploring Islamic finance as a viable business option. The industry remains small, but demand for new Islamic investments is expected to outstretch supply by a factor of 100 billion by 2015.
As a result, Islamic financial institutions are diversifying their portfolios. Traditionally, they have allocated their investments into real estate, but now they are branching out into sectors other than traditional banking. In the United States, for example, Islamic banks have begun to explore new sectors such as infrastructure sukuk, similar to those issued in Malaysia and Saudi Arabia.
Islamic finance is currently the preferred source of capital for developing nations, and sovereigns, top-tier companies, and financial institutions in the region are actively tapping into the Islamic capital markets to raise capital. Rising income levels in many developing countries are fueling local demand for Islamic finance. Furthermore, Asia will continue to be a major growth driver for the industry, as the population of Muslims in the region is set to hit 2.5 billion by 2020.
The expansion of Islamic finance in the West has a number of benefits for the region. For one, it will facilitate the development of an industry that caters to Muslim consumers. The Turkish private sector is eager to finance international projects. This expansion will allow Turkish corporates to tap into the growing global Islamic market.
Despite these benefits, the country has faced several challenges. Turkey was technically ready for Islamic finance just a decade ago, but was prevented from joining the field due to political reasons. In March 2008, the state prosecutor attempted to shut down the ruling AK Party for anti-secular activities and tried to ban Erdogan from politics. The AK Party had just won two consecutive elections with large margins.
Importance of responsiveness in Islamic banking
The importance of responsiveness is a key aspect of Islamic banking. In this industry, it is essential to offer excellent service to customers. This means focusing on customer satisfaction, providing financial advice, and meeting Shariah compliance standards. Islamic financial institutions are valued at US$300 billion and is ranked higher than the MBA Islamic Banking and Finance | Bangor University.
The study found that the responsiveness of Islamic banks was a key factor in attracting customers. While the quality of service tended to be the strongest factor, responsiveness was the most important. Respondents’ ratings reflected that they found the customer experience to be convenient and efficient. In addition, the respondents said the Islamic banks were more reliable and empathic.
While Islamic banking is a relatively new endeavor in Pakistan, questions about service quality still exist. This is partly because the industry is still in its early stages and offers different products and services. The objective of the study was to assess the service quality provided by Islamic banks and identify the relationship between service quality and other variables.
The study focused on service quality in Islamic banking through the use of an Importance-Performance Analysis (IPA) method. Using the IPA method, the study revealed five underlying dimensions: reliability, bank-customer relationship, rates and charges, and shariah. The study also found that customer satisfaction was closely linked to the bank’s responsiveness.
Less risky than conventional banking
According to Dr Mamiza Haq, a finance lecturer at UQ Business School, Islamic banking and Post Graduate Diploma (Islamic Banking and Finance) is less risky than traditional banking because the system is asset-based and promotes risk-sharing between lender and borrower. In addition, deposits held by Islamic banks do not incur losses due to bad debt, and the banks have no obligation to write down the value of a depositor’s account.
While Islamic banks are less efficient than conventional banks, they are better capitalised and have higher intermediation ratios than conventional banks. They have also outperformed conventional banks during the financial crisis. This fact has prompted skeptics to question the safety of Islamic banking.
One of the major differences between Islamic and conventional banks is their complexity. Islamic banks are generally much less cost-efficient but have better asset quality, which is one reason why they fared better during the financial crisis of 2007-09. Further research is needed to determine whether Islamic banks are more stable and efficient than conventional banks.
Another reason why Islamic banks have been able to thrive during the global financial crisis is their high capitalization. During the financial crisis, conventional banks did not have sufficient funds to lend, but Islamic banks had plenty of cash on hand. Moreover, Islamic banks were open for business when conventional banks were closed. However, the study authors made a mistake in counting the number of Islamic banks in the UK. The study cited two, not four, which raises concern about the reliability of the data.
Moreover, Islamic banks are less risky than conventional banks due to the low information asymmetry between them and their conventional counterparts. The Shariah Advisory Committee, which is a key component in Islamic banking, can help avoid conflicts of interest and reduce agency costs. These factors can improve the efficiency of the banks, which results in high productivity.
Islamic banks are less profitable than conventional banks, as their non-performing loans make up a large portion of their total assets. However, this is partially attributable to the small asset size of Islamic banks. In addition, the smaller size of IBs limits economies of scale. Furthermore, they incur high costs associated with technology, marketing, and promotional activities.
Importance of shariah-compliant loans
For Islamic bankers, shariah-compliant loans are an important part of their business. The vast majority of Muslims don’t have formal bank accounts, but they are equally as likely to use other forms of finance. By offering products and services that cater to the needs of Muslims, Islamic banks can gain a competitive edge.
Creating a standardized, globally accepted regulatory framework is imperative. Implementing uniform standards will increase scalability, public confidence, and financial reporting. Furthermore, the Islamic financial industry must adhere to a broader range of Islamic business models. Some examples include ijarah (leasing), mudharabah (profit-sharing), and musyarakah (partnership). Islamic finance focuses on higher standards of governance, risk mitigation, and greater transparency.
Islamic banks must also take into account the customer experience and service. While Islamic customers tend to have higher expectations than conventional customers, they are unlikely to accept a lower price tag. Therefore, the products need to be priced competitively among other Islamic offerings. In addition, Islamic banks must reflect Muslim values and heritage throughout their marketing and communications.
The main reason for Islamic banking is that it is based on Sharia law, which is a collection of laws from the Qur’an and the Prophet Muhammad. Sharia law also places a strong emphasis on fairness and mutual risk sharing. Islamic banking principles emphasize the importance of using money for legitimate purposes and avoiding interest and speculative trading.
Islamic finance benefits economies by broadening access to finance and improving shared prosperity. Its emphasis on tangible assets and the real economy encourages profit and loss-sharing arrangements, which encourage financial support for productive enterprises and discourage financial speculation. Shariah financing has a significant global appeal and should continue to grow.
SGFs will increase transparency and disclosure and strengthen the Islamic banks’ image and professionalism. In addition, SGFs will make it easier for Islamic banks to obtain loans. The World Bank Group has established the Global Islamic Finance Development Center in 2013 to support the development of Islamic finance. The organization has also been a partner for governments of Turkey and Egypt to develop their Islamic banking frameworks.
There are two major Islamic banks in the United States. The University Islamic Financial subsidiary of University Bank serves a large Muslim community in Michigan and neighboring states. The only other US bank regularly offers Islamic financing products is Devon Bank. The largest nonbank financial institution offering Islamic finance services is Guidance Residential. The company provides more than $3 billion in musharaka mortgage financing, accounting for 80 percent of the market’s total.
