Making Islamic Banking Resilient

Recently, I was invited to be part of a panel to present our views at the International Islamic University of Malaysia (IIUM) on how to make Islamic Financial Markets resilient. With great excitement I prepared my slides (panelists are given 20 minutes to present) and tried to figure out the best approach to present it in such a short time. However, when the session came, due to time overshoots and constraint, me as the last speaker was only left with 10 minutes. I had to make it count, so I talked fast.

Afterwards, however, I do not feel as if it was mission accomplished. Time was too short for me to put my argument properly and I had to drop many points in fear of cramming too much information into that 10 minutes. So I decided to post my slides up, and make a proper short commentary on what I meant to be communicated. Bear with me.

The Financial Industry Must be Resilient

  • STABILITY : The public must be confident on the resilience of the financial markets where the public is assured that there is not misconduct of public funds in the day to day operations of the banking industry. BNM has put in great lengths to ensure stability via sufficient capital, liquidity and funding. The operations of the bank must always meet the statutory requirement on financial stability with the introduction of the Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR), Rate of Return Framework (ROR), and Risk Informed Pricing.
  • SUSTAINABILITY : Any business, must intend to survive in the long run. Selecting your customers are important, and risk mitigation mechanisms must be available to defend the business. But at the same time, re-investment of profits must also be made for future growth, so it is a balance to be maintained.
  • INTEGRITY : As Bankers, integrity always plays an important, and fundamental, part.  But Islamic Bankers, another layer of integrity is also imposed which is Shariah. Banks are expected to be more and more of a moral champion in support of the various SDGs and ESGs where the idea of being good will eventually lead to better profits and prosperity. BNM’s Value Based Intermediation aims to expand the role of banks to be more than just profit driven, but more inclusive to embrace a wider range of customers and cater for their needs.

The Challenges are manifold.

Being resilient is always a challenge for the Banks, especially with so many moving parts in the financial world. New regulations, new competition, new structures, new products and new models continue to plague the banking industry. To change our mindset to make Banking and Financial Market more better requires a lot of soul searching and will power to make the change. I summarised the challenges into 3 broad categories:

  1. Consumer Market. Any major change in the banking model is not taken well by the consumer market. Customers come to the Bank mostly for advise on their banking services. The Banks struggle to introduce differentiating products, from the debt structures and into the thought of creating value through investments. I am not sure how successful introducing the VBI into the consumer market, but the has been a lack of awareness programmes to introduce to the public.
  2. Corporate Market. Corporates are driven by profits and benefits. It is their core function ie to increase shareholder value.
  3. Financial Markets. We lack sufficient financial instruments in the market. That is why the industry can only grow organically. It needs the strong-will to pump more capital into the market and creation of structures that do not mirror the conventional books.

The Reality is that Traditional Banks need to keep up.

  • Traditional Banks. Heavily regulated to ensure financial stability. But the speed of adaptation to new thinking and new technologies are too slow. It is high cost to make the change, but also it is high cost just staying where you are. Ask Nokia. If all Islamic Banks do is replicate, they are in danger of becoming obsolete in the near future.
  • Challenger Banks. Provides alternative banking structures or arrangement, with little or no hassle, with or without the use of technology. A lot of customers now by-pass banks to opt for the most convenient and fast banking products. With very minimal regulatory requirements.
  • Digital Banks. This new breed of banks are definitely very interesting. There are two differentiators i.e. 1) Banks that only digitalise their processes and paperwork and speed, but the fundamental bricks are the same, and 2) Banks that try to be different and offer a totally new proposition with a new set of bricks. Yet, Islamic Banks are expected to do all and adopt more stringent requirements when entering into the Digital space, while dealing with old issues such as constructive ownership and Aqad. More importantly, these issues can probably be resolved by NON-BANKS, offering the same terms and conditions, sometimes with slightly better proposition such as speed, accuracy and low cost. For example, big data companies such as Facebook and Grab intend to open their own “bank”. Facebook just launched its Libra bank trading in cryptocurrencies. Grab is rumoured to enter as well and these Big Data companies already have their database of ready customers for them to roll out their Digital Banks.

Stop Looking at Your Feet. Stretch out your hand and move to touch new Horizons.

A lot of discussions have been held between the academia and practitioners. It seems we are always looking ways to innovate and integrate into the future, but without any real solutions on how to actually do it. As mentioned, the will-power to affect change remains a huge challenge. Instead of “What Is….”  to be turned to “What If…” where solutions are always been discussed and developed for a solution, and “What Next…” clearly implying the shift in banking products from traditional to new developments.

It is no longer sustainable to just replicate. True innovation is on the rise. New solutions are needed to be offered to the customers.

The Next Generation bankers must familiarise themselves with all the blockchain and Internet of Things language and terms currently floating around. More importantly, there should be a look at the whole ecosystem to see where the Shariah elements can be included, and where others must be excluded. Collaborative discussions, between regulators, academicians, practitioners and Shariah scholars must work together for the growth in the industry. It is not just any growth, it involves a total paradigm shift to adopt the new ecosystem.

There is a need to differentiate and upscale the business practices. While we continue to focus on the Traditional Bank in making it more resilient, we might miss this opportunity to join the Industry Revolution 4.0 to revamp Islamic Banking and overlook the threats coming from other financial institutions (NON-BANK). This is the Banking disruption in real life.

Steering a Shariah Decision

Click on above picture to download the article in pdf

HIDDEN TRAPS IN SHARIAH DECISION MAKING

I came across an interesting article titled Hidden Traps in Shariah Decision Making by bro Ehsanullah Agha (click on picture for full pdf article). The article summarises what we product developers have known for quite some time now, and has now become necessary tools in ensuring the products we design are approved by our Shariah Committee. It summarises the involvement of Shariah in decision-making in an IFI, as well as some of the “traps” that Shariah Committee falls into when making decisions.

The 4 “traps” mentioned are:

  1. Anchoring an opinion
  2. Adhering to the Status Quo
  3. Confirming Evidence to support a decision
  4. Framing of information

While the above is referred to as “traps”, I would rather refer these as “approaches” to solicit a decision, and perhaps all the above can come together (not exclusively) in considering a decision. Reading the above exclusively may give the impression that a product team can resort to a specific tactic in order to extract a certain decision. Admittedly, there are such cases, especially where management requires a specific decision to support a business. But Shariah Committees are often expected to be the gatekeepers for such decisioning.

A quick comment on the above points:

  1. Anchoring. While product teams do not consciously try to anchor an opinion before presenting to Shariah Committee, we often do so to provide perspective on the rationale for such proposal. This can be done by highlighting a crisis or regulatory danger to support the proposal. It becomes the baseline discussion point during the deliberation stage. And we do it to keep the discussion in focus to achieve the objective ie resolving the crisis.
  2. Status Quo. By far this is one of the main consideration of an approval by Shariah Committees. Usually we call it Urf ie customs or acceptable market practice on a certain product behaviour. Personally, decisions based on Urf is not something I prefer but it is sometimes necessary to quote as such, especially if there is no major criticism on its usage and practice by the public (which also includes religious scholars). There is nothing wrong with accepting the norms of the society; my only contention is that I may not fully understand the deliberation points when such decisions are made by other parties for the fear of missing out a critical argument that should have been known and resolved by my team. Two things come to mind; Ignorance is bliss, and Blind leading the blind.
  3. Confirming Evidence. This is also a key point where a certain decision is preferred over the other. When there is a bias for arriving at a certain decision, the product research, analysis and design (including practicality in operations) are equally biased in finding evidence to support reaching of that decision. Rightly so as mentioned in the article, the evidence to support the contract of Bai Inah in Malaysia is generally extracted from the Shafie school of thought while sidelining the rest of the opinion that is equally valid. The evidence provided for the acceptability is biased to enable the consideration to approve the structure.
  4. Framing. In my opinion, framing is a necessary tool for product development teams simply due to the amount of information available in the market. While we understand the need for a robust deliberation session with the Shariah Committee, the forums available to us (and the allocated time given) are usually restrictive. To go into full academic and technical discourse will be challenging especially when a quick decision is required. The information that we provide are those we deemed most relevant to support the proposed solution. There may be other decisions that the Shariah Committee can arrive at, if only we had provided more information. But the danger lies where the inclusion of too much information may result in indecisiveness or confusion. Sometimes too much information clouds the real issue further, and it takes time to bring things back into focus. Therefore, we frame the information relevant to the issues. The intention is not to exclude, but to include what is relevant.

A GOOD DECISION COMES WHEN ALL PARTIES ARE ENGAGED

When a product team goes into a proposal, discussion or request for a certain decision, the Shariah Committee is expected to be conversant with the topic at hand to be able to engage in a meaningful discussion. The product team brings in the technical requirements, with some general Shariah background information, market analytics and practical implication on process requirements expected by Shariah. The Shariah Committee must bring in their expertise in Shariah knowledge to dissect and analyse the team’s proposal, not just what is being presented as information but also the rationale, the intention and the technical nuances proposed for the product.

Asking the right question is important for the Shariah Committee, just as providing the right context and intention is also important for the product team. In general, the product team must not go into a Shariah proposition with the intention to manipulate, coerce or blindside the Shariah Committee into a “business” decision. The effort must show full consideration in compliance with Shariah. As much as the heavy burden placed on the Shariah Committee shoulders are real (with fines and jail-time outlined under IFSA2013 when there’s failure to execute their duties), the same burden must also be felt by the IFI’s product team whenever a product is being designed and launched. The people I work with, I see strong commitment and awareness on the need to do the right things, all the time.

WISH LIST FOR 2019

It is easy to expect Shariah Committee to be well versed in all aspects of banking and finance when the decision is required. And it is also easy to expect product development teams to be fully aware of all “relevant” information to be able to share them objectively with the Shariah Committee. Such an ideal scenario will mean all parties come to the table fully aware of all the potential issues, with sufficiently extensive information and in-depth theoretical research to support all the argument. This does not always happen in real life.

I believe the only way to bridge this expectation is to significantly increase the knowledge of all parties. We see this starting to happen at the Shariah Committee level where BNM now encourage at least 1 industry expert to sit in the Shariah Committee, even without a Shariah background. This is to promote knowledge sharing and a different point of view during decisioning, and take notice of any attempts to coerce a decision.

On this same vein, I believe the next natural step is to have Shariah-trained individuals to become product developers in IFI. Most Shariah-based graduates that we see, enter into the banking world via the Shariah department. But how about entering other departments such as sales, credit or more importantly product-development? Such background knowledge in Shariah may itself force a self-regulating approach when designing a products. The Shariah arguments will be the first filter when assessing a product; if it fails at that filter, it will not see the light of day. And Shariah Committee can take some comfort that the Shariah deliberation has already started at the onset of the product development process.

I have seen some impressively good work done by Shariah-based product developers. This should be the way forward in finding new Shariah-compliant banking solutions. Hope I get this wish next year. Looking forward to 2019.

Another Good Site : Islamic Finance Resource

Click on picture to jump siteOnce in a while, friends ask me if there are reports or articles on Islamic Finance, and as much as I would say my site has it all, I know for certain my site contains mostly my musings on Islamic Banking. It is certainly my resource centre for my field of work, but there are other sites that are maintained and organised more systematically.

One of the sites that I do visit once in a while is Islamic Finance Resources, which contains a lot of updated news and latest industry reports. A good place to find statistics and some discussions on interesting Islamic Finance structures, and useful information. Mostly excerpts from the IFN and Reuters news portals. Certainly an additional place for us to seek information.

Do have a check on the site and hope you find the site useful.

Report : Islamic Finance Development Report 2017

Click on picture to go to report

Information on Islamic Banking and Finance performance has always been an interest of many practitioners, myself included. Yearly we scour the best looking and informative reports on the internet that is full of data on the industry, especially when it covers the global markets as well. Sometimes we find an average one, but nowadays there seemed to be an abundance of available reports. Some have “good” contents, but when I come across “great” one, I am tempted to put it on my site. For future reference, off course!

What we always love to find out is the performance of the Islamic Banking industry locally and globally, as it will provide reliable data to management on the latest trends that contributes to the bottom line. And presented in simple and clear infographics will only ensure some of the slides will be “cut and pasted” for speaker presentations, being quoted in many sessions. This reports provide all those opportunities.

More interestingly, this report provides insights on what has been going on in the world. For example, items such as Value Based Intermediation (VBI) espoused by BNM was also mentioned. There is talk about Islamic Fintech, Awqaf Funds and other local going-ons, including CSR initiatives. I would say this report covers many new areas of interest in Islamic Banking and Finance.

It also has a four-slide presentation on the most recent dispute on Sukuk involving Dana Gas. This was a real concern by many many parties over an extendable period of time. Nonetheless, this report make a good job summarising the key issues about the Dana Gas case, until its resolution. What a good write up for layman.

I hope these kind folks don’t mind me posting their report on my site. As mentioned, this website was maintained aimed to be a repository of the many discussions on old and new issues. If you want to download the report yourself, click REPORT : ISLAMIC FINANCE DEVELOPMENT REPORT 2017. Also find other reports and this report in the Knowledge Centre.

Happy Reading

Ethica Institute

Today I came across a very useful site which I feel worthwhile to share with readers. The Ethica Institute of Islamic Finance has this section of a Database for Q&As relating to Islamic Banking, with Scholar-approved answers. I make no guarantee of the “Scholar approved” statement, but reading some of the answers to the questions, it is consistent with the practices and experiences that I have in this limited time in Islamic Banking industry.

I attached their link for readers and hope they can be useful to you too.

 (## No I don’t get a commission for this!)

If there should be any other links that readers may find useful for other readers, don’t hesitate to send the link to me and I will add it to the list of useful link on this website.

Shukran and Assalamualaikum all…