Religiosity

Sometimes, as a practitioner, we wonder what motivates a person to subscribe to Islamic Banking products. Is it really based on the attractive features of a product, trying out something new, or is there an ingrained desire to subscribe to a Sharia compliant product? I know many non-Muslims subscribe to Islamic Banking products based on the intrinsic benefits afforded by the products, such as a more fairer penalty terms, transparent fees and charges, and flexibility in settling the accounts early.

But what of Muslims? How can we understand the triggers that encourage a Muslim to subscribe to a Sharia-compliant product?

I came across this writing by Dr Hanudin Amin which mentions a term that I hardly hear in the industry; Religiosity. It refers to the conceptual level of a person’s “piousness” to be marked into different levels (index), and he aptly split it into 3 general categories i.e. 1) Pious Religious, 2) Moderately Religious, and 3) Off-Hand Religious. His paper suggests that the Pious Religious group tends to accept Islamic Banking products more compared to other groups (in his study it’s focused on Home Financing-i). It also proposes that perhaps it is worthwhile to consider packaging Islamic Banking products based on the different levels of “Religiosity” to better appeal to them. This may indeed widen the scope for acceptance as products may be perceived differently by different people, although essentially it is the same product.

To read a bit more on the study, do have a read on the research below.

RELIGIOSITY INDEX FOR ISLAMIC HOME FINANCING IN SABAH

By Dr Hanudin Amin*

Excerpt :Earlier muslim scholars have supported the finding that a consumer’s religiosity has a significant effect on consumption in a muslim context (e.g. Elgari, 1990). Someone who approaches an Islamic bank for a mortgage is endowed with a certain level of iman. Bendjilali (1995) believes that choosing interest-free financing is blessed by Allah (SWT), hence it is rewarded. Bendjilali (1995) points out that:  “A muslim consumer who approaches the Islamic bank to get a loan for a real transaction to be financed through murabaha mode is endowed with a certain level of iman. The degree of iman will indicate the degree of compliance to the Shariah”.

For full Article, click on this link.

Tell us what you think. Should Islamic Banking products designed to a specific level of religiosity or can the one-size-fits-all approach appeal to everybody? Comments appreciated.

*The author is an Associate Professor/Dean at the Labuan Faculty of International Finance, Universiti Malaysia Sabah, Labuan International Campus. He has a PhD from the International Islamic University Malaysia (IIUM) in Islamic Banking and Finance (PG310163). He can be contacted at hanudin@ums.edu.my

Advertisements

German Banks: More Islamic than Islamic Banks?

In one of my engagements a couple of years ago,  I had the fortune to present my views on the Islamic Banking industry and its challenges in front of an audience in INCEIF. One of the bright participants there had subsequently proceeded to complete her MSc Research and recently gotten in touch with me. I had a read of what she had published, and it is a remarkable piece of academia. I have since asked for her permission to publish it on this site, for the benefits of other readers. Good food for thought.

Thank you Ms Rosana Gulzar Mohd, for your allowance to this request.

Overall, I find the research quite enlightening and overall accurate. It is also a good reminder of what we still need to achieve to ensure Islamic Banking remains focused and strong for the foreseeable future. Happy reading and do give your constructive feedback on the paper for our discussion.
Note : Ms Rosana was a student from INCEIF : The Global University of Islamic Finance and recently finished her MSc thesis concluding that a) Islamic banks are not really ‘Islamic’ and b) the recommendations for reforms. The analysis centres on the industry in Malaysia. She is keen to pursue her PhD. (Click this link for alternate site to download research)
Middle East Institute – National University of Singapore
Abstract:
This study, which compares the German system with Malaysia in the hope of improving Islamic finance, uncovers four paradoxes. Germany is chosen because its focus on mutuality and small enterprises, at the expense of profit maximisation, not only embodies the Shariah principles of justice and social welfare but also makes the system more stable. The banks’ profitability and stability between 2006 and 2014 are compared. This covers their performances before, during and after the global financial crisis. The indicators used are the banks’ return on average equity (ROAE), return on average asset (ROAA) and net loan to deposits and short-term funding. While this study finds that Malaysian banks, including Islamic ones, are indeed significantly more profitable and efficient than German banks, it uncovers four paradoxes. Firstly, it is ironical that Malaysian commercial banks are less aggressive than the Germans in their loans-to-deposit ratio. Secondly, the profitability of Malaysian development financial institutions (DFIs) and banking cooperatives are comparable, if not higher, than its commercial banks. Thirdly, the ROAE for Malaysian banking cooperatives rose 41% during the 2008 crisis when other banks’ fell. The last paradox is that while Malaysian commercial banks seem prudent in their lending, the DFIs and banking cooperatives are leveraged to an alarming extent. This study concludes with two reform recommendations: a rethink of the economic drivers in Malaysia and a sprucing up of the DFIs and cooperatives’ balance sheets towards national standards.

Sharia Compliant Banking in Malaysia

One of the long running arguments on Islamic Banking in its current state is the level of compliance to the rules of Sharia. There are still many believers out there who are not really believing in Islamic Banking. There are many suspicions in the industry. The main one is that Islamic Banking is a copy of conventional banking with merely a Sharia wrapper around it.

Sharia CompliantThis view is admittedly hard to dispel, unfortunately. Especially in a market where the industry is running 2 parallel banking systems ie Islamic Banking and Conventional Banking side by side. Sometimes, there is an additional element ie Islamic Banking Windows where an Islamic Banking operation resides in a conventional banking, leveraging totally on the conventional banking infrastructure.

The Middle-East has been able to gain more focus on the development of Islamic Banking. Despite Malaysia being one of the prominent pioneers of the industry, the stability of what we are seeing in the Middle-East has been the focus of ensuring the products they offer are deemed more Sharia compliant. While Malaysia is coming out with innovations to catch up with competition from conventional banks, the Middle-East is looking to products they already have and improving them to ensure Sharia compliance, fully backed by an international Shari’a framework.

This is clearly a different approach to the development between the two Islamic Banking industry.

In my view, the Middle-East has a clear advantage when in comes to sustainability. The advantage is simply this; the wants of the consumer. The Middle-East consumer simply WANTS Islamic Banking. No question about it. The consumers are split to either want Islamic Banking or does not want Islamic Banking. The trend is shifting away from the view that they are indifferent to any banking structure. There is a growth in preference for Islamic Banking, and this is the main driver for the development of the industry.

Malaysia, on the other hand, has a different set of consumers. The Malaysian consumers, whom may be just as pious as their Middle-Eastern brothers, continues to view the Islamic offerings with deep suspicion, which mould the attitudes towards Islamic banking industry. Admittedly, some Islamic Banking contracts have been disputed, tested and contested in a court of law, and in some cases the banks are not able defend these contracts properly. Reputational damage done; and some quarters have taken advantage in making the molehill bigger than it really was.

In Malaysia, the consumers only want and expect certain things from their banking product; cost savings features with full benefits, cheap pricing and easy to use. There is strong preference for Islamic Banking products but if there is a better alternative in the conventional banking space, the attitude is “Why not?”. At the end of the day, it all comes down to dollars and sens; “How much does it cost, what savings do I get, how much do I save”? Islamic or non-Islamic? It is all about what money I earn or save which I can use for my family and myself.

Maybe economic standing of the consumers do play a part. A product in Malaysia seems to be more about justice, even if it is just a misplaced perception, and therefore it must be cheap. Islamic Banking products in Malaysia have evolved significantly since its inception in the early 80’s. It is now more equitable, competitive and in many cases, has more “justice” elements in its structure. The issues that may arise 10 years ago, in my view, has already been looked at and smoothed out.

Bank Negara Malaysia (BNM) has introduced many measure to support this idea of justice. The Ibra guidelines to ensure equitable settlement. Regulated Late Payment Charges to ensure consumer rights are protected. Synchronisation with the conventional banks on Responsible Financing and Product Transparency. Tight regulations of the Fees and Charges that an Islamic bank can charge to consumers. Does anyone know how rigorous the process BNM has imposed to approve fees and charges that an Islamic Bank can charge? 4 levels of approval at BNM, even after the Bank’s internal Sharia Committees have approved those charges. To get approval from the internal committee is already tough; to go to BNM to get the final approval is not something we look forward to.

These are good steps, but is it enough? Will the Malaysian consumer take that quantum shift to buy into Islamic banking products?

SSBAs I mentioned earlier, the main difference between what’s happening in the Middle-East and Malaysia is the consumer preference. In Malaysia, the consumer wants a product that provides justice to them, whether it’s pricing or features or convenience. Islamic or otherwise, it’s the job of Islamic Banks to win them over.

Therefore, this difference in the consumers mindset in the Middle-East may eventually be an important factor. Since Middle-East consumers just WANT Islamic banking, the industry there is given the benefit of the doubt for its development. Because of this, the emphasis of the development is more on Sharia compliance rather than just pricing, features and innovation.

fatwa

My limited experience in the Middle-East led me to one important conclusion; consumers want the comfort that when they choose Islamic Banking, the product must assure it meets the Sharia compliance required. By this, it is important to know the people who develop and approve the products. Great weight is placed on the names and reputation of the Sharia scholars themselves. Consumers genuinely want to know who approves the product structure, and want to see the scholars stamp on it. Requests for a copy of the fatwa governing the approval of the product is a norm in the Middle-East. As mentioned, the emphasis is on Sharia compliance, more than merely pricing. There is a huge trust and confidence in the Sharia scholars themselves, in their ability and the quality of decisions made on the products.

For that, I do applaud the consumers who chose Islamic Banking for looking beyond pricing. Many times I have been asked to furnish details and profiles of the Sharia scholars who approved the products. The decision to buy the product is more often than not, based on these profiles. The assurance of Sharia compliant banking became more important, even though there are better pricing elsewhere. And I believe that product innovation will have to come naturally once the performance of the Islamic banking industry is in the upswing. Competition and customer feedback drives innovation, but in the first place we need the right customers asking for the right solutions to be banking with us. As pricing and feature becomes the second priority, the Middle-East banks will be well placed to take a step back and assess compliance and therefore build consumer confidence organically.

Furthermore, many corporates and government-linked institutions mandates their financial dealings to be Sharia compliant, even making it part of their constitution and governance. This will drive the demand for Sharia compliant banking even more. With a ready market seeking, looking and wanting Islamic products and services, one can foresee a sustainable growth in the industry.

I don’t know what can possibly change the consumer mindset for this in Malaysia. Until then, we will always be playing catch up with the conventional banks even when BNM is pushing for a more wholesome Sharia compliant banking system. It could be a painful transition that the Banks will find difficult to stomach when the existing structure seemed to be working well. But without this change, will the industry ever make that quantum leap?

It’s catch-22. Someone needs to be bold enough to see it out, bite the bullet and draw that line in the sand; take a chance on Islamic banking with confidence and without so much suspicion. Maybe that is what is needed to make that paradigm shift in consumers.

Readings : December Papers x 3

Murabaha

And to close off the year, BNM gave us a further 3 reading gifts for us to enjoy our holidays:

  1. Murabahah (2013)
  2. CP Mudarabah (SR,OP, OR)
  3. CP Musharakah (SR,OP,OR)

The Murabahah Standards looks interesting, and so is the Mudarabah Concept Paper. Do have a read and tell us what you think.

Looking forward to the coming holidays.

Conversations on Islamic Banking in Malaysia

Malaysian Islamic Banking industry is undergoing a massive structural change. I was a bit surprised when we had visits from several research institutions asking Islamic Bankers on opinions on how to make Islamic Banking in Malaysia more “Islamic”. From those discussions, I got the impression that the Central Banks is really pushing the Islamic Banking agenda, which will be a quantum jump away from the current model of “replicating” the conventional cousin’s model. This quantum leap also means that the model that Central Bank envisioned will be substantially different to the Islamic Banking model practised in the major geographies in the Middle East.

What we practitioners picked up in the discussions were the persistent questions of:

  1. Why has banks not started to offer products based on more “Islamic” products such as Musyaraka financing or Mudharaba financing?
  2. What does bank think about contracts such as Salam?
  3. What does the bank think about the leveraging model i.e. the management of Islamic funds via the conventional Treasury function?

This line of question leads to the impression that the standard banking model should be evolved into a more “Islamic” structure of risk-taking, profit-sharing, venture-financing and cleaner utilisation of customer investments and funds. This is a clear departure from the traditional way a bank is set-up, whether pure Islamic Bank or Islamic-windows operation. The only response we can give was: The above products requires a different view on risk-taking and credit, and moves closer to the model of venture-capitalist and development banks. Traditional bankers will not be able to assess the risks on such products, and shareholders will be open to a higher risk-profile to demand a higher return on their funds.

ISLAMIC BANKING MODEL : HOW DIFFERENT IS DIFFERENT?

This envisioned model will be something not entirely new. There are already working models, but generally the stakeholders, including the customers, MUST understand (and accept) the concept the risk vs return pay-off of such model.  Something very similar to the risk-taking vision of Islamic financing is Venture Capitalism (although many shudder to the word “capitalism”).

Venture capitalist works on the ratio that in 100 customers, maybe 5 or 10 customers are able to survive their start-up period and have decent returns, and the returns to the venture capitalist is sufficient to cover the losses incurred from the remaining customers. The risks of losing the capital is high, and in the cases of Development Banks, government backing usually covers for loss-making enterprises, so long as it serves a purpose toward the national agenda. But this is the essence of risk-taking, and its corresponding rewards. If Islamic Banking want to expand, the thinking must therefore be expanded into this space, i.e. the realm of Mudharabah financing.

Musyarakah

Other models includes a co-operative model where typically a group of “investors” enter into a collective and co-operative agreement to embark on an entrepreneurial endeavor. The money is pooled to create capital and business is run by the “elected committee” and performance is reported regularly to all stakeholders. Profits are shared according to agreed payout ratios or to be re-invested into the business; losses are borne according to equity of each investor.  And the manager of the business earns a management fee. This is a typical Musyarakah arrangement.

Such models can be easily formalized under Islamic Banking, but we realized the fact that there is a huge monster in the shadows, ready to pounce on efforts to grow the Islamic Banking envisioned by the Central Bank that falls along this route.

CONVENTIONAL BANKING. HUGE, OLD, RICH MONSTERS.

Developing the Islamic Banking in its present form of replication and innovation alongside the huge monster of Conventional Banking has already proved to be a challenging task. Developing a truly “Islamic” Islamic Banking will pose an even greater challenge. Can Islamic Banks afford another gestation period of regulatory upheaval, customer re-education, corporate buy-in, legal re-thinking and more importantly the impatience of shareholder dollars while the kinks of the new model are being smoothened out? Can we afford to fall further behind while we get our new act together? The so-called great momentum of Islamic Banking growth will be lost, and at a risk of losing even further ground as Conventional Banking takes up the slack left opened by Islamic Banking. It is hard to win back customers, if customers’ confidence in the model is no longer there (albeit temporary). To switch to a different banking model, no matter how noble the intention, will put the Islamic Banks right to the sword. It will be “make or break” for all.

TYPES OF IFI

We will go up against a huge giant which will only get stronger with this. Political-will can help, together with strong regulatory push for industry survival. But the next question to be asked is that, will the market itself be ready for such a shift in thinking? Can they accept that a Bank is no longer a Bank, but instead a partner in their businesses? Do they even want Banks to partner them? Are they willing to share the risks, and therefore the equivalent returns with the Banks? If today they are paying a cost of capital financing at about 7.00% per annum, and earning a net margin on their business at about 15% per annum, under the regime of profit sharing at 70%:30%, are they willing to share their net margin of about 10.50% with the Bank? Alternatively, will the Bank be willing to take the risk of sharing profits if the returns are lesser than 7.00%? What about loss making endeavours? Will only riskier businesses be interested in such models, since presumably such business will not have been able to obtain funding coming from the “conventional” credit assessments? It will be a scenario where the Islamic Banks will “share risks” if it is a high risk customer, and conventional Banks will “transfer all risk” to its low-medium risk customers they onboard.

It will be interesting to finally see the Central Bank’s plans for the future. I am sure there is something in the works, especially after we just had a third research team ask us the same, same question again. “What are the things holding back the Bank from introducing these types of “Islamic” Islamic products?”. The one answer that crops up in my mind.

“That huge, rich monster standing right next to us. Ready to pounce.”

Similar Article: Old Qahwah in a New Cup?