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Islamic Retail Banking and Finance: Global Challenges and Opportunities

The growth of Islamic banking and product development among Islamic retail banks
Professor Rodney Wilson, University of Durham, Institute for Middle Eastern and Islamic Studies, United Kingdom

Introduction
Sharia -compliant banking has clearly a powerful appeal for Muslims; indeed many have refused to deal with conventional banks, and one of the greatest achievements of Islamic retail banks has been to attract savings that might otherwise not be harnessed by the banking system. When Islamic banking is first introduced in economies with only conventional banks, deposits seem to take off rapidly, reflecting the pent up demand for Sharia -compliant facilities. After five to 10 years, however, the momentum appears to be lost and the volume of deposits stagnates as a proportion of total bank deposits, at around 1525 per cent in the Gulf and around 10 per cent in the case of Malaysia. How can Islamic retail deposits rise beyond these ceilings? One answer is of course to bring all banks into conformity with Sharia law, as in Iran under the 1983 Usury Free Banking Law. This, however, precludes customer choice and reduces the pressure on Islamic financial institutions to offer competitive and innovative services as they have a captive market. A more satisfactory way of increasing the long-term potential for Islamic retail finance is to examine the cultural barriers and misunderstandings surrounding the industry and to analyse how these can be overcome through customer education. Profiling Islamic retail bank clients can also be helpful. Who are the customers of Islamic banks, and how do they differ from the clients of other banks? Are the clients especially pious, do they already have bank accounts with conventional banks, are they young or old, what is the level of their educational attainment, and are they from any particular socio-economic group or occupational category? Unfortunately, there is very limited survey data on Islamic bank clients, but it is evident that the answers to these important questions depend on the market being investigated and that sweeping generalisations are unhelpful. It is instructive to contrast the clients of Jordan Islamic Bank and Dubai Islamic Bank. Both are longestablished institutions, the latter being the oldest Islamic bank in the world established in 1975 while Jordan Islamic Bank started its operations in September 1979. The clients of these institutions reflect the very different situations in each of these economies, and the structure and competition in the local banking markets. As Malaysia is the major market outside the Gulf region where Islamic retail banking has developed significantly, it is also fruitful to examine its experiences, focusing on Bank Islam Malaysia, the first major dedicated provider of Sharia -compliant retail financial services in South-east Asia. Islamic retail banking in the United Kingdom will also be discussed from the customers perspective, looking at the newly established Islamic Bank of Britain and the products it offers.

Jordan Islamic Bank


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Jordan was already a mature banking market when Jordan Islamic Bank was established, with the Arab

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Bank and the Jordan National Bank being the two largest conventional banks, the former largely serving the Palestinian population as it was originally headquartered in Jerusalem before the creation of Israel. The new Jordan Islamic Bank attracted some clients from both these banks, but many retained their existing accounts with conventional banks, rather than banking exclusively with a new, untried entity. Most of the clients were Jordanian nationals, some of whom were of Palestinian origin, but the majority had been born on the East Bank. Sami Hamoud, one of the pioneers of Islamic banking in the Arab world, and a Jordanian national, was a leading advocate of the new bank. He had worked for Jordan National Bank since 1956, but as the son of a well-known Islamic scholar, he became increasingly uneasy with the interest-based finance of conventional banks. Hamoud appeared on a series of religious television programmes in Jordan hosted by the prominent 1970s Islamic scholar, Sheikh Ibrahim Zaid al-Kilani. There he expounded his views on banking, and attracted the attention of viewers to the new concept of Islamic finance. 1 The credibility of Jordan Islamic Bank was increased by the stature of those involved in its preparatory committee, including Dr Mohammed Saqr, a Harvard-educated economist, and Sad al-Din and Misbah al-Zumeili, from wealthy local business families. There was also a Saudi Arabian connection, as Sheikh Saleh Kamel of the Dallah Al Baraka Group took a 40 per cent stake in the capital of the new bank. Many Jordanian expatriates worked for Dallah Al Baraka, and these were among the new banks first clients. Many of the initial customers of Jordan Islamic Bank were wealthy business people or professionals such as doctors, dentists and university professors, and its shareholders were also important customers. 2 The client base built up perhaps more slowly than its founders had anticipated, although ironically it was dissatisfaction with the small returns on savings deposits paid by the conventional banks that prompted customers to open profit-sharing accounts with Jordan Islamic Bank, which actually paid a higher return. In recent years the predominance of savings and investment accounts has continued, as this remains a focus for client interest in Jordan. Current accounts represented less than one-third of total deposits in 2003, whereas investment accounts constituted two-thirds of the total. 3 Jordan has been subject to a high degree of economic uncertainty, not least because of the difficult situation in neighbouring countries, notably Iraq and Palestine, with which Jordan has significant trade links. Furthermore, there are few social security benefits in Jordan. In these circumstances clients and potential clients tend to view Jordan Islamic Bank as a savings institution rather than a purveyor of consumer credit. As primarily a savings institution, Jordan Islamic Bank has focused on expanding its branch network throughout the country, and by 2004 it had 66 branches from Aqaba in the south to Irbid in the north, with a high concentration in Amman. As a consequence, the bank had attracted 913,000 accounts on a variety of terms to suit Jordanian savers. The unrestricted investment mudaraba accounts were divided into one-year fixed-term, three-month notice and savings accounts with partial instant access. The oneyear fixed-term deposits paid 4.04 per cent in 2003: the three-month notice accounts 3.14 per cent; and the savings accounts 2.24 per cent. Some 300 cash prizes are awarded annually to savings depositors to enable them to perform Hajj or Omrah , and there are also 100 prizes in kind distributed in order to attract savers. Jordan Islamic Bank also offers restricted investment accounts on the two-tier mudaraba principle where funds are designated for a particular project in which the depositor shares in the project rather than the bank profit, and the bank charges an arrangement and management fee. Such deposits are

The growth of Islamic banking and product development among Islamic retail banks

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The growth of Islamic banking and product development among Islamic retail banks

higher risk, but the depositor, who typically will already have savings and unrestricted investment deposits, will anticipate a higher return. To further diversify its pool of savings and investment facilities, Jordan Islamic Bank also offers investment portfolio accounts, designated as muqarada bonds, where the bank manages a portfolio of assets on behalf of bondholders and charges a management fee, with the bondholders sharing in the profit the asset portfolio generates on the mudaraba principle. The increasing sophistication of savings and investment products appeals to Jordan Islamic Bank customers, who are well educated, often university graduates, and have an increasingly good understanding of Islamic finance. Many of the depositors are young, and the bank tries to facilitate marriages, enhance family values and build a moral society through its activities. In cooperation with the Chastity Charitable Association it was involved in the 11th Group Wedding in which 114 brides and grooms celebrated their marriages in 2003. Each couple received JD100 (US$141) and in addition qualified for a

qard hassan interest-free loan, with JD153,000 (US$215,500) distributed to 302 newly weds in 2003. 4 This type of activity creates much goodwill and attracts many new clients to the bank.

Dubai Islamic Bank


The economy of the UAE is very different to Jordan, with one of the highest levels of per capita income in the world, but with expatriates accounting for over 80 per cent of the population. Dubai has become a diversified service-based economy, and the most important retail centre between Singapore and Europe, with construction of the worlds largest shopping mall and the worlds tallest building starting in 2005. The UAE has a sophisticated banking system, with the worlds largest banks, including HSBC and Citigroup providing retail as well as corporate and investment banking services. The competition in the market is intense, and Dubai Islamic Bank has to offer services to its retail customers similar to those provided by the global players. Although Dubai Islamic Bank was originally established to serve the merchant community of Dubai back in the 1970s 5 a role it still plays through its murabaha financing much of the growth in recent years has come from its retail operations. By 2005 the bank had 52 branches to serve its retail clients, plus 12 cash offices without staff, but with ATMs. Personal banking is highly developed in the UAE with most employees having their salaries paid into bank accounts, and debit card transactions are much more common than in many other parts of the Muslim world where there remains a heavy reliance on cash. The modern culture and high customer expectations regarding banking services in the UAE means that all banks have to invest heavily in information technology, where there are of course considerable economies of scale. Medium-sized institutions such as Dubai Islamic Bank are inevitably at a cost disadvantage, but despite this the bank has invested heavily in state of the art systems. Since the 1990s Dubai Islamic Bank has offered a telephone banking service, Al Islami Al Mubasher , and more recently this has been extended to Al Islami Mobile Banking and Al Islami Online . 6 Through these channels clients can hear or view their balances, find out if their salaries have been paid into their accounts, obtain details of the last five transactions and receive account summaries and detailed statements by fax. Since 2004 clients have also been able to obtain details of transfers and remittances, request a chequebook or even open a new account through these distance delivery channels without going into a branch. Debit cards can also be managed through online, fixed-line telephone and mobile banking, as virtually all clients of Dubai Islamic Bank have mobile telephones and access to computers. Debit cards can
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be activated and blocked and personal identification numbers (PINs) blocked by telephone, text

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messaging or through online banking. This gives the client increased assurance in case cards are misplaced or stolen. All current account holders receive a free Electron card that they can use in cash machines to withdraw money or make purchases from retail outlets. This functions as a debit card, with payments deducted immediately from current account balances. Clients can also pay an annual fee and obtain a Visa charge card, which can be used for retail purchases or instant cash, with the outstanding balances settled once each month by an automatic debit from clients current accounts. No interest is levied on outstanding balances, with clients receiving up to 40 days of free credit, the banks profit coming from the annual fee charged to the client and the commission from the retailer. Both Classic Visa and Gold Visa cards are offered, the latter having a higher spending limit, its issue being dependent on the clients salary and assets. Dubai Islamic Bank offers the same range of retail services as conventional banks in the UAE, as its clients are part of the same culture and have the same needs. The major difference is that the products have to be structured to be Sharia -compliant, because that is the expectation, and indeed the demand of its clients. In most respects, however, the clients are no different to those of conventional banks, either in terms of socio-economic status or even with respect to religious observance. There is a greater proportion of funds in current accounts in the UAE than in Jordan, as there is less of a savings culture and more emphasis on spending (consumer confidence being at a high level). Nevertheless, Dubai Islamic Bank offers a variety of savings and investment accounts, with withdrawals limited to one per month on the former, whereas investment deposits are for fixed periods ranging from three months to one year. With both types of account the depositor shares in the banks profits on a mudaraba basis, the highest return being that paid to those holding investment deposits of oneyears duration. In the Gulf countries where the culture emphasises sexual segregation, including with respect to financial matters, both conventional and Islamic banks have established exclusive ladies branches. Dubai Islamic Bank has designated these as Johara branches, the first opening in the Jumairah district of Dubai in 2003, and with 11 operating by 2005 from Abu Dhabi to Sharjah. 7 Special privileges are offered to women using these branches, notably shopping vouchers that entitle the holder to discounts at selected retail establishments, as well as health and education benefits.

The growth of Islamic banking and product development among Islamic retail banks

Consumer and housing finance


Consumer financing products are important for the major Islamic retail banks in the Gulf, including Kuwait Finance House, the Al Rajhi Banking and Investment Corporation and Dubai Islamic Bank. Clients have adapted very readily to the culture of purchasing cars and major household goods on credit. The emphasis of these Islamic banks is on responsible lending, and there are no household debt problems comparable to those in some Western countries. In the case of Dubai Islamic Bank, vehicle finance is based on the murabaha principle, with the bank purchasing the vehicle on behalf of the client, with the latter repaying by regular instalments over up to 60 months. Clients of other banks, including conventional institutions, may be given vehicle finance, provided they provide passport and employment details, plus bank statements for the previous three months. Similar requirements are specified in the case of consumer goods finance, on which a flat 6 per cent profit rate was applied in 2005. Dubai Islamic Bank also provides housing finance to UAE nationals who have secured a grant or a loan through the governments housing programme. This is known as the Sakan finance scheme, which
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The growth of Islamic banking and product development among Islamic retail banks

covers finance of up to AED350,000 (US$95,000) for the purchase of homes, the repayment period being from 12 to 108 months. The scheme works on the murabaha principle, with fixed monthly payments, rather than the variable monthly payments offered by some Islamic finance providers for ijarah mortgages when the finance period is longer. There is a very active market in freehold property in Dubai, with foreign nationals permitted to purchase apartments and houses, unlike elsewhere in the Gulf where buying is restricted to local residents. Dubai Islamic Bank does not get involved in this market, however, as the developers usually refer purchasers needing mortgages to their financing subsidiaries. Emaar Properties, one of the largest developers, has an Islamic finance subsidiary, Amlak Finance. Dubai Islamic Bank has both expatriate customers and those who are local nationals, the latter representing a majority. Virtually all of the expatriate customers and all UAE citizens are Muslims, with the expatriate customers mainly from Pakistan and India. Although the bank is gradually increasing the proportion of UAE citizens in its employment, a majority still come from Pakistan and India, although by 2007 the majority will be local nationals. Dubai Islamic Bank, like other UAE banks, has its publicity and website in both Arabic and English, but in the branches Pakistani employees often speak to clients from the Indian subcontinent in Urdu. Expatriates are more likely to be attracted to major multinational banks because their size and brand image instil confidence, as is the case with Standard Chartered and HSBC, the latter being especially well represented in the UAE. On the other hand, expatriates who have extensive business dealings with UAE citizens often believe it is politic to be seen to have an account with an institution such as Dubai Islamic Bank, as this means they are more likely to be viewed as part of the local community, and it emphasises their faith-based credentials as Muslims. The government of Dubai is supportive of the bank, 8 although it also deals with local conventional banks, unlike the government of Sharjah, which encouraged the conversion of the National Bank of Sharjah (through which it channels most of its business) into an Islamic bank. A fieldwork survey of Dubai Islamic Bank clients by Obaid Al Zaaibi, a doctoral research student at Durham University, shows that it is the assurance of Sharia compliance that is the most important factor attracting clients. The Sharia board members are well known and respected locally, comprising Dr Hussain Hamid Hassan, the chairman, Dr Mohammed AbdulHakim Zoeir, the general secretary, Sheikh Mohammed AbdulRazak Alsidiq and Dr Ali Aldin AlQura. They are very proactive, and examine all new products proposed in detail before issuing any fatwa , as well as analysing specific contracts about which they are invited to give opinions. The Sharia board members are also actively involved in training programmes for bank staff, they inspect marketing material used to promote the Islamic financial products, and provide a Sharia audit of the banks annual reports.

Bank Islam Malaysia


As the first Islamic bank in South-east Asia, Bank Islam Malaysia has set the standard for Sharia -compliant financial services since it first opened in July 1983. It has been listed on the Kuala Lumpur Stock Exchange since January 1992, and by 2005 it had 85 branches, with representation in all the states of the Malaysian Federation. Retail banking has been the major focus of its activity, with over 50 prod22

ucts offered, and an extensive range of services comparable to its conventional counterparts.

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However, Malaysia is a very competitive market-place for retail banking, with large conventional institutions such as MayBank dominant in the market. As a result, although Bank Islam Malaysia deposits have been growing by an average 15.8 per cent over the 200004 period, it still accounts for only around 5 per cent of total deposits. Furthermore, deposit growth has slowed down in recent years, and 2004 actually witnessed an 8.9 per cent fall. 9 During 2004 total current account deposits by individuals in Malaysian banks rose by 15 per cent and savings deposits increased by 7.6 per cent, so clearly Bank Islam Malaysias ability to attract and retain deposits was less than impressive. 10 The relatively poor performance may be explained by competition from Bank Muamalat, the second exclusively Islamic bank, 11 and from conventional banks offering Islamic windows and counters. Unlike the Islamic banks in the Gulf and Jordan Islamic Bank, Bank Islam Malaysia pays a small return on its current accounts, the rate for retail deposits being 0.2 per cent, although for deposits of over RM25,000 (US$6,580) 1.3 per cent was paid in 2005. The minimum deposit is RM500 (US$132) with deposits based on the wadia concept of sale at a loss. 12 Bank Islam Malaysia also offers Wadia Savings Accounts where the minimum deposit is only RM10 (US$2.6). These accounts pay a return of 1.5 per cent, but although depositors are issued with an ATM Smart Card, they do not receive chequebooks, and standing orders and direct debits cannot be set up on these accounts. A savings passbook is provided to record transactions undertaken within bank branches.

The growth of Islamic banking and product development among Islamic retail banks

Mudaraba savings accounts are also offered by Bank Islam Malaysia, and provided a minimum balance of a mere RM25 (US$6.6) is maintained, depositors are entitled to a share in the banks profits, the rate in 2005 being 1.78 per cent. This rate is modest, but account holders are allowed to join the Group Family Takaful Plan. In the event of the account holders death, providing they are not over 65, families can receive benefits subject to the account holder having maintained a balance exceeding RM500 (US$132) during the six months prior to death. Family benefits are proportional to the average monthly balance, and range from RM500 to RM5,000 (US$132US$1,320). The investment accounts offered by Bank Islam Malaysia are time deposits for periods ranging from one month to five years, with higher rates the longer the period. In 2004 the profit rates on these investments ranged from 2.49 per cent for one month to 4.19 per cent for five years. The minimum investment is RM500 (US$132). These accounts operate on the mudaraba principle, with the profits shared between the investor and the bank as entrepreneur on the basis of a predetermined ratio. Bank Islam Malaysia has designed accounts to suit the perceived needs of particular groups of retail depositors. The Wadi Savings Accounts are designed for young children under the age of 12 with a minimum initial nominal deposit of RM1. The accounts can be held jointly with mothers, fathers or guardians, and withdrawals are permitted once per month. Free gifts are available to those with a minimum balance of RM100 (US$26) as well as a return of 1.78 per cent in 2004. The terms of the Ijraa Savings Accounts for teenagers are similar, these being targeted at the 12 to 18-year-old age group with gifts more suitable for older children.

Pewani Savings Accounts are designed to appeal to women over 18, the minimum deposit being
RM100. These pay a higher return than the childrens accounts for balances exceeding RM50 (US$13), the profit share being 2.13 per cent in 2004. Depositors who maintain more substantial balances of at least RM50,000 (US$13,158) are entitled to takaful hawa coverage for up to half that amount, as well as entitlements to annual cancer check-ups and subsidised hospital treatment. 13 Those who have retired from work are eligible for Sakinah Investment Accounts that paid a return of 2.97 per cent in 2004. The minimum investment is RM50,000 (US$13,158) for a period of 12 to
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The growth of Islamic banking and product development among Islamic retail banks

60 months, which is extendable. Account holders are entitled to a range of financing packages without arrangement fees or security being demanded. These include personal and education financing, as well as finance for Omrah and other package tours, vehicle financing and Balti Home financing. Account holders are entitled to Bank Islam Cards, either classic or gold depending on their account balances. The Bank Islam Cards can be issued as Visa or MasterCard, but are free of riba . Three Sharia -compliant contracts are used bai inah , wadia and qard hassan . With the bai inah contract there are two agreements: under the first the bank sells a piece of land to the customer at an agreed price; under the second the bank repurchases the land at a lower price, the difference representing the banks profit. The cash proceeds from the second agreement are used to create a wadia account, which the customers can use for retail purchases via their cards and cash withdrawals. The bank may, at its discretion, permit a customer to temporarily spend or withdraw more funds than are in the wadia account by providing a qard hassan interest-free loan. This may be granted where a valued customer suffers a temporary loss of earnings through illness, or there are exceptional expenditures required for hospital treatment or other emergencies. Bank Islam Malaysia offers a debt consolidation plan for those in financial difficulties. This involves the remortgaging of the property owned by the client, with the bank taking a charge on the property as a guarantee of repayment.

Consumer financing
As with other Islamic banks, Bank Islam Malaysia offers several consumer finance facilities for housing, vehicles and education, as well as personal undesignated financing and finance to cover Omrah travel to Saudi Arabia, which is more expensive for Malaysians because of the distance involved. The housing and vehicle financing use bai bithaman ajil sale and deferred payment contracts based on pre-arranged monthly instalments. The rates for home financing vary according to the funding total and the period involved, but for the first year charges only amount to 2.8 per cent and for the second year 6.0 per cent as the bank allows for new homeowners having to buy furnishings and other household items that may limit their capacity to repay. For years three to 10 the bank charges 7.5 per cent for home finance for amounts up to RM250,000 (US$65,790) for 100 per cent financing and 7.3 per cent for 80 per cent financing given the lower risks involved. For financing exceeding RM250,000 the rates increase to 8.0 per cent and 7.8 per cent respectively. Rates rise by 0.1 per cent for periods exceeding 10 years, and a further 0.1 per cent for periods exceeding 20 years. Vehicle finance is actually cheaper than housing finance as Bank Islam Malaysia has teamed up with several car distributors to offer attractive rates. For locally manufactured Proton cars the rates vary from 3.5 to 3.88 per cent, with the lower rates quoted for the more expensive vehicles. The rates for the generally cheaper Perodua cars range from 4 to 4.5 per cent, and those for more expensive imported cars from 3.5 to 3.6 per cent, with finance available for up to nine years, but with rebates ( ibra ) for early settlements. Education financing from Bank Islam Malaysia is relatively expensive, with 8.0 per cent charged where security is offered and 9.7 per cent charged where there is no security. The bai bithaman ajil structure is used for the financing. Rates increase by 0.1 per cent for financing for over three years and a further 0.1 per cent for financing over five years up to maximum of 15 years. Fees financed must be for courses approved by the National Accreditation Board of the Malaysian Ministry of Education or
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courses overseas at reputable universities and colleges. A security deposit equivalent to three monthly

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instalments is required, with one guarantor needed for financings of less than RM10,000 (US$2,630), and two guarantors for financings beyond that up to a maximum of RM25,000 (US$6,580) if the first guarantors net income is below RM3,000 (US$790) per month. Personal financing is available for up to 10 times gross salary, with the maximum being RM25,000 (US$6,580). This is available for up to seven years for those aged 55 or below earning at least RM1,500 per month (US$400). As with educational financing, guarantors are required, as is Group Family Takaful Insurance. The underlying contract combines qard hassan with bai sarf sale with deferred payment,

The growth of Islamic banking and product development among Islamic retail banks

bai sarf being the pre-Islamic sale of gold for gold or silver for silver, which can be interpreted today as currency exchange. 14 For finance of less than three years, 8.5 per cent is charged, with 9.0 per cent charged for over three years. Bank Islam Malaysia offers a wider choice of accounts and financing facilities to its retail clients than any other Islamic bank, but it could be argued that the choices are too complicated and confusing for its customers. It is difficult enough to explain to clients how basic products are Sharia -compliant, without having to get into the intricacies of a dazzling array of products. Arguably the products are too close to what conventional banks offer and not distinctive enough. Even though clients are seen by personal financial advisers, who explain what products are most suited to their needs, so much effort has to go into explaining the products that the time to advise on Sharia -compliance gets crowded out. This may explain why Bank Islam Malaysia has recently suffered a fall in market share despite its pioneering efforts. In the past its deposits have been more stable than those of the conventional banks, but it is not clear if this is still the case. 15

Islamic Bank of Britain


For over two decades there has been a perceived need for an Islamic bank to cater for the 1.8 million Muslim residents of the United Kingdom, but an early attempt by Al Baraka to establish a retail operation in the 1980s proved unsuccessful. 16 Although the major international banks in the United Kingdom and the London subsidiaries of banks based in the Muslim world have offered Islamic deposit and financing facilities since the early 1980s, these have been primarily to serve institutional clients and overseas high net worth customers rather than the local Muslim community. In 2002 an initiative was launched to found an Islamic bank in Britain, supported by the leading Islamic banks and finance companies in the Gulf. Some 14 million (US$26 million) of start-up capital was raised, and an application was made to the Financial Services Authority (FSA), the UK regulator, for a banking licence. After much discussion and investigation, as is usual with licence applications, the FSA granted the licence in August 2004, and the first retail branch was opened in the Edgware Road in London the following month. The banks head office and operational centre is located in Birmingham, the second largest city in the United Kingdom, which has a major concentration of the countrys Muslim population. A further 45 million (US$85 million) was raised through a private placement in the Gulf to finance the medium-term business development objectives. First and foremost, Islamic Bank of Britain stresses its values of faith, convenience and trust, with belief in Islam coming first. The experienced Sharia supervisory committee comprising Sheikh Muhammad Taqi Usmani of Pakistan, Sheikh Abdul Sattar Abu Ghuddah of Saudi Arabia and Sheikh Nizam Yaquby of Bahrain approves all products. 17 This Arab and Pakistani representation reflects the ethnic origins of much of the United Kingdoms Muslim community, although in the longer term, British
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The growth of Islamic banking and product development among Islamic retail banks

Muslim representation on the Sharia committee may be important for credibility among the younger generation of clients and potential clients. Unlike Bank Islam Malaysia, Islamic Bank of Britain stresses that it tries to make all transactions with the bank simple for the customer in terms of delivery and understanding. Current accounts were offered from the beginning, which pay and charge no interest. Account holders are issued with a chequebook and debit card, and standing order and direct debit facilities can be set up on the accounts. Monthly statements are issued, and the bank provides a foreign currency and travellers cheque service. No minimum balance is required to open a current account, but the account should be kept in credit. Savings accounts were also offered from the outset, with the basic savings account requiring only a 1 (US$1.90) minimum deposit. These accounts operate on a mudaraba basis with the clients sharing in the banks profits, the rate being reviewed monthly. The rate for December 2004 was 3 per cent, unchanged since October. The profit share is paid gross, but savers are warned that it is treated like dividend income for tax purposes. Islamic Bank of Britain issues a tax voucher showing the amount of the profit distribution each year, plus a 10 per cent tax credit that can be offset against any dividend tax liability, effectively reducing the rate to 22.5 per cent. The clients liability is explained clearly and simply and most Muslim residents of the United Kingdom should understand the tax position. Term savings accounts are also offered for periods of one, three and six months, with 5,000 (US$9,500) being the minimum investment. Competitive profit rates of 3.5, 3.75 and 4.0 per cent respectively are paid on these accounts, which also use a mudaraba structure. Islamic Bank of Britain also offers treasury deposit accounts for high net worth clients. The minimum deposit is 100,000 (US$190,000) with fixed periods of one, three or six months offered. These are structured on a murabaha basis, with the deposit used to finance a commodity transaction; the bank acts as agent and charges a fee. The depositor obtains the profit from the purchase and sale of the commodities, usually through the London Metal Exchange, and the expected profit rate is quoted to the depositor in advance. Returns payable are competitive with those offered on conventional treasury accounts around 4 per cent in January 2005. Islamic Bank of Britain will be offering home finance in 2005 as its branch network expands: initial personal finance is being through an unsecured facility structured on the tawarruq principle. This can cover payments for medical services or the cost of a wedding through a cash advance. The bank purchases a Sharia -compliant commodity and sells this to the client on a cost-plus profit basis, with the customer making the payment on a deferred basis through instalments. The client then appoints an independent agent recommended by the bank to sell the commodity, and the proceeds are deposited in the clients account for immediate use. The procedures are clearly explained in the banks literature, and most clients and most importantly the Sharia committee are satisfied with the legitimacy of such transactions.

Lessons from Islamic retail banking experience


What are the lessons from these diverse experiences of Islamic retail banking in Jordan, the United Arab Emirates, Malaysia and the United Kingdom? First, Islamic banks must be focused on the needs of their customers and not simply mimic conventional banks with respect to product offerings. Customer education should focus on explaining the nature of Sharia -compliant products, as Islamic bank clients will be receptive to this, because ultimately it is this that attracted them to the bank. This is more impor26

tant than encouraging the devout to use as wide a spectrum of products as some conventional banks

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offer. Islamic bank products should be distinctive. The challenge is not to have innovation in fiqh through endless ijtihad , but rather to innovate the products themselves so that they can meet rigorous standards of Sharia compliance. There may well be some services that Islamic retail banks cannot provide, and some scholars even view tawarruq with scepticism as, despite the legal niceties, it can result in problems of consumer indebtedness. The banking culture in different countries where Muslim clients and potential clients live varies considerably. In all the markets considered here, retail banking is well developed, especially in Dubai, Malaysia and the United Kingdom. Clients expect a high level of service, including immediate access to their funds in current accounts and the use of automated facilities. In poorer Muslim countries the large investment needed to provide such facilities makes their provision problematic for both conventional and Islamic banks. The move from cash-based to card-based transactions and electronic transfers is part of the process of financial development, but Islamic banks have to move with their clients, not get ahead of them. Transparency is desirable so that Islamic bank clients can be well informed, but this implies providing relevant information in a helpful manner, and not simply providing a bewildering mass of detail. The publicity provided by the Islamic Bank of Britain is an example of good practice, as it is clear and concise. That of Bank Islam Malaysia is well organised, and tries to be informative. Within the Arab world the Islamic banks in the Gulf undoubtedly lead by example, and the website and publicity of Dubai Islamic Bank in Arabic and English is especially informative, and attractively presented. Islamic banks should first and foremost stress their ethical values. A positive message such as that of Islamic Bank of Britain is better than simply stressing prohibitions. There are lessons from the Western ethical banking industry in this respect, especially from institutions such as the Cooperative Bank in the United Kingdom. Most Muslims will be aware of the Islamic prohibition of riba , but they may be less aware of the ethical merits of Islamic financial products, and why their use is more than just their conventional equivalents. The challenge for Islamic retail banks is to get across this message. Success in this can take Islamic banks beyond the 1525 per cent range of total bank deposits in the Gulf, the 10 per cent barrier in Malaysia and the 0.1 per cent figure in the United Kingdom.
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Malley, Mohammed, Jordan: A Case Study of the Relationship Between Islamic Finance and Islamist Politics, in Henry, Clement and Rodney Wilson (eds.), The Politics of Islamic Finance (Edinburgh: Edinburgh University Press and New York: Columbia University Press, 2004), pp.191215. Shallah, Ramadan, Jordan: The Experience of the Jordan Islamic Bank, in Wilson, Rodney (ed.), Islamic Financial Markets (London and New York: Routledge, 1990), pp.100128. Jordan Islamic Bank, Annual Report 2003 (Amman) (www.jordanislamicbank.com/annualreport.html). www.jordanislamicbank.com/news_5html (accessed 21 January 2005). Wilson, Rodney, Banking and Finance in the Arab Middle East (London and New York: Macmillan, 1983), pp.8084. www.alislami.co.ae/electronic/mubasher.html (accessed 23 January 2005). www.alislami.co.ae/retailbanking/aljoharah.html (accessed 23 January 2005). Lewis, Mervyn K., and Latifa M. Algaoud, Islamic Banking (Cheltenham, United Kingdom and Northampton, Maryland, United States: Edward Elgar, 2001), p.126. Bank Islam Malaysia, Annual Report 2004 (Kuala Lumpur), p.1. Bank Negara Malaysia, Monthly Bulletin of Statistics (to November 2004) tables II.12 and II.13.

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Islamic Retail Banking and Finance: Global Challenges and Opportunities Chapter 3 www.euromoneybooks.com Euromoney Institutional Investor PLC

The growth of Islamic banking and product development among Islamic retail banks

11 12

13 14 15

16

17

www.maamalat.com.my (accessed 28 January 2005). As defined by Umer Chapra, M., Towards a Just Monetary System (Leicester, United Kingdom: Islamic Foundation, 1985), p.170 and p.265. www.bankislam.com.my/prodct_dpssimppwni_e.htm (accessed 28 January 2005). Malaysian Securities Commission, Glossary on Islamic Banking (Kuala Lumpur, 2004). Yusoff, Remali, The Stability of Deposits in Islamic Banks Versus Conventional Banks in Malaysia (University of Durham, PhD thesis, 2004). The Experience of Islamic Banking in England in Piccinelli, Gian Maria (ed.), Banche Islamiche in Contesto non Islamico (Rome: Instituto per LOriente, Universit Degli Studi di Roma, 1994), pp.249283. www.islamic-bank.com/islamicbanklive/SupervisoryCommittee (accessed 28 January 2005).

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