Each western market presents different challenges for Islamic finance and hence there is no single formula to expedite entry. The UK market has been the most open, but London was affected more severely by the global financial crisis than other western markets and Islamic banks located there continue to record losses. In the Eurozone (EU) the civil law environment is less accommodating than common law jurisdictions, but Ireland is the only country in the EU with a common law tradition.
North America is even more challenging, although retail Islamic banking has made some progress in Canada, especially in Ontario where most of the Muslim population resides. In the US the Muslim population is fragmented along ethnic lines and geographically dispersed. Islamic financial products are available at state level in California, Illinois and Virginia, but there is little available in major centers such as New York. This is unlikely to change, but initiatives at local level that stress business opportunities with Islamic finance are more likely to succeed than at Federal level where politics gets in the way.
RODNEY WILSON
Emeritus Professor, Durham University UK and Visiting Professor, Qatar Faculty of Islamic Studies
The brutal answer to this question is that instead of applying an Islamic veneer to an un-Islamic debt-based financial system the industry could — if it went back to first principles — re-create in modern form the solutions and products which pre-date the modern system of finance capital comprising debt and equity.
CHRIS COOK
Principal, Partnerships Consulting
There are a number of barriers to entry in the financial sector such as history and credit rating. Lack of either of these makes it difficult for a new institution to penetrate the market. The financial crisis has resulted in a situation that, due to the fact that many institutions were not lending, new institutions could gain market share. However, although this is still to some extent the case, there is also still a high level of distrust in the market and a high aversion to change. A potential alternative to gaining market share would be to first set up as a local or community-based bank and grow from that position rather than attempting to directly become a global player.
DR NATALIE SCHOON
Principal consultant, Formabb
The question is ahead of itself.
Today, Islamic finance is domestic phenomenon. How many UAE or Malaysian Islamic banks have a meaningful presence and corresponding revenue generation in other Muslim countries? For example, it has been several years, has the Al Rajhi experiment in Malaysia met expectations?
If we assume Malaysia (home country) has the most robust infrastructure for Islamic finance, banking and Takaful, how many host countries (wanting Islamic finance) have a similar infrastructure and top down government support for Islamic finance? Malaysia’s approach has been time tested (1983), patience-oriented, and stakeholder-coordinated, hence, it would be a challenge to fast track in other countries (interested in tapping the petro liquidity), as the law of unintended consequences would kick in, resulting in possible irreparable damage.
However, has Malaysia become complacent on Islamic finance? For example, there are five FSA-approved Islamic banks in the UK, however, not one Malaysian shareholder, founding or otherwise. Maybe for Malaysian Islamic financial institutions, expansion is adjacent (Indonesia) before regional (ASEAN), and then international.
Furthermore, an example of rhetoric over commitment includes Hong Kong and Singapore, as they planted the flag of wanting to be an Islamic finance hub several years ago. Where is (wholesale) Islamic finance in these jurisdictions?
In the west, in places like the US, there is a small, but very vocal anti-Shariah movement, and they have made an admirable financial inclusion opportunity into a political ‘hot potato’ issue. Thus, local (western/conventional) institutions will not sacrifice existing customers/business to capture a marginal business (today). For example, HSBC Amanah offered Islamic mortgages in the US in early 2000, but not only stopped, but closed shop in few short years.
Full disclosure: I had the first Islamic mortgage from them, but had to refinance (conventionally) as rates went down and an Islamic refinancing package was not available. Furthermore, there was the issue of tax deductibility of the profit rate payments whilst I was a customer.
For Islamic finance to be truly international, beyond mega-banks and success of IILM, jurisdictions need to touch upon: Shariah, tax, accounting, regulations and standardization. Generally, western jurisdictions will not amend laws for a level playing field, and Islamic finance must seek to fit into existing regulatory infrastructure. Having said that, there is some guidance provided from the work done in the UK on elimination of double stamp duties for mortgages, deposit insurance, and so on. However, a UK Treasury spokesperson, concerning the decision to not to issue a sovereign Sukuk, recently said: “It is judged not to provide value for money.”
Islamic Bank of Britain (IBB), the only deposit taking FSA approved retail Islamic bank in Britain, has need of a financial rescue package and is on the auction block.
There is also the question of genuine demand for Islamic finance in the post 9/11 environment in western countries, where Muslims (primary target segment) reside. For example, some Muslims are not interested in Islamic finance, while others are concerned that if they participate, they will be on some government list, etc. To date, there is no deposit-taking (government-licensed) Islamic bank in US, Canada, Australia, etc.
The vision of Islamic finance is global, however, the reality is that we need to graduate from domestic to cross-border. Only then can we attempt to answer the headline question.
RUSHDI SIDDIQUI
Global head, Islamic finance & OIC countries, Thomson Reuters
Why do we need to focus on western markets? Islamic finance is faith based and we first need to serve the Muslim communities who are interested in Shariah solutions and markets/segments where banks have critical mass.
I am NOT making a case for restricting Islamic banking but no Islamic bank board will allow Islamic banks to do things which destroy shareholder value
AFAQ KHAN
Islamic Banking, Standard Chartered Saadiq
Conquering’ western markets is difficult because it is governed by factors outside the realm of Islamic finance. Rather than focusing time and effort on it, it would be better to focus on areas of the Muslim world where penetration is still shockingly low. Unfortunately, this is the majority case in most countries. For the minority population in the western markets that are Muslim, they can have local institutions that cater to their needs.
MONEM SALAM
Director of Islamic Investing/deputy portfolio manager, Saturna Capital
I don’t think that penetration of western markets is what it should be about. The home markets aren’t truly penetrated, and the value proposition is not yet defined in many markets. Moreover, the service quality is not yet to global standards. In the meantime, the cost of entry or expansion in emerging markets is attractive relative to the returns and growth opportunities. The cost of entry in western markets is exceptionally high and the return and growth prospects are much more challenging. I like my grandmother’s advice: “Tend to your knitting at home: when the world knows how good it is, the world will come calling.”
ABDULKADER THOMAS
CEO and President, SHAPE ─ Financial Corp
One important prerequisite for the expedition of the growth of Islamic finance in western markets is the creation of a conducive regulatory environment which encourages the setting up of Islamic finance institutions in these countries.
MARCEL PAPP
Head Retakaful, Swiss Re Retakaful
The Islamic finance industry has succeeded in both the Middle East and the Southeast Asian markets because of the cultural demonstration that it affords, amid growing income levels. The same elements do not prevail in western markets, given the secular nature of the business and regulatory framework. As a result, firms operating primarily in the Islamic finance space, however successful, exist outside the mainstream.
There may be many technical reasons for narrow penetration in developed markets – including poor capital base, regulatory biases, political agendas – but we feel that a primary reason, entirely within the control the industry itself, is the failure of the industry to express the benefits of the discipline it offers to stakeholders. It’s ultimately the assurance and comfort afforded by the Islamic finance discipline that will capture wider appeal.
With respect to such enthusiasm, conquering western markets is an unrealistic goal. But the industry can make important inroads through effective business strategies, based on creative application of investment and marketing research. Thoughtful lobbying efforts are also an important tool that the industry has largely eschewed, to its detriment.
DOUGLAS CLARK JOHNSON
CEO, Codexa Capital
Using the phrases ‘western markets’ and ‘the Islamic finance industry’ confuses rather than enlightens.
Each country where Muslims are a minority of the population is a distinct financial services marketplace which has to be assessed on its merits. Relevant factors will include the total population, levels of affluence, propensity to consume financial services, financial services regulatory rules, level of Muslim population etc. If a business attempts to looks at ‘western markets’ as a totality, as if Germany and Slovenia (for example) could just be taken together, it is guaranteed to take the wrong strategic decisions.
Similarly ‘the Islamic finance industry’ does not take strategic business decisions. Such decisions are taken by individual companies seeking to maximize profits by entering those markets where they believe business can be done profitably.
Against this background, there is considerable scope for successful Islamic financial services providers based in Muslim majority countries to expand profitably into countries where Muslims are a minority. Such expansion is probably best carried out one target country at a time, and by concentrating on niche services. Asset management and provision of Takaful, especially family Takaful, may well be more successful than offering vanilla banking services. Any market entry strategy needs to minimize costs. In particular customer acquisition costs risk being high as Islamic financial services will not be well understood in most such target markets, so a strategy is needed to keep such costs low.
MOHAMMED AMIN
Islamic finance consultant and former UK head of Islamic finance at PwC
TThe foremost step in this process is to make the structure of the Islamic finance industry strong by catering to the current weak spots, which are criticized the most, as preventing this industry from getting its own autonomous identity and image, separate from the conventional one in the western markets.
In the first place, measures should be taken in order to ensure that sanctions are associated with the available standards in the industry and, therefore, are effectively enforced. For instance, Islamic finance institutions not complying with the standards should incur some fines. The standard makers, such as AAOIFI and IFSB, should put in place internal repressive organs that would have authority over the same institutions. The Central Banks of the co-operating countries should play an active role by approving such enforcement mechanisms. Such mechanisms will ensure a level playing field between similar Shariah products or services, resolving the current varying interpretations leading to severe criticism on a global platform.
Secondly, when structuring products or services targeting the western markets, a special emphasis should be put on innovation, a targeted approach and diverse strategies addressing the specific needs of those markets.
Last but not least, use of social media, technology and other advertising media will, in the current competitive financial markets, be of the utmost importance to make investors in the western markets aware of the opportunities offered by Islamic finance products and services and the success of this industry.
SUFIAN BATAINEH
Managing director, Dananeer