The Islamic finance industry has had an unprecedented growth spurt over the last couple of years. The latest projections by the global recruitment consultancy Morgan McKinley indicate that the total global value of Islamic assets are to reach upwards of US$6.5 trillion by 2020; this is compared to just US$150 billion in the mid-1990s. This rocket-like growth, that left conventional financial institutions scrambling to get a piece of the action, was a result of many factors; most notable of which is the innovative spirit embodied by the industry professionals. In this article, YOUSSEF ABOUL-NAJA expounds on the Islamic leasing industry.
Scholars and professionals alike sought to create and optimize various Islamic modes to facilitate a streamlined transactional environment. To that end, in order for the Islamic finance industry to grow toward, and subsequently break through, this US$6.5 trillion mark, a new breed of innovative spirit is required; ingenuity must come from how new markets are approached. Current Islamic modes are fairly evolved; it is mainstream acceptability that is now needed. As the efficiency lines blare between that of conventional and Islamic modes, new tactics are required to unlock a wider client base. This is especially crucial for Ijarah, considering its similarities to conventional leasing. Ijarah can easily pave the path for more complex Islamic modes in countries lacking Shariah compliant laws, should it become widely accepted.
Review of 2015
The Ijarah industry has been exclusively focused on market penetration issues, specifically:
- to ensure their offered rates are comparable to prevailing market rates, and
- to target piety-centric clients (those looking to move away from Riba (usury)).
Other important issues such as innovation have taken a backseat. The industry’s main goal is achieving market breakthroughs.
This resulted in the emergence of an Ijarah culture vying for a rates war, where the competition is any entity offering financial services. This mentality is obviously flawed; for example, Ijarah is nothing more than a complementary financial avenue compared to banks. To make matters worse, given the lack of Islamic finance talent, the majority of Ijarah senior management come from the conventional industry; implying poor access to clients seeking Islamic products. As a result, the performance of Ijarah companies has been, at best, as good as other conventional leasing companies.
This is of course not to say that successful Ijarah companies do not exist; but the general global trend with Ijarah companies is that they are scrambling to win market share. The problem becomes muddled when an Ijarah company is trying to break through in a country that lacks Shariah compliant laws.
Preview of 2016
Ijarah is a fairly straightforward Islamic mode, and its existing contracts are well defined. Albeit some work is needed when it comes to insurance and maintenance liability, but such rework, when completed, will not result in additional markets being unlocked. What the Ijarah industry needs to do is lead the way with respect to leasing innovations. Ijarah companies need to infuse technology in such a way that conventional leasing clients feel the necessity to move their business to them. The Islamicity part of the service should merely be the ‘cherry-on-the-top’.
Presently, Ijarah companies have been inheriting the current mode of operations of leasing companies and making them ‘Islamic’. But these operational modes are outdated; the leasing industry has not been changing at the same pace as the business environments its clients are operating in. A departure from the norm is what is needed, given the dire need for change by leasing clients. Such a proactive approach would not only unlock new markets for the Ijarah industry, but create awareness and acceptability.
It is true that economies rise and fall, but what remains certain is that SMEs are the propellant engine of any economy. As such, considering that SMEs constitute the main client base of leasing companies, the leasing industry is poised to stay. To date, the Ijarah industry has been going through the ‘self-exploration’ phase, a necessary step toward product maturity. But given the product’s state of sophistication, should the Ijarah industry elect to maintain its reactive stance, more harm will follow than good. The Ijarah industry is currently standing at a unique crossroad; only the innovative path will make it soar. At the end of the day, the Ijarah industry’s life cycle is no different than that of other industries; as the old adage warns: “Innovate or die.”
Any public opinion or media appearance is the author’s independent personal opinion and should not be construed to represent any institution with whom the author is affiliated.