news, KHURRAM HILAL, the global head of Islamic banking products at Standard Chartered Saadiq, sheds light on the emerging trends in Shariah compliant banking product development and shares his thoughts on the industry moving forward.
Over the last decade, the Islamic financial universe has been witnessing the evolution of Islamic products, moving from plain vanilla and basic deposit and financing solutions to more advance products such as hedging, Sukuk, structured investments etc. This is in line with the growing sophistication of customer demand and increasing competition in the market, prompting industry players to be more innovative in their product offerings to stay ahead of the race.
Recognizing the potential in high net worth individuals, the retail segment has begun to see increased emphasis by banks on the growth areas of private banking and wealth management as more customers are seeking to manage their wealth in a Shariah compliant manner. Commenting that these areas are one of the most underdeveloped areas of Islamic finance with very few providers offering comprehensive wealth management solutions going beyond deposits and local equity funds, Khurram says: “For a Muslim investor his hurdle rate starts at 2.5%, that’s the Zakat that he has to pay on his savings. You can’t get these returns from deposits (inflation adjusted). Hence we need to offer our clients a holistic offering which not only helps them achieve their investment objectives but also provides sufficient diversification to keep the risks under control. At Standard Chartered Saadiq we see huge potential in this space and have already rolled out our comprehensive Shariah compliant private banking proposition last year. The response has been great and based on customer feedback we are now expanding our product suite.”
In the wholesale banking arena, providers are observably putting more focus on structured trade finance products as Islamic finance fast becomes the vehicle of choice for trade due to the complementary nature of the two sectors.
“Islamic finance and trade are a natural fit as Islamic finance has to be asset-backed, and the buying and selling of goods is a reality of life,” explains Khurram. “The industry is now focusing on the more complex trade needs of clients looking at cross-border trade flows; from Africa to the Middle East and across Asia – this is a burgeoning area. Islamic finance offers a natural advantage over conventional banking which is its ability to take ownership of assets. This on one hand provides the clients a fit for purpose financing solution and on the other hand offers great risk mitigation for the bank as it has recourse to the underlying goods in case of a credit event.”
In addition to that, the wholesale banking sector is also experiencing an increased effort on the part of players and regulators alike to develop acceptable common standards across Shariah boards to further boost the growth of the industry.
Moving on to the institutional space, the Shariah compliant financial stage is exhibiting considerable focus on interbank markets over Islamic securitization instruments on banks’ balance sheets. “We are seeing an emergence of Islamic repo products, which are in essence collateralized Murabahah,” Khurram elucidates. “This opens new doors for Islamic banks as it improves their ability to unlock the liquidity tied up in long-term Sukuk holdings.”
Mirroring the conventional?
The Islamic finance industry has been slapped with accusations by certain market participants and non-participants alike alleging that Shariah compliant products lack originality and are merely conventional products repackaged under a thin Islamic compliancy veil. This lack of innovation, some players assert, would inhibit the growth of the industry. However Khurram offers a different perspective: “While it is true to some extent that Islamic finance products do mirror the conventional, conventional banking has more than 400 years of experience and knowledge that Islamic banking, as a relatively young industry, can learn from and adapt to where appropriate.”
Having said that, Khuram nonetheless affirms that: “It is important for Islamic banks and practitioners to ensure that we live up to the promise which Islamic finance brings with it; the notion of fair, equitable and wholesome banking practices that contributes to the socio-economic development of the society.”
Survival tips
As the industry continues to grow at an unprecedented rate, the nascent industry still struggles with the issue of human capital scarcity, technological disadvantages and less-than-comprehensive regulatory frameworks.
So how does one survive in this seemingly non-conducive environment? Apart from boosting efforts in developing competent human resource, increasing investment in upgrading banking technology and working together with regulators to design a conducive regulatory framework for the Islamic financial industry, Khurram shares that Standard Chartered stays ahead of the curve by offering innovative Shariah compliant end-to-end solutions, capitalizing on the bank’s strong 150-year old history and expertise, and more significantly by adopting a ‘one bank collaborative structure’.
“We have over the years built a pool of resource and industry knowledge through the experience of working with our clients and being at the forefront of product innovation, with a clear view of Islamic principles,” says Khurram. “Our strategy is driven by a strong client focus and we work in close partnership with the bank’s transaction banking, financial markets and corporate finance teams to ensure we are aligned to the evolving needs of our clients.”
Healthy but not immune
With growth in most markets, from majority Muslim countries across the Middle East and Asia, to growing acceptance in Muslim minority jurisdictions like Kenya, the market outlook for the industry is looking positive, especially with increasing customer demand and support from regulators.
“Islamic institutions are a part of the larger financial system. It is in this relationship that the Islamic banking system cannot be looked at in isolation. Challenges faced by conventional financial institutions will have implications on the larger financial system, and in turn Islamic financial institutions.
Though healthy, Islamic banking is not immune to shocks in the economic system so we need to stay alert and be quick to respond,” cautions Khurram.
With good banking practices, healthy competition to steer product diversification and innovation, and a commitment to the value proposition behind Islamic finance, the industry is bound to continue its upward trajectory.