Interview: Hassan Jarrar
How will the issuance of new regulations that require Islamic banks in Bahrain to undergo external audit challenge the market?
HASSAN JARRAR: Bahrain has one of the more robust regulatory frameworks with respect to Islamic banking and financial services. Nevertheless, more transparency is needed, and the new external auditing requirements will help in this respect. I think the issue of standardisation is less of a concern because, despite there being individual sharia boards, there is a convergence in terms of the methods and services that Islamic financial institutions offer.
The real fundamental challenge that the sector faces is two-fold. First, Islamic banks need to lose the “Islamic” categorisation and go beyond the limitations imposed by the label. As long as “electric cars” are so-called, rather than just “cars”, acceptance by a wider range of consumers is going to remain limited. Islamic financial services need to follow Tesla’s model, which identified their products simply as “cars”. This will allow financial institutions to widen their customer base through added value rather than by capitalising on religious obligation. Second, the sector faces the challenge of innovation. Currently, the mindset of Islamic banks is to imitate conventional lenders and replicate their products and services in accordance with sharia law.
What role does innovation play in the development of the Islamic financial services sector?
JARRAR: If banks are to move forward, they must become more adaptive. Most conventional banks have failed thus far in becoming digitalised, so it is important for Islamic banks to learn from these mistakes to become relevant players in the modern setting. Significant amounts of money have been spent on technical innovation without the proper consideration of customer readiness and demand. At the same time, neglect of hard and soft infrastructure has made it difficult for the Islamic financial services sector to become adaptable. The Central Bank of Bahrain took a leadership role, initially making sure Islamic financial services are appropriately regulated and now focusing on helping develop soft infrastructure to allow for innovation. The regulatory sandbox is a great opportunity for both conventional and Islamic financial services to innovate, and we are already beginning to see new financial technology companies forming in Bahrain because of this.
In order for the sector to continue growing, customer service focused innovation must become a central focus of Islamic banks. Investment in education, mentorship and succession planning are essential parts of enabling this innovation, which is necessary to the long-term success of banks. However, these areas are largely overlooked in this region.
Given the high concentration of Islamic banks in Bahrain, what factors are holding back the consolidation of the financial services sector?
JARRAR: Most Islamic banks are small and have insufficient capital, so they would be more effective and efficient institutions were they to consolidate. Culture is the key factor holding back this shift because people are always reluctant to make difficult decisions. The main challenge though, with regard to regulation, the structure of banks in the sector, and relationships between banks and those they interact with, is the relationship Islamic institutions have with international regulators, more specifically US ones. It is important for Islamic finance to develop a stronger relationship with US regulators. US regulators, as opposed to the US government, are significant stakeholders with an outsized influence, so they need to better understand Islamic banking. Similarly, building stronger ties with correspondent banks by learning to speak the same technical language will pay dividends in growing and stabilising the sector.
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