Interview: Tarek Akel, Iyad Ghasoub Asali, Sami Al Afghani, Musa Shihadeh
What do you identify as the most promising growth segments for Islamic banking in Jordan?
TAREK AKEL: Looking at the market, there are several potential growth segments on the retail and the corporate fronts. In terms of corporate banking, the government and the Central Bank of Jordan are working on cultivating lending to small and medium-sized enterprises (SMEs) with the help of non-governmental organisations, the Overseas Private Investment Corporation and other entities. When we start looking at retail banking, we see a large number of working-aged young men and women entering the market.
With the median age in Jordan being 22 years, the country is facing a wave of demand for retail banking products. In the next several years we are going to witness an increasing number of young people who want to buy homes, vehicles and take the other, at times costly, steps to starting families. The Islamic retail banking segment is developing the tools and capabilities to meet the needs of this demographic.
Another important growth area is government borrowing. Trends suggest that government borrowing is going to be rising in 2012-13. The government is looking to tap the country’s Islamic banks for borrowing due to their massive reserves of cash.
LYAD GHASOUB ASALI: The retail and SME segments provide the strongest growth opportunities for Islamic banks in Jordan. In the retail segment, where there has been a tremendous increase in demand, one key to success is for banks to develop wide-ranging branch networks that span the country’s urban and rural areas, and that cater to a diverse mix of clientele. Strong branch coverage facilitates prompt and high-quality service delivery, which is always the main concern for customers. Jordanians are highly religious and, in many cases, prefer halal means of doing business, but they will not flock to Islamic institutions if Islamic products are not accessible, competitively priced and of high quality.
Meanwhile, by extending credit facilities to SMEs, Islamic banks have a major role to play in supporting economic development, given that SMEs constitute such a large portion of the Jordanian economy. Indeed, this is why the government, in partnership with international organisations, has sponsored a number of programmes in recent years to support SME lending. Ultimately, you cannot depend on a handful of blue chip companies to drive growth and prosperity.
SME lending is good for banks because it yields strong returns, and because it allows banks to create portfolios that are diversified across multiple small clients, which in turn reduces overall risk. Although some perceive SMEs, on an individual level, to be riskier, the local default rate in this segment is low. Still, there are some obstacles in SME lending; in particular, SMEs need more help than corporate clients in preparing financial accounts for lenders and completing credit applications.
SAMI AL AFGHANI: Islamic banking is gaining momentum in Jordan and in the region. The most promising growth segments for Islamic banking in Jordan are public sector, SMEs and retail. However, Islamic banks must not rely solely on religious beliefs to fuel growth, but must work hard to develop and improve their product offerings through innovation. More importantly, they must work doubly hard to improve service quality standards. Having said that, I believe the retail segment will keep its growth rates. Meanwhile, the medium-sized corporate segment may grow exponentially to provide clients with the tailored products that cater to their financing needs. Public sector growth will be largely dependent and conditional to the passing of the law governing sukuks.
MUSA SHIHADEH: Islamic banks in Jordan are well positioned to support both retail and corporate clients, as well as the vast array of SMEs. In particular, I would like to highlight the role the sector plays in financing retail customers in the middle- to lower-income brackets, both in Amman and in rural communities. In many cases, our retail services come in the form of (finance lease lending ending with ownership). Moreover, Islamic banks have the ability to help fund capacity-building projects in every sector of the economy. Jordan’s health care and education systems are under enormous pressure. Consequently, Islamic banks can support the construction of schools, universities, clinics and hospitals. In the energy sector, we can finance upgrading works on electricity grids and distribution systems. These examples are not merely theoretical; they are based on actual cases in which Islamic banks have financed core industries that help to drive national economic development.
To what extent are local consumers and businesses familiar with sharia-compliant finance?
AFGHANI: The banking sector in Jordan is very well-developed and the vast majority of the business community is sophisticated and knowledgeable of conventional banking services and products. Unfortunately the same cannot be said regarding Islamic finance, as there is a general lack of awareness about the pillars and main principles behind it. Many do not differentiate between both modes of finance but are inclined to deal with Islamic banks to relieve their conscience. This imposes an additional responsibility on Islamic banks to educate and increase awareness among the public about the essence of Islamic banking. This is something that Jordan Dubai Islamic Bank has been keen on doing since its inception through sponsoring Islamic conferences and focusing on training our customer service officers and front-line staff to answer and educate our customers.
AKEL: Modern Islamic banking institutions have been operating in Jordan for quite some time, but evidence suggests that their market share has not yet peaked, although the steady growth of Islamic banking in this market also suggests that businesses are becoming more aware of the uniquely tailored financial services available through Islamic banks. Islamic banks accounted for 11% of total assets of the Jordanian banking sector in 2009 and 13% in 2010. In terms of customer deposits, Islamic institutions accounted for 13% in 2009, and this increased to 15% in 2010.
We are seeing very strong demand for murabaha finance programmes, and I expect that this well-known product will continue to entice local consumers. Indeed, partly due to the strong interest and level of awareness among Jordanians, I also expect that there will be several new entrants to the country’s Islamic financial services market, which currently has four banks and three insurers.
ASALI: Consumer and business understanding is moving in a positive direction, especially now that the number of Islamic banks in Jordan has increased from two to four. Moving forward, I expect rising competition to not only promote better awareness, thereby growing the pie for everybody, but also to strengthen the quality of Islamic offerings as market players battle to attract and retain customers. Ultimately, it is my belief that most Jordanian consumers are inclined to choose sharia-compliant financial products so long as they understand them, and so long as price and quality are at a certain level.
In the past, some mistakenly believed that Islamic banking is necessarily more tedious and less rewarding, but more and more people in Jordan are beginning to realise that this is not the case. Through increasingly popular products such as murabaha, which is a form of retail financing commonly used for the acquisition of products and automobiles and ijara , which is a form of financial leasing used mainly for acquisition of homes, Jordanians are now able to support their families and make major financial decisions while adhering to their core religious beliefs.
SHIHADEH: The robust asset and deposit growth for Islamic banks in Jordan demonstrates that the local population is quite familiar with halal financial products. In terms of promoting awareness, it should be noted that Islamic banks face many of the same challenges as conventional players. In both markets, banks must strive to articulate the value of their products to customers. In addition, both Islamic and conventional institutions must be sure to continuously upgrade the skills of their front line personnel in line with international best practices, and their communications infrastructure in line with the latest technological developments.
How does Jordan fit into the broader international Islamic financial industry? Are there any models elsewhere that Jordan can emulate as it works to develop its Islamic finance business?
SHIHADEH: In terms of models that Jordan can emulate, the kingdom has developed its own system of Islamic finance in accordance with its culture and the size of its economy. The more important issue, perhaps, is how Jordan can encourage Islamic banks in the country to adhere to one set of sharia-compliant guidelines emanating from the Central Bank. One set of guidelines for the sector would help the broader public to better understand the advantages offered by Islamic financial products.
AKEL: Jordan first embraced Islamic banking in 1978 with the opening of the first Islamic bank in Jordan, which is also one of the oldest Islamic financial institutions in the world. With this background, the kingdom is viewed positively by established regional and Islamic banking institutions.
If we include Al Rajhi Bank, three out of four Islamic banks operating in Jordan are part of wider regional Islamic banking groups, which is a sign of the industry’s confidence in the country. Moreover, Jordan has a solid base of Islamic scholars and bankers and a group of universities and research institutes that deal with Islamic banking and provide the domestic and regional market with high-quality professionals who have become known and respected in this field.
AFGHANI: Although the countries in the Gulf Cooperation Council (GCC) have more sophisticated Islamic financial sectors, over the long term Jordan has the potential to become a major regional player in this industry. As the kingdom develops its Islamic financial model, it can look to the GCC, and especially to places like Dubai, which gave birth to the first Islamic bank worldwide. In addition, Jordan can look for inspiration to South-east Asian nations like Malaysia, though the differences in sharia compliance interpretation between that country and Jordan are significant.
ASALI: Every country has its own economic and sociological characteristics. Invariably, these characteristic shape the contours of the financial system. Rather than point to one specific nation as a model in the Islamic financial services industry, Islamic banking should serve the specific requirements of the country in which it exists. Of course, this is not a licence to go beyond the boundaries of sharia compliance, which must not be transgressed. Jordan has excelled at balancing the needs of the country with the demands of the faith, which is why our system is respected worldwide.
What regulatory reforms are most needed to stimulate growth in Islamic financial services?
ASALI: The legal regime in Jordan for Islamic finance is comprehensive and transparent, and, therefore, it is highly conducive to business growth. All Islamic banks in the country have sharia committees composed of renowned scholars. These committees must approve all bank activities, and have the authority to veto decisions made by the board of directors.
The sharia committees provide detailed statements demonstrating how the financial institutions under their purview are operating according to Islamic principles. Because they make no compromises on sharia compliance, Islamic banks based in Jordan are respected worldwide and represent models for institutions in other countries to follow.
SHIHADEH: The proposed law of Islamic finance instruments, which the government is keen to issue, and which we have been waiting for some time, is an essential reform that we expect to implemented very soon.
Sukuks are sharia-compliant instruments that can finance public and private projects, and that are based on profit and loss schemes, and do not deal in interest. By opening the door to Islamic investors, the sukuk law would attract significant capital inflows from the Middle East, and in particular from the Gulf. This would help stimulate the economy.
In addition, we look forward to the passage of a law creating a secondary market for Islamic financial instruments, which would be beneficial to the market. This would allow Islamic banks to better serve the nation and the economy.
Meanwhile, varying interpretations of sharia compliance are not, in my opinion, a major obstacle to growth and development in the sector. Islamic finance is fundamentally asset-based, not paper-based, and should involve a degree of risk and profit sharing. In my view, Islamic financial institutions should have their own in-house sharia boards, while adhering to the fair and comprehensive international standards laid down by the Islamic Financial Services Board.
AKEL: Right now in Jordan we have a situation where the legal framework does not exist for sukuks to be issued and traded. There has only been one issuance of sukuk in Jordan by a corporate entity in 2011 that was done under a special government exemption from tax and regulatory rules. The proposed sukuk law should pave the way for sovereign and corporate issues in the future. Once a critical mass of government and corporate-issued sukuk is reached, we will see the development of a secondary market for sukuks, which will help institutionalise pricing mechanisms.
In terms of varying interpretations, I do not believe that this is an obstacle. All Islamic banks in Jordan have sharia committees that examine potential products to ensure that they are sharia-complaint. For the most part there is a consensus on the tenets of Islamic banking and on what banking products qualify as sharia-compliant. In most cases, a high level of cooperation between banks and scholars is exercised to reach common ground of sharia-compliance. Any differences in interpretation do not affect the way Islamic banks cooperate or integrate into their markets.
AFGHANI: One regulatory issue in Jordan is the lack of a legal framework for the issuance of sovereign sukuks, which is unfortunate because these financial instruments would create another channel of liquidity in the economy, thereby supporting public sector projects and business expansion. In the sovereign sukuk segment, there are two major regulatory obstacles in particular. First, local lawyers in Jordan do not allow you to mortgage or pledge government assets, which is a must for sukuk issuance. Second, once a special purpose vehicle (SPV) is established to own the asset, which will eventually distribute the dividends, the revenue coming from the SPV is taxed. This taxation is a hindrance that must be addressed.
Solutions to both problems have been presented to the government, which is now considering a new sukuk law. I am optimistic that this law will be passed because Islamic financial institutions in Jordan, in partnership with well-respected overseas players such as Dubai International Capital, have been aggressively petitioning the authorities for reform in this area for over the past two years.
With respect to varying interpretations, the main pillars of Islamic finance are not in question. For example, usury and the financing of businesses involved in trades such as liquor and gambling are clearly forbidden, and no scholars will tell you otherwise. That being said, there are indeed some issues, including the use of products such as tawarruq, or commodity murabaha, that have come up for debate. Whereas some want the industry in Jordan, and indeed, worldwide, to become more innovative, others see constant innovation as a threat to compliance. Such debates have been around forever. When murabaha, which is now the bread and butter for Islamic banks, first began, there was intense discussion about its permissibility.
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