Interview: Tirad Al Mahmoud
To what extent are the principles of Islamic banking universal, and how can these play a role in penetrating the conventional market?
TIRAD AL MAHMOUD: Research has demonstrated that since the financial crisis there has been a growing mistrust among consumers and a heightened demand for ethical banking. Therefore, the ethical values and benefits of Islamic finance are attracting large amounts of customers from the “conventional” market to sharia-compliant banks, as the principles of Islamic banking represent a universal finance model that benefits people of all faiths. Thus, as the sharia model is widely considered to be more risk-averse, demand for its products and services continues to grow. As a result, the industry has experienced double-digit growth in recent years and sharia banks now account for over 20% of the UAE’s banking assets.
The reality is that the concepts of Islamic finance have the potential to strengthen economies. The business model minimises systemic risk, as Islamic banks are tied to the real economy and real assets. Some scholars even argue that the economic downturn in 2008 could have been avoided if Islamic banks had played a larger role in the global economy. Moreover, Islamic banks tend to reduce economic disparity and encourage longer-term investments. This can result in greater wealth accumulation among people of different financial backgrounds.
On a global scale, Islamic banks remain something of a niche industry. However, this is not the case in the UAE, where sharia-compliant institutions have a significant market share. We anticipate that, as awareness of the aforementioned benefits of Islamic banking become more apparent internationally, the gap between conventional banking and sharia-compliant banking will continue to narrow. Here in the UAE, we anticipate double-digit growth to continue, although – given the current economic climate – perhaps at a slightly more muted rate than in years past.
Why is the standardisation of sharia compliance necessary to further support the growth of Islamic banking in the UAE?
AL MAHMOUD: While Islamic finance is one of the fastest-growing segments in international finance, a standard and universal interpretation of sharia principles will be required for the industry to reach its full growth potential. There is a real concern within the Islamic banking community about the absence of a centralised body that sets rules and regulations. The majority of Islamic finance institutions look to guidelines set by the Accounting and Auditing Organisation for Islamic Financial Institutions. However, many sharia boards differ in their interpretations. We have seen some countries – such as Bahrain, Jordan, Syria, Sudan and Qatar – adopt standards nationally, which is a positive step. However, there are three main challenges to greater adoption: the interpretation of Islamic laws, the scarcity of qualified sharia scholars and the fragmented nature of the Islamic finance industry. These issues will need to be addressed by local government if the UAE is to become the centre of the global Islamic banking industry.
How do you respond to claims that service gaps exist between Islamic and conventional banks?
AL MAHMOUD: The Islamic banking industry has evolved significantly. Not only have Islamic banking retail products and services achieved parity with conventional ones, but I would argue that they have now surpassed them. The quality of service – including through the development of online and mobile banking, ease of access and the scope of sharia products – are very much on par. However, Islamic banks provide greater customer protection and they do not participate in schemes that might at times be predatory in nature, which gives them a clear advantage. Now the challenge going forward will be to achieve the same level of parity within the corporate banking space.
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