Misconceptions prevail about Islamic Financial Service Industry

Oct 29 - Nov 04, 2007

Blossomed out in the farewell decades of the yester century, Islamic Financial Service Industry bent over backward to compete with the conventional financial system across the world in its teething introductory stage. There is a paradox that Muslim population forms the major customer-base (segment) of the IFSI. To some extent, the reality militates against this school of thought. Recent years have witnessed an unprecedented propensity of conventional financial institutions towards departmentalizing on shariah-compliance basis. More so, the non-Muslim financial services' consumers do tend to subscribe to Islamic financial services. However, there is no denying the fact that the industry is still in the process of expanding its product range. And it does not offer, yet, customers as much variety of financial solutions as conventional system does. Although, imitable transparency in financial transactions and stringent criteria for making clients-verified by rising interests in Islamic modes of financing-people are seeking short term advantages in bagging returns than long term advantages of strategic profits. There are associated few misconceptions, which IFSI is struggling hard to do away. Consumers often outnumber industrial customers whose dependence on banking transactions is high. In Pakistan, the numbers of consumers seeking financial services are multiplying day by day. Many financial institutions, be it conventional or Islamic, have set up a full operational base and are competing stiffly to attract customers' loyalty for their offers. Certainly, shariah-based financial institutions have an upper edge in designing persuasive strategies in our nation where main portion comprises of Muslim population. Riba-free financial services have been their marketing punch line over the year. Meezan Bank Limited-the premier Islamic bank of Pakistan started its operation in 1997- is working on a line to educate masses that it does not cater to a particular community rather it concerns about how to mobilize bankable masses. Having 75 branch-networks in urban and suburban areas, it plans to increase to 100 within this year. Four years ago Meezan Bank Limited appointed a young and energetic Zafar Ali Khan who has an impressive command over IFSI. Currently, bestowed with the responsibility of heading consumer finance operation of Meezan Bank, he feels proud to have come to Islamic finance sector for more personal than professional reasons. After graduation in MBA-Marketing in 1995, he began his career in marketing. He's worked in Mashriq Bank Dubai and spent three and a half year in product development. In ABN Amro bank, he performed in asset management, credit management, and consumer assets portfolio. Along with the other major responsibilities in Meezan Bank Limited, he is working to establish new consumer finance products such as credit card. Astonishing and informative issues and dynamics of shariah-compliance banking services he delineated during a must-read interview session with the PAGE. Following are the proceeds of that Q&A session:

PAGE: How many consumer finance products does Meezan Bank Limited offer? And what are the specialties they are attached with?

In consumer finance side, Meezan's product menu includes auto finance and housing finance. They are the flagship products of ours. Key market propositions are based on customers need. Of course, we are working on other products as well. We launched auto finance four year ago, housing is yearly younger than that. We have basically "Ijarah" based program for auto financing sector, which derived from an Arabic word "Ijarah" meaning lease. It is a lease program in which bank is the owner of the asset. It leases out vehicle to customers on certain tenure, price, and profit range. And similar to the other leases, customer pays back through certain installments, composed of rental and principal payment. There is a clear distinction line between conventional and Islamic leasing. Islamic finance is asset-based. Asset belongs to the bank and it is the owner of the asset. In conventional lease, in contrast, customer is the owner of the asset and bank basically gives financing against the vehicle. Whether the asset exists or does not exist, bank will acquire its particular amount at all cost. In our case, the right and the responsibility of ownership rest with the bank. Typically, in case of non-existence and non usage of asset, bank does not take venture for that. One should come to Islamic finance by not paying interest/Riba/Sood, which is Haram (illegal) in Islam. We offer a range of new, used, imported, and higher luxury products, which many service providers do not. Ijarah based products are available in all bank's sales hubs of major cities offering garage out facility. Housing finance is the second portfolio. Meezan was the first provider of Islamic product in the market and full-fledged Islamic commercial bank. It was the first to launch milestones on the deposit sides, alternative distribution sides, and women's banking having designated branches for women. Housing finance is a critical asset based product. Housing is an important driver of micro and macro economic growth. Government has brought its focus of importance for housing finance recently. There is gap of 4,000 to 5,000 units in demand and supply in the nation annually. In order to address the issue, Government's National Housing policy has made a lot of progress, however, one of the flaws remains documentation title, it happens to be different in each of the provinces of Pakistan. It does result in on-ground issues. But there has been a lot of progress in regulatory and stamping sides all in all. Meezan launched housing finance product to meet the critical demand and supply gap. We brought forward a housing finance product based on "Musharqa", which is again inferred from an Arabic word 'Shirqat' i.e. partnership or joint-partner-shared-equity product. As long as customer purchases bankÝs share title of ownership is transferred to the customer. Within a period of three years, Meezan bank market share in this sector has reached to 6 percent with a relatively small network as compare to other banks amongst roughly 25 housing finance providers nationwide. There is no asset, there is no banking. Equity based financing mitigates the risk of financial lose as it is real. It does not move along with the speculation. Conventional financial system involves in open-ended blind lending. We are working on a new shariah based product including Islamic Credit Card.

PAGE: The retail loans/GDP ratio of Pakistan is said to be four percent. In your perspective is there enough a room to increase Islamic modes of retail banking? How do you plan to go about?

Significantly, there is a large population of around 10 million bankable people who can open operational bank accounts. The demand of Islamic financing is skyrocketing. Gradually market is getting educated. Islamic finance has stabilized its roots. Now, people have realized that Islamic banking is the reality different from conventional banking. After all, we are Muslims. If we are getting the same pricing, same convenience, same distribution network, profit, accessibility; if the turnover rate of Islamic banks are good, product variations and convenience they provide to customers are appropriate then the growth of Islamic modes of financing in retail banking must be growing at par with the conventional banking. There is a universe opened for Islamic banking and financing.

PAGE: Despite rapid growth of assets of Islamic banking to double digit in some Muslim countries world over, the assets of Islamic banking in Pakistan have just reached four per cent of the total banking assets. What barriers do put a halt in achieving parallel growth?

Time is basically the main barrier. Islamic banking is at infancy level in Pakistan to have introduced fully just five or six year back. Secondly, Islamic bankers are sparse so are there penetration in the market. But the growth rate is high. Islamic banking is growing 60 to 65 percent per annum while conventional banking 14 to 15 percent. It is witnessing an astronomical growth. Even the conventional banks started delegating a portion for the Islamic banking. Another hurdle owes to regulatory policies of the government. Islamic financing requires specific parameters and methodologies in deposit and liquidity management sides. Unfortunately, we need to go to the conventional market for the money requirement. Islamic bankers including Meezan bank in coordination with SBP are working on to devise products and tools to address liquidity management issues; seeking alternatives to the money market borrowing; and to set up separate Islamic indicators. As the time goes on, we will have an independent Islamic auditing and accounting structures. The structure has been built and somehow regulations are there. Inshallah, it would further grow.

PAGE: Is it right that the core segment of Islamic Financial Service Industry forms consumers who prefer to sacrifice returns for shariah-compliance products/Islamic products? Does it mean that consumer gets return lose in this banking sector. As it is a statistically proven fact in McKinsey's survey 2005, which revealed that shariah principles was the single most important factor identified by the Islamic banking customers in choosing their banks.

It is an interesting question and reference. When we launched Islamic banking, the situation was quiet analogous. At the beginning, in fact, it has become difficult for us to build the credibility as the opponents are comparing this with past attempt of shame and fabricated version of Islamic financing in Zia's era. We had to educate the people to change the perceptions. In my experience, the people initially attracted towards Islamic banking were "hard core" Muslims adhering to it at all cost if that even meant loss; they were willing to more expensive products or services. But, look at the present growth the majority of the people in the market are willing to join shariah compliance products if it is giving security, profitability, and accessibility. We are working to educate and persuade these people by offering them competitive advantages. Some of the pioneering financial institutions in USA and UK have been using Islamic modes of financing with local nomenclatures.

PAGE: In which way, does the arrival of foreign Islamic banks affect on the nation's IFSI and in subsequent scenario what value additions, do you foresee, could consumers expect?

Competition is always beneficial. With the arrival of new banks, Islamic banking has more options to penetrate in grass root level. This would give a way to new product development, products variety, and boost to price competition. It is highly required. One can not cater to large market single handedly. Above all, the Islamic product menu is quite heavy. This calls upon number of bankers to join in. The customers are there; in case of service providers' absence the potential demands will be shifted nowhere.

PAGE: Does the frame work of martinet approach in selecting client viz. tough "know-your-customer" requirements alienate your prospective customers? What in substitution trust-your-customers approaches may be filled in?

Risk management and fraud control are few of the security measures SBP has bound all financial institutions to follow in order to eliminate the threats of money laundering and illegitimate transactions among others. Thus Islamic banks are no exceptions. Yes, we can't finance alcohol distillers for example. And nor we can engage in any other kind of "Haram" financing. No matter which market we are losing.

PAGE: Do you support the idea that Islamic financing does not have universally followed vocabulary, sometimes, creating misnomer? For instance, "Istisna" originally means manufacturing and delivery of something against advance payment while in IFSI this kind of financing means payment by an Islamic bank to the manufacturer of a thing for its delivery to the bankÝs client of non-deferred payment relationship.

The both have similar meaning. Besides, there is a marginal difference of terminologies. There are, however, region wise differences but it is because of the interpretation. Otherwise, it does not affect or make any difference. Nor, it begets any disturbance in the normalcy of operation of Islamic financial system.

PAGE: How the pace of developments in Islamic consumer financing can be expedited?

There should be a greater progress on liquidity management side. SBP is giving licenses to financial institutions the quantity must be increased further. Again, competition is indispensable for the promotion of this industry. The existent players are needed to raise their budget outlay in terms of time, money, and effort to educate the market about the true essence of Islamic financing and comparative advantages it beholds. As long as the middle class strata increases so does the demand of Islamic modes of consumer financing domestically as well as internationally.