What's new in Islamic banking?

The rise and rise of Islamic banking is a phenomenon of our time, with the consensus growth estimate being 15% per annum with total assets now in the region of $230-250 billion.

Last week the twice-yearly International Islamic Forum was held in Istanbul, and around 250 delegates gathered for what has become the industry's premier event. Networking is even more important in the small world of Islamic banking than in most sectors because a lot of progress goes undocumented and important new developments can be overlooked.

The main theme to emerge from the latest IIF is that Islamic banking is making big progress in the retail space. New products - such as Islamic credit cards and mortgages from National Commercial Bank - and a drive to open more branches to serve the general consumer are expanding the scope and attractiveness of Islamic banking.

In essence the industry is capitalizing on its good name and ethical foundation to win new customers while at the same time going all out to match the traditional banks with services and products. There is a real commitment to ensure that banking with an Islamic bank does not mean compromising on either.

At the same time Islamic finance is coming under increasing competitive pressure from the international banks. HSBC and Citibank were among those represented at the IIF last week, while the UBS Islamic subsidiary Noriba was a platinum sponsor of the event.

For the time being the international banks are concentrating on wholesale Islamic banking for major projects and mutual funds, but it can only be a matter of time before the retail Islamic consumer becomes a target. The local Islamic banks are not asleep and are doing their best to consolidate their hold on their natural clients.

But does Islamic banking really have a role to play? The danger is that by producing banking products which behave identically in practice to conventional banking products that the true 'Islamic' value is lost in the process.

What does it matter if the transactional structure is Sharia compliant, if the payment of installments on an advance from the bank is a mirror image of traditional banking?

An Islamic purist will doubtless only be content with the 100% Sharia product, but there is something to interest the less devout as well. For the whole structure of Islamic banking is inherently more conservative and lower risk than its traditional counterpart. Thus, the argument goes, your money is safer, although the failure of many Islamic banks around the world suggests this guarantee is not absolute.

Nonetheless, the 'Peace of Mind' factor for the clients of Islamic banking is significant and particularly in the Muslim World is a major factor. All the same, as one speaker at the IIF pointed out, in Malaysia 70% of the customers of Islamic banks are non-Muslim, so the appeal of banking with an ethical basis is not just religious.

Indeed, there is an irony in the spread of Islamic banking in that by growing so rapidly it is expanding total credit, albeit on a non-interest, profit-only basis. Some Islamic bankers like to argue that a society built on credit is an inherent evil, and yet in popularizing banking to their own community this is what they are doing.

On balance, however, the message that emerged from the IIF, which is only 18 months old but already established as a 'must-go' conference in the industry, is that Islamic banking is emerging as a strong competitor in the retail market and that theological debate is now taking a back seat as the marketers take over.

With international competition now breathing down their necks, local Islamic banks are going all out to become full competitors in the retail segment, and this is the phenomenon to watch for in the next few years as the sector continues its spectacular growth.