Counter Point: Islamic banking on a stronger footing

Emirates NBD

The growth of Islamic banking has suddenly taken off in the past two to three years after the lull in the 1990s. The recent statement by Anis Jallaf of Emirates Bank to consider converting Middle East Bank into an Islamic bank highlights the emerging trend in this regard.

In so far as the Emirates Banking Group (EBG) is concerned I always wondered why the bank was not capitalising on its two banking licences and doing something creative with one of them. The move, if implemented, will mean providing a two window option to EGB Group’s clientele.

At the moment the Central Bank is asking banks to either use their licence for commercial banking or for Islamic banking. While commercial banks can offer some Islamic banking products, they cannot have full service Islamic banking side by side with regular interest-bearing commercial banking.

I personally believe that the Central Bank should allow local banks to open Islamic bank subsidiaries, rather than restrict them to merely offering some products.

Islamic banking funds have been on the rise in the past few years, and it might be a reaction to the events of 9/11 after which an outflow of funds occurred from the US as Arab and Muslim depositors took their money out.

The growth of Islamic banking in Malaysia has been amazing and from being peripheral players in the banking scene we now see Islamic banks coming to the forefront of a number of financing deals, products and general services.

If one were to look at the large project financing deals in the UAE alone one would notice that in virtually every deal there has been an Islamic component of financing structuring. This is, indeed, very healthy and sets the stage for a lot more to happen.

It is time now for Islamic banks to innovate, create new products and services that encompass investment banking and trade finance. In fairness, a lot of the innovation work related to capital markets and project financing was started by the Western banks that used their expertise to design and build Islamic capital investment products.

When this combined with their experience in reporting and management of funds they created a niche for Islamic investments into the Western markets that attracted a great deal of capital from countries such as Saudi Arabia and Kuwait.

Islamic banks and institutions within the region need to address this aspect of the innovation cycle and cater to what I believe is a growing market with the promise of being one of the major sectors of the finance segment of the economy.

Indeed, there are challenges in terms of the accounting issues related to Islamic banking and the recognition of income being different, but there, too, considerable progress has been made in solving any potential problems.

The writer is the UAE-based president of Sher Consulting

 

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