ICSFS: Islamic banking must be standardised

Viktoria Holubniuk Blog May 26, 2017 | 0

Following the oil price crash, Islamic banking has emerged as a key support for businesses looking to capitalise on the opportunities of economic diversification.

Islamic banking has been one of the financial industry’s great growth stories over the past few years. The Islamic (interest-free) model has encouraged innovation, both in terms of product offerings and business support. In a break from convention, Islamic banks aim to function as true financial partners for their clients, as opposed to taking on the old-fashioned role of bank as lender.

However, this positive intent has been held back by the issue of standardisation. Despite the best efforts of industry bodies, there is still no agreed interpretation of religious rules in relation to banking. Thankfully, this is starting to improve, as key players mature and the benefits of interbank transactional business becomes apparent.

World Finance spoke to Robert Hazboun, Managing Director of ICS Financial Systems (ICSFS), about these changes and what modern Islamic banking can offer to business partners.

How has Islamic banking changed in recent years?
Since the early 20th century, the Islamic banking industry has flourished. It has been identified as the fastest growing segment within the global financial market. After the 2008 financial crisis, the banking world realised that there must be something wrong with the status quo; the lack of solid supporting assets put banks at risk of huge deficit and bad assets.

Conventional banking sees money as an asset and applies charges according to amount and time. Basically, conventional banks are often more interested in applying penalties for delays than in the client’s business. Islamic banking principles, on the other hand, mean that the bank must be involved in a client’s business, not to rack up penalty charges, but rather to share profits and losses.

Why has demand risen so dramatically?
Several elements have boosted the growth of Islamic banking. The introduction of banking for the unbanked is a major factor, as a considerable proportion of the population in Muslim-majority, resource-rich countries believes that the conventional way of banking is not consistent with their religion and way of life. Previously, these people operated their own equity sharing and financing systems through unofficial domestic institutions. The expansion of Islamic banking instruments, however, has brought them into the financial market.