Fadi Yazbeck, Product Manager for Islamic Banking at Temenos, explains why Islamic windows might be the way forward.
While the Islamic banking market in Africa is very much in its infancy, it is poised to develop at a phenomenal rate. A large proportion of the continent’s 240 million-strong Muslim population is untapped due to the limited availability of interest-free banking and, with this population projected to expand by 60 per cent to 400 million within the next two decades according to a 2011 projection by the Pew Foundation, the potential pool of customers is vast.
Meanwhile, the significant liquidity available within Islamic finance, largely derived from Middle Eastern investors, presents an ideal source of funding for Africa’s huge infrastructure needs. The asset-sharing structure of these transportation, property development and power generation projects are particularly well-suited to the asset-sharing financing model of Sukuk.
Standalone Islamic banks are rare
Despite this evident potential, however, standalone Islamic banks are still comparatively rare across the continent, with only a handful in existence. These are concentrated in countries such as Sudan and Djibouti, while Nigeria, a country with a 50 per cent Muslim population, has only one standalone, Jaiz Bank.
This is a consequence of the logistical difficulties and high-risk involved in setting up a new bank in Africa, together with the strict regulations involved in offering a Shari’ah-compliant solution, which have presented a double barrier to start-up Islamic banks in the continent.
A lower risk solution
Yet, there is a far lower-risk way of accessing Africa’s enormous Islamic market potential, which is through offering an Islamic solution within an existing bank.
Indeed, a small number of African conventional banks are successfully providing Islamic banking services to their customers through an ‘Islamic window.’ These include Commercial Bank of Ethiopia, Ecobank, Afriland First Bank, First National Bank of Botswana and Barclays Bank, Kenya.
So far, other banks have been slow to follow their lead, deterred by the perceived complexity of offering a fully Shari’ah-compliant solution that is separate from the conventional banking process. This compliance is far encompassing, extending not only to the avoidance of both fixed or floating payment of interest or fees for loans of money, but also investments in prohibited services or products.
However, as Africa’s Islamic financing market gathers momentum, conventional banks that delay in offering their customers an Islamic banking solution will lose out to both standalone Islamic banks, and those with an Islamic window.
A delicate balancing act
With the debates over what constitutes Shari’ah compliance and whether a conventional institution can ever be truly Shari’ah-compliant so hotly contested between Islamic scholars, gaining the trust of customers is absolutely paramount in creating an Islamic window at a conventional bank. It’s essential that customers can rely on their bank to be transparent and honest in the products it offers, to ensure that they are not unwittingly breaking Islamic law through their investments.
There are several key things that a conventional bank needs to do to ensure full Shari’ah compliance:
First and foremost, conventional banks need to have full segregation of their Islamic banking products from their conventional products. This should happen at an accounting level to ensure there is no mixing of funds, with Islamic deposits being invested into non-Shariah-compliant products or investments. This is necessary to gain the trust of investors, offering assurance that their investments are uncontaminated by the investments of conventional investors who are not observant of Islamic banking law.
To achieve this, the deployment of modern banking software, specifically configured to the requirements of Islamic banking solutions will be required.
An independent supervisory board
Each bank should appoint a Shari’ah advisor to review contracts and product structure and approve new products before they are offered to the public. This should take the form of an independent supervisory board consisting of scholars qualified to issue religious rulings on financial transactions. These rulings and resolutions should be binding for the bank’s management. This Board will provide ongoing supervision and checking of contracts, procedures
The bank’s management should be fully committed to adhering to Islamic banking principles and offering a true Shari’ah-compliant product. No matter how stringent the Shari’ah advisory board, if the bank’s management is not convinced by those values, the Islamic banking products may have flaws leading to non-compliant transactions.
Safeguarding Muslim investors’ funds
It is an established principle in Islamic law that the Mudarib does not guarantee the Mudarabah capital for the capital provider. Hence, investment accounts in Islamic financial institutions are not guaranteed by the Mudarib. However, this doesn’t prevent an Islamic window from seeking to guarantee those funds through the bank’s conventional counterpart. This is critical to gain trust and acceptance from clients and encourage them to invest in Islamic banking products.
Each bank needs to review the way that profit is calculated and ensure that accounting entries are in line with local regulations for Islamic banking or compliant with guidelines set by global regulatory bodies like the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). Accordingly, the AAOIFI has issued and published a number of accounting and auditing standards for all Islamic financial institutions, to enable a broad, standard interpretation of Shari’ah law.
Finally, banks should also engage in awareness campaigns to educate their clients on the Islamic banking products and services that are available, setting out how they are different from conventional banking products.
The path ahead
Africa’s ambition to develop Islamic banking solutions is clearly there. Jaiz Bank, the standalone Nigerian Islamic bank has plans to increase its 11 branches to 100 by 2017. Regulatory bodies across the continent are pushing through the issuance of Shari’ah-compliant policy statements and rules. Recently, Nigeria brought in new Sukuk guidelines; Kenya has been making regulatory changes since 2011 and producing some of the more complex Islamic banking products such as real estate investment trusts, while South Africa, with a population of around 750,000 Muslims, has rewritten its tax laws to enhance the transparency of Shari’ah- compliant products.
With all of this groundwork in place, the potential benefits for conventional institutions adding an Islamic window to their capabilities are immeasurable.
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