By FintechOS · October 05, 2021
7 minute read

The Islamic Window: meeting the demand for Shariah banking

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Key takeaways 

  • The Islamic finance market is now worth GBP 1.6 trillion and set to grow 12% in the next year 
  • Entering this market requires developing new, Shariah-compliant products quickly 
  • FintechOS Lighthouse allows you to get new products to market faster 

The Islamic finance industry is now worth GBP 1.6 trillion, globally, and set to grow by 12% this financial year. This is a huge, largely untapped market for banking, but it’s also a complex one. 

So, what makes Islamic finance unique? Followers of Islam must adhere to the principles of Shariah law, a system of rules that determine what is acceptable in Islamic culture. Shariah includes a strict set of guidelines regarding economics and the lending of money, which must be adhered to by banks hoping to cater to Islamic customers. 

These restrictions are implemented by Shariah advisory or supervisory boards, who have the final say on what is permissible for Islamic banking. International Islamic finance boards include the Accounting and Auditing Organization for Islamic Finance Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB). 

Shariah banking 

The rules for Shariah banking essentially comprise a different way of doing business that isn’t compliant with most western banking policies. This means Islamic customers need to use specialist banks or banking products to meet their needs. 

Islamic customers need to use specialist banks or banking products to meet their needs.

Not only does this leave a huge number of customers and a large pool of wealth in need of Shariah-compliant services, but many commentators are championing Islamic finance as a more-ethical alternative to traditional banking. This is because Shariah finance encourages lenders and banks to act unselfishly in an equal partnership with their customers. 

It’s no wonder that Islamic banks are becoming more prominent in the market. A center for Islamic finance has sprung up in Malaysia. Meanwhile, the UK has five Islamic banks, and over 20 banks offering Islamic products. 

To access this growing market, you need to be able to offer Shariah-compliant financial products, which is easier said than done. Let’s look at some of the basic requirements for Islamic finance. 

Riba and murabaha 

Perhaps the biggest difference between western finance and Shariah banking is that making interest on loans and savings is considered unethical. In Islamic culture, earning interest is seen as an unfair advantage to the lender at the expense of their customer. This is known as ‘riba’. 

This is usually where western banks find their minds are a little blown.

How can you make a profit without charging interest on loans?

Well, Shariah law rules that money has no intrinsic value and is merely a means to an end. As such, interest being the goal of the loan for a bank is not acceptable, nor is it compliant to simply offer money. Instead, banks are expected to take fair payment for the services they offer in the acquisition of a specific asset. 

Instead of interest, Islamic finance works on the basis of murabaha. Rather than taking out a loan, the customer is hiring the bank to act as their agent in acquiring an asset. The customer will then pay the bank back for the cost of the asset, along with a fee for their services. This is known as ijarah. 

Think of it like offering a friend some money to go to a coffee shop and buy you a latte. You might give them five dollars and ask them to buy you a coffee worth three dollars, then tell them to keep the change as reward for going to the shop for you. This is murabaha.  

It’s essentially just cost-plus pricing, and can be thought of as the loan equivalent of credit sale or rent-to-buy. The customer is renting the cost of the product they wish to buy from you and don’t own that money until they have paid your fee. 

There can be no fluctuation in the amount the customer pays on top of a Shariah loan, as the fees are agreed beforehand. There can, however, be trading involved, with profits and losses shared between you and your customer. Rather than earning interest on your customers’ loan, you’re essentially investing in them and their future prosperity, becoming their business partner in life. 

Treating customers fairly 

Another way that Islamic finance is seen as an ethical alternative to western finance, is in its transparency regarding risk. Again, Shariah prescribes banks must be altruistic in their service of customers. This means Islamic banks need to make an active effort to ensure their customers are aware of risk. 

Far from just putting something in the small print, Islamic banks need to make an active effort to warn their customers about any possible adverse outcomes to their lending. This means having clear conversations with customers about how likely they are to benefit from any investment to avoid contractual ambiguity – known as gharar. 

Ironically, this is exactly the kind of culture that regulators are fighting to install into the western banking world, yet are struggling to find a way to standardize that across the industry. From regulation to robo-advisors, authorities are struggling to instill the kind of banking culture that has existed in Islamic finance for hundreds of years. 

This doesn’t even just apply to the relationship with the customer.

Islamic financial products must be completely separated from any unlawful or unethical practices in any related chains of distribution or production.

Shariah-compliant investments mustn’t have any involvement with industries that are prohibited under Islamic law, such as firearms, gambling (maysir), alcohol, tobacco, non-halal foods such as pork, and adult entertainment. Yet, Shariah also rules out any industry or practice involving injustice (zulm), threat (tahdeed), deception (khedaa), human or machine error (ghalat), and exploitation (istighlal).

Islamic finance must also avoid any kind of ihtikar – monopoly. This means not only that the industry must remain fair and competitive for customers, but also that there’s no barrier to entry for western banks willing to offer Shariah-compliant products. 

The Islamic Window 

While Islamic banks, such as Gatehouse and Al Rayan, are end-to-end Shariah-compliant, western banks may own a Shariah-compliant subsidiary, such as Emirates Islamic. More common, however, is the so-called Islamic Window option. 

So long as the process remains compliant with most of the Shariah provisions on ethics, banks can use their existing funding to offer Shariah-compliant products to both Islamic and non-Islamic customers. This means your Islamic offering will be acceptable under Shariah, and also offer a potentially more ethical alternative to your entire market.

Banks in the UK offering Islamic Window products include HSBC, Barclays, Deutsche Bank, and JP Morgan. It’s a straightforward way to enter the lucrative Islamic market without a top-down restructure of your organization. 

How we can help 

FintechOS Lighthouse includes our low-code Innovation Studio, which allows you to create bespoke end-to-end products according to your customer personas. Since the Studio requires minimal coding, you can create new products quickly without relying on your technical teams, allowing you to launch new products to market faster than ever before. 

Start with a customer persona for the Islamic market and you can then create a portfolio of Shariah-compliant products in our Digital Banking Product Factory quickly, without coding. Then, our Scoring and Rating Engine will automatically evaluate custom business rules and our Customer Journey Designer will let you tailor your service for Islamic customers. 

You can then use our Personalization and Omni-channel Campaigns Tool to create engagement strategies for your new Islamic customers. Our platform contains everything you need. 

To find out more about how our platform can help you launch Islamic finance products, book a demo.

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