The mistrust borne from the financial crisis has completely transformed the culture of banking. Where once irresponsible risk-taking reigned supreme, sustainability and ethics today play a far more important role than they have ever done before.
As a result, alternatives such as Islamic finance have gathered extraordinary momentum, as customers seek instead to explore new opportunities outside of the traditional banking space.
Many believe that the Islamic finance industry could tip $2trn by the year’s end (see Fig. 1). However, the complications that come with being a relatively new sector remain an issue for many, especially those in emerging markets. We spoke to Lloyd Maddock, CEO at Oman’s Ahli Bank, about the sector’s unique opportunities, and the various challenges it faces on a national and global scale.
Islamic finance is a rapidly growing market worldwide. What are the main challenges institutions such as Ahli Bank face in developing the industry?Islamic finance is relatively new to the Sultanate, which of course means that knowledge about the Islamic finance sector is also relatively low. However, given the ability of the Islamic finance model to offer innovative financial solutions to an under-served market, it is seen as a community-banking niche with considerable growth potential.
In the Muslim world, and increasingly in the West, significant segments of the institutional and retail markets are actively considering this alternative for their financing and investment needs. However, the general availability of information remains limited for what is still a young and evolving industry. Although Islamic finance has generated substantial coverage in the media and academic journals, there has been little study as yet on how Islamic financial institutions differ in practice from conventional banks.
Many believe that the Islamic finance industry could tip $2trn by the
year’s end
How does Ahli Bank remain competitive?
We do not have any institutional limitations that will hamper our competitiveness or our ability to meet the expectations of the Omani financial market. Our Al-Hilal branch network is the largest in the country, spanning seven Islamic branches catering to all regions within the Sultanate.
We also exhibit a keen focus on our e-channels, and stand at the forefront of product development in the region. We remain competitive not only with other Islamic finance institutions, but also with the conventional finance institutions in the country, and on a consolidated basis we are the fastest growing bank in Oman.
Islamic financing by definition entails a direct link between financial flows and real flows in the economy. That is, funds will flow from Islamic banks only in direct support of real underlying economic activity. Therefore, investors will approach Islamic banks only when they have genuine needs, and in this sense, Islamic financial architecture could be seen as superior to the existing interest-based financing architecture.
How has Ahli Bank developed its e-channels? How have clients responded to this service?
At Ahli Bank, one of our brand promises is “convenient banking”. We are striving to provide a uniform and superior experience across all deployed channels, whether it be ATM, internet banking, mobile banking, SMS banking, or cash deposit machines. We firmly believe that empowering the customer to undertake transactions at a time and place convenient to them, and through a mode they find most suitable for the purpose, is the best way forward in our search for customer service excellence.
So far the response from customers has been encouraging, with a rapid take up in the use of online and e-channel platforms to perform day-to-day banking. As a result, we will shortly be expanding our e-services to include loan applications and new account openings.
What attracts clients to Islamic finance?
Though the concept of Islamic finance is hundreds of years old, the modern version of it has evolved recently to satisfy the needs of those looking to invest without being in contravention of their religious beliefs.
Besides the moral incentives, there are attractive investment opportunities unique to sharia-compliant investments. The sector has grown to $1.6trn in assets over the past three decades, according to the Global Islamic Financial Review, and is impossible to ignore – even for non-Muslims. From an investor’s perspective, Islamic investors cannot make money from money. There must be real assets involved that can be easily identified. But religion isn’t the only reason. A second source is people looking for diversification.
Muslim consumers are looking for financial products that are aligned with their value base, and non-Muslim consumers are also increasingly interested in the alternate funding channels and genuine returns that Islamic finance can provide. Islamic financial institutions become partners with clients within transactions rather than simply an intermediary.
It is noteworthy that many corporates, typically large ones, are regularly issuing sukuk to compliment more traditional ways of raising project finance or term debt (through bond issuance or syndicated loans). This reflects the large pool of liquidity within Islamic finance that sukuk issuers are able to tap, within appropriate financial structures.
What advantages does Islamic finance offer investors?
Islamic investments are distinguished by a ban on interest-based transactions, an emphasis on equitable contracts, the linking of finance to productivity, the desirability of profit sharing, and the prohibition of speculation and uncertainty in business contracts.
Sharia-compliance in effect results in avoidance of transactions that are eschewed by Islam, including option trading or interest-based transactions, such as margin trading and short selling. Saving and investing in line with religious principles is important for many Muslims, and an increasing range of financial products are now available to meet sharia rules.
The rationale behind the prohibition of interest in Islam suggests an economic system where all forms of exploitation are eliminated. In particular, Islam rule aims to establish justice between the financier and the entrepreneur. The financier should not be assured of a positive return without doing any work or sharing in the risk, while the entrepreneur, in spite of their management and hard work, is not assured of a positive return.
Can non-Muslims be successful investing in Islamic finance?
Islamic finance is not restricted to any one person or followers of a single faith, and is open to everyone. Non-Muslims that choose to include sharia-compliant investments in their portfolio will notice it becoming enhanced by having a socially conscious, ethical aspect to their investments.
Additionally, what is noticeable when investing in Islamic finance is an emphasis on equitable contracts, the linking of finance to productivity, the desirability of profit sharing, and the prohibition of speculation and uncertainty in business contracts that will facilitate a greater transparency, reducing overall portfolio volatility.
What sort of products does Ahli Bank offer SMEs?
Ahli Bank understands that SMEs play an integral role in boosting economic growth and stability. Our research has shown that in most countries, SMEs generate a substantial share of the GDP and are key sources of employment creation, in addition to SME start-ups being incubators of entrepreneurship. We understand and believe SMEs are the lifeline of any economy, and in Oman, Ahli Bank plays an active role in the provision of both financial and non-financial inputs to the sector.
Our SME products are designed specifically to help our customers realise their ambitions, by providing them with products that accommodate their business needs, regardless of industry specific requirements. The product suite includes working capital finance, lease finance, diminution musharaka, and trade finance facilities.
Our goal is not just to be a financial institution that provides generic services to clients, but one that delivers bespoke solutions and propositions specific to the sector. Beyond simply lending money, we support SMEs to plan for their business expansion; informing and preparing to counter any obstacles that they may experience, and more broadly, to lend assistance in deepening the culture of leadership among our business pioneers.
What specific types of SMEs are typical Ahli Bank customers?
The SME proposition in Oman is built around three key needs: access to efficient banking services and channels; access to finance with a simple procedure and fast turnaround time; and access to advisory and training services.
There are two distinct business segments within our banking unit – the first being the leasing and commercial finance unit that caters to our customers’ borrowing needs with credit facilities up to $130k. We also cater to trading companies that have transaction banking needs and are generally non-borrowing. Non-SME clients are relationships managed by industry specific teams within our corporate banking department.
