CAPITALISING ON GROWTH
Q&A with Mr Muhammed Ikram Thowfeek
ISLAMIC BANKER (IB): What is the most invaluable lesson you have learnt over the years after setting up several Islamic banks?
MUHAMMED IKRAM THOWFEEK (MIT): Always make sure every day is a ‘learning lab’ and never settle to your own given mandate of your job position whatever it may be, but go beyond with the intention of learning other areas of speciality and also extending a support or giving a helping hand to your fellow founding team mates. You will be opened up to tread into other areas during the setting up process until those positions are filled over time, giving you a greater opportunity to get some exposure in other areas of business. Then you will be equipped with knowledge, experience and exposure to set up your own outfit, either in the field of Islamic finance or any other entrepreneurial initiative of your own.
IB: What are your top three trademark achievements in the setting up of Islamic finance institutions?
MIT: I am a chartered accountant by profession and learnt Islamic finance only by practice, not by going through any academic study programmes since there were none when I started 25 years back. Every setting up opportunity that I had worked is unique to its country, people, process, systems etc., but one thing is common – the founding team spirit of going that extra mile to achieve the objectives of the launch. The top most trademark achievements in setting up Islamic finance institutions can be attributed to the following: 1. Building a name as a ‘specialist’ in setting up Islamic
banks and financial institutions from scratch, without confining myself to accounting and finance. 2.The opportunity to set up an Islamic Bank during the challenging times and at the peak of the global financial crisis, where any sane professional banker would not tread in that path of establishing any new banks (for that matter Islamic or conventional) during those turbulent times, but we did against all odds. Today, it’s a success story. 3. Always been an active player in the steering committees of the setting up initiatives, adding value beyond the role of my mandate as a CFO and other senior positions I have held. Got involved in retail, corporate, investment banking, whilst educating the team members from a training and career development perspective. I learnt the most from this proactive approach of sharing the 3Es , namely education, experience and exposure.
IB: Can you enlighten us on the major differences in starting up a fully-fledged Islamic bank and an Islamic banking arm of a conventional bank?
MIT: One of the most challenged and also the major difference in setting up a fully-fledged Islamic bank and an Islamic banking arm/window of a conventional bank is the capital. How it has been raised and how clean and untainted from riba-based (interest/usury) capital of a conventional bank. There are other fundamental differences between an Islamic Banking (IB) arm/window of a conventional bank and a fully fledged Islamic bank, where the latter commands acceptability, credibility and transparency in terms of their capital, systems, product offerings, etc., unlike the Islamic banking arm/windows of any conventional bank. Furthermore, the IB arm/windows of a conventional bank will always be looked at from a much lower perspective mainly due to the objective of its formation, which is mainly to retain the existing customer bases who are demanding Islamic banking and finance, whereas a fully fledged Islamic bank’s objective is not to retain any customer base, but to offer their products and services to a new clientele and new market.
IB: As the Islamic banking sector becomes increasingly competitive with numerous conventional banks opening up Islamic banking windows, how do fully fledged Islamic banks maintain their competitive edge in the market?
MIT: This is a very practical question. I always want to share my responses drawn from my practical experiences and exposure gained over two-and-half decades in the Islamic finance industry. Practically, one of the central banks in the Middle East approved the setting up of Islamic banking windows and independent branches by fine-tuning their prudential regulatory framework. A couple of years later, the same central bank requested all
the conventional banks to close down those windows and independent branches within a timeframe, mainly to bring ‘fair play’ among the banks, both conventional and Islamic banks in terms of competition.The decision taken by the central bank was due to the cry of those fully-fledged Islamic banks whose businesses were eaten up by the small window and branch-based Islamic banking initiatives using the strength of the conventional banks’ balance sheets, as if those small players in the Islamic finance industry were equal and in a level-playing field with those fully-fledged Islamic banks, resulting in unfair competition among the players in the Islamic finance Industry. To bring fair competition in the banking system, the central bank did away with the window and independent branch based Islamic banking initiatives of the conventional banks. However, the central bank gave an option to convert their conventional outfit into fully-fledged Islamic Banks if they genuinely see a demand for Islamic finance and if it can bring bigger benefits to all the stakeholders of the conventional bank through that conversion and also to compete on an equal footing. However, none of them
IB: In emerging markets, there aren’t too many personnel who are Islamic finance-trained. Many come from a conventional system and go on to learn the basics and principles of Islamic finance. What challenges do you see to this kind of import and export of talent between the conventional and Shari’ah system?
MIT: Yes, there is a dearth of professional Islamic bankers and Islamic financial specialists who are equipped not only with qualifications, but also with experience in the field. Due to this shortage of Islamic finance talents, conventional personnel are much sought-after to bridge the gap with the intention to train them in Islamic finance basics so that they can apply their practical conventional knowledge and experience. But in practice, the teaching of basics of Islamic finance to those who are soaked in conventional best practices, it’s difficult to change their paradigm. What happens on ground is that they try to superimpose their conventional thought processes and have heard many times, the majority of them say it’s the same thing. However, having said that, the Islamic Financial Institutions have learned immensely from dealing with conventional banks/ bankers to uplift the
institutions to a near level-playing field in some areas.
IB: Technology continues to evolve at an amazing speed. Do you think Islamic finance institutions are now ready to embrace advanced technologies on par with their conventional counterparts to take the industry to the next level?
MIT: Very true, technology is evolving at a speed none of us can comprehend where it will be tomorrow or in the next five years to a decade. But what we really know is that it is changing a physical economy into a virtual economy and then into an augmented reality. In a virtual world, there is no exception for financial institutions they must cope with the changing demands of the customers and other stakeholders. During my 25-year career in the field of Islamic finance, I can say that still there is a long way to go for the Islamic financial institutions to catch up with some of the global conventional banks’ technological driven initiatives. I have seen some of the newest Islamic banks (have worked in two of them) where they tried to build a competitive edge among the Islamic financial institutions by bringing in conventional tech-driven best practices. This is one of the most important areas where Islamic financial institutions need to focus on if they are to go global and compete in a level-playing field with their conventional counterparts.
IB: Based on the common principles of Shari’ah compliance, the global halal industry and Islamic finance would look like natural partners. But both seem rather divergent with calls for closer collaboration between the two growing. Why do you think this has been the case and what potential do you see with Islamic finance and the global halal Industry leveraging on each other?
MIT: As we speak, the halal industry is gathering momentum not only in the local markets, but also regionally and globally. The recent mega event on halal industry in Abu Dhabi is testimony to this and there are other countries planning to spearhead on this lucrative and promising industry. Even non-Muslim owners or the management want to make their outfits, for example hospitals, hotels etc., halal-compliant.
IB: From your own experience, you have come across opinions that the word “Islamic” should be removed from the branding of all Islamic finance institutions in order for its products and services to appeal to a global market. What is your response to this?
MIT: This is one of the hot topics discussed in some of the recent conferences and forums, whether the name ‘Islamic’ is hindering the growth potential of the Islamic finance industry and if this is detrimental to reaching out to non-Muslims. I have heard of those who have changed the brand name of their Islamic finance institution by removing the ‘Islamic’ tagline and/or using only an abbreviation of the IFI to go as a brand, whereby the name‘Islamic’ will not be portrayed. They defend their change and it’s their opinion, and everyone has their own way of looking at things. For me, it’s not the tagline ‘Islamic’ that is hindering the growth potential of the industry and/ or reaching out to both the Muslims and non-Muslims alike with Islamic finance propositions. What is needed the most is awareness on Islamic finance to reach out to every nook and corner of the world. By reaching out to all mankind, everyone benefits from the Islamic finance propositions. Today, 80% of the Islamic finance market potential is untapped due to lack of understanding as to what Islamic finance is all about. The day they come to know, the moral, ethical, social and religious values and benefits of the Islamic finance industry everyone will rally around and patronise.
IB: Since Islamic banks are strictly Shari’ah-compliant, does this make it tougher for them to establish new, innovative products and services for their customers?
MIT: Islam is very simple and peaceful to those who are guided by the Creator. Anyone with a crystal clear intention, who takes any initiative in line with Islam, like establishing Islamic finance institutions, developing innovative products, coming out with Islamic finance and education solutions to serve the masses, it can never be complicated or tougher as you mentioned, if the focus is to obey the Lord and to make a ‘difference’ to humanity .
IB: With the impressive growth trajectory of global Islamic banking, do you think it’s time for the formation of a Shari’ah-based Islamic World Bank?
MIT: Today, Western bankers and global players are not only acknowledging the viability of Islamic finance, they too are penetrating the industry in a big way by establishing their Islamic bank arm/window or independent branches to capitalize on the enormous growth potential and opportunities of this multi-trillion dollar Islamic finance industry. Not only the conventional banks entering into the Islamic finance fold, even the International Monetary Fund (IMF) and the World Bank are structuring deals in a Shari’a-compliant manner and accepting it as an alternative system of finance. That is the appetite for Islamic finance among big funding agencies like IMF and World Bank. The research highlights that every year global wealth is increasing significantly, but the poverty in the world ‘raises its ugly head’ in front of our own eyes. As we speak and read, there are 3.3 billion people all over the world, which is almost 50% of the global population, living on a mere $2 per day or less. Who can provide solutions, with focused, structured and measurable products and/or services to uplift humanity? Can or have the IMF, World Bank, IDB, and even the newly-formed NDB provide/provided that focused, structured and measurable solutions to uplift the downtrodden? Not to my knowledge. However, it’s a long felt need and hardly can we see any seed being planted on these lines to set up the likes of the World Bank, IMF and the recent NDB, which are all non-Shari’a compliant. But the industry is yearning for the “First Global Islamic Bank” ‘to uplift humanity’ through Islamic finance solutions. As we say, InShaAllah (God willing), it will come forth.
IB: Since you are a Sri Lankan, can you give us an overview of the current Islamic finance climate in the country, and what is the expected growth in the next five years?
MIT: Sri Lanka is one of the finest destinations for Islamic finance as it has got a long history going back to the 1980s. Now, there is a fully fledged Islamic bank and there are more than twenty Islamic financial institutions (IFIs) as windows of conventional banks or finance / leasing companies are heavily engaged in the market. Specially the post-civil conflict banking and finance sector growth is noteworthy as we can see the involvement of various aspects of this industry has been lobbied by various stakeholders in the market. The key factors for successful Islamic finance in Sri Lanka are healthy competition, support of the regulators, ethical savvy customers and most importantly, the industry practitioners and Shari’ah scholars. Another encouraging trend in Sri Lanka is that we have got not only an Islamic bank and financial institutions, but insurance, capital market
players, SME and micro finance, advisors, consultancy
firms, educational institutions and publishers too. When we had the first Islamic finance institution in Sri Lanka as a finance company in 1997, we had a concern as to whether Islamic finance could exist in this market. Later the industry has evolved through many aspects, including the banking law changes in 2005 and key tax law changes in 2011, and now it has been set for steady growth. Sri Lanka’s Islamic banking and finance (IBF) has grown 42 percent to LKR 50 billion in assets in 2014, the Minister of Industry and Commerce revealed in May 2015. The IBF industry will grow with double-digit growth for the next five years in unparalleled competition. I would like to state that the Mayor of the City of London Alderman Alan Yarrow, who was on a recent visit to Sri Lanka, stated that a raft of key measures Sri Lanka should prioritise if it is keen on becoming a competitive financial
centre in the region is the need for an Islamic finance sector in Sri Lanka. So as of 2015, we are heading towards new challenges, including new product development to reach out to various segments of local and regional stakeholders.