In many ways, Islamic finance has broken out of a narrow sphere and established itself firmly in the finance and banking industry. In many parts of the world, it has succeeded as a result of its Islamic identity. However, in order to make a quantum leap from a niche industry to a strong component of the global financial system, Islamic finance will need to broaden its appeal to reach out to the non-muslim circles. Needless to say, its core values that guide the industry most certainly must stay to preserve the essence of Islamic finance, but its stereo-typical name which limits its growth has to be done away with. For instance, in Turkey, which is a strong secular Muslim state, Islamic banking is called participation banking, with the term “participation” used to bridge the gap of religious boundaries. From a historical perspective, the Islamic finance industry was developed based on theoretical conceptions about economic organisation deemed acceptable on the grounds of sound Islamic doctrine, as debated by Islamic economists and Syariah experts over the course of several decades.
However, Islamic finance did not grow as an industry, until the 1970s when the increase in oil prices led to surplus liquidity in the Gulf Countries Council (GCC). Dubai took the stage as the first city to launch an Islamic bank. Other countries such as Pakistan and Malaysia viewed Islamic finance as an outgrowth of efforts to Islamise the economy in Pakistan and as a broader industrialisation strategy in Malaysia. With the initial spurts of growth occurring in the Middle East, North Africa, Pakistan and Malaysia, the focus on Muslims and the use of the Islamic label was wholly accepted. Since then, global Islamic banking assets have grown tremendously reaching US$1.3 trillion (RM2.9 billion) in 2011, with an expectation to reach US$2 trillion by 2014.
Today, the top 20 Islamic banks make up 55 per cent of total Islamic banking assets, concentrated in seven countries, including GCC, Malaysia and Turkey. To keep up with competition and stay relevant, Islamic banks will have to broaden the marketplace or else face destructive competition. Countries such as Malaysia, where more than half of the consumers are non-Muslims, have succeeded in attracting non-Muslim customers despite the Islamic label, duethe government’s financial incentives which make Islamic banking more cost competitive than conventional banking. Islamic finance has excellent potential at reaching beyond faith lines by positioning itself as a platform for ethical and co-operative banking alternatives. This is a significant opportunity due to broad reaching consumer dissatisfaction following the financial crisis of 2008-09. However, many countries hurt by the financial crisis have majority non-Muslim populations; which places the label “Islamic” at a disadvantage.
In markets like the United States, South Korea, Nigeria and India, the use of the Islamic label provokes a strong response from anti-Muslim groups that is unrelated to the substance of Islamic finance, but on a negative perception of anything “Islamic”. NonMuslim consumers exploring alternatives may also be turned of by the “Islamic” label feeling that the industry is not for them and only for Muslims. Notwithstanding the falsity of these claims, the Islamic label can act as a barrier to the industry’s goal of explaining the benefits of the product on its merits alone. Not only does this limit the appeal of Islamic finance for non-Muslims, it also stifles the drive to improve products, making them more competitive with traditional financial products.
There is a strong hesitation to shifting away from the “Islamic” label due to past successes, in spite of the Islamic identity. The point that is mulled over is that moving away from the “Islamic” label could isolate it from the very consumers who have helped it succeed to this point. However, this does not have to be a reality. One good example of bridging the religious gap is the Bellingham, Washington-based Amana Funds, which include two of the largest Islamic funds globally. After many years of slow growth primarily among the Muslim market, the funds grew rapidly with many types of the products after they were recognised for their leading performance by Morningstar. By highlighting the value proposition of the funds, Amana was able to reach both Muslims and non-Muslims, whilst avoiding the dilution of the Islamic identity of the product. Islamic products are quite capable of gaining acceptance among many diverse groups of people by offering a compelling financial rationale. Changing the name of the game to “participation” finance may not necessarily resolve all the issues related to the label “Islamic”, however, once the industry has overcome the hurdles of positioning Islamic banking as beneficial to all consumer groups, we will be able to focus on the more serious issues needed to drive the industry forward. Overcoming these challenges are fundamental steps in making Islamic finance stronger and more competitive, ultimately resulting in the industry achieving more traction in the global financial markets.