Islamic Banking & Finance Page 09-08-2019

Muhammad Arif
Muhammad Arif: Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan.

Concerns regarding Islamic Finance and Economics

The global spread of political Islam – or, Islamism – is a complex, nuanced, and fluid phenomenon with critical implications for the durability of international human rights architectures premised on universal norms; for state sovereignty; and for peace, order, and the rule of law. There is ample evidence to suggest the detrimental effects for democracy, economic justice, and security caused by ideas and actors operating under the rubric of Islamism, shorthanded to mean the global spread of sharia law still exist. The globalization of Islamic banking and finance through the use of sharia-compliant and sharia-compatible practices and instruments, reflected in the move by Western countries like the United Kingdom to serve as hubs for Islamic financial operations, is raising concerns by some international economic and political experts that spread of Sharia law into international financial and banking markets may exercise a corrosive effect on support for universal human rights standards and may facilitate global funding for terrorist activities by Islamist extremist groups. However both Muslim-majority and Western countries are now focusing on to contain these areas of concern.

Lottery-linked savings accounts in Islamic banking

Savings accounts offered by Islamic banks linked to a lottery or a raffle on top of profit-sharing payments are becoming increasingly popular in the industry as a product to attract new retail customers, particularly in times of low profit levels.  A so-called prize-linked savings account also called lottery-linked savings account is an incentivized savings account where a part of the profit payments on deposits are distributed as prizes among account holders based on chance. They are attractive to consumers as they offer the opportunity to win a large prize while the savings are never lost, unlike in a conventional lottery. And such accounts can mostly be opened with low minimum savings which makes them even more attractive to retail customers.
As an example, for every 100 dollars deposit in a lottery savings account, savers earn an agreed-on profit rate which is naturally lower than non-lottery linked accounts plus one entry to a regular raffle of a prize scheme with top prizes reaching in the 100,000 to millions and smaller prizes down to 1,000s, collected from the total profits.  Such prize-linked savings accounts have some interesting characteristics, especially in the field of behavioral economics. Banks are in fact gamifying savings which appears to work because it makes saving more fun for certain population brackets which are willing to forgo a part of the profit-sharing payments for the opportunity to win a much larger prize. Particularly among people who normally don’t save or have relatively low savings, demand for prize-linked savings accounts seems to be the highest which makes such accounts a perfect vehicle for banks to attract new retail customers. Studies also show that prize-linked savings accounts are also popular among those with higher debt levels and no other savings accounts, which is exactly the population that governments would like to encourage to save more.

Now, here some might say that there is an aspect of gambling in such accounts, which could be a concern for their Shariah compliance. Indeed, some scholars argue that it was unclear in how far awarding such prizes is justified as the vast majority of depositors would not receive them, which would be an aspect of gambling rather than risk-sharing. However, others say that awarding such prizes was halal since they would serve a much greater purpose than the simple excitement of gambling.  After all, these prizes would replace set interest payments, which are forbidden under Shariah law, and Islamic banks would encourage saving by those who want to remain Shariah-compliant with such accounts.

As a general rule in Islamic finance, it all depends on a jurisdiction’s interpretation of Shariah law. In Iran, the world’s largest Islamic finance market by assets, prize-linked savings accounts are the most common form of savings accounts available to the public, as they are viewed as a ‘gambling-free lottery in compliance with Islamic law by Iranian scholars. They are also offered in other Muslim countries, namely Indonesia, Pakistan (where the State Bank of Pakistan also offers prize-linked state bonds or sukuk), Oman, UAE and Turkey.

There are also new related products emerging, for example prize-linked, Shariah-compliant loans. Thereby, the winner of the lottery receives the prize as an interest-free loan from the bank, and buyers of tickets get their money back after the winner’s repayment of the loan. It is also being extended in the charity space, for instance as prize-linked charity as an incentivized form of zakat or as support of non-profit and social organizations.

Analysts say that prize-linked banking products are particularly beneficial for countries where much of the money is out of the system and the share of unbanked people is high, such as in Iran and in developing Muslim countries through their emphasis on savings rather than spending and their feature to integrate those into the financial system who used to be excluded from it

United Kingdom as western hub of Islamic finance

The United Kingdom intends to remain the “western hub of Islamic finance” as it prepares to launch its second sovereign sukuk, or Sharia-compliant bonds. “The success of our financial sector is proof we are dynamic country, a country of opportunity uniquely suited to sukuks and Islamic finance,” said John Glen, the British Economic Secretary to the Treasury, at the 2019 London Sukuk and FinTech Summit.

Even after Brexit, Britain will remain committed to international markets, including development of Islamic finance. “Hopefully you will come to understand, even as our relationship with Europe changes, we will remain committed to international commerce,” he noted.

The UK was the first non-Islamic country in the world to issue a sukuk when it raised £200 million (Dh923.3m) in 2014. The five-year deal is maturing in 2019 and the government has plans for another Sharia-compliant debt raising through its second sukuk.

The announcement by the UK Chancellor of the Exchequer, or finance minister, Philip Hammond, did not give the size or the timing of the new deal, which will replace the facility maturing in 2019. Although sparse on details, Mr Glen said the new sukuk will be Sterling denominated, “which should help UK-based Islamic finance institutions meet their mandatory liquidity requirements without extra FX risk”. “Until recently there was no sukuk outside the Muslim world. Islamic finance evolved … to [become] a veritable force of financing, the UK stood up, took notice and embraced the opportunity,” he added.

The London Stock Exchange listed its first corporate sukuk in 2007 and its first sovereign sukuk in 2008. Since then, 72 Sharia-compliant bonds have listed in London amounting to $53 billion (Dh194.64bn), with 2018 being a record year with $8.6bn. Al Rayan Bank, the UK’s largest Islamic bank, issued the largest ever Sterling-denominated sukuk of £250m in February 2018.

Spread of Islamic Banking in UAE


Younger customers are expected to play a crucial role in the growth of Islamic finance and expand its customer base in the future of UAE.

With Muslim spend estimated at $2.1 trillion in 2017, the Islamic economy continues its steady growth driven by an expanding, young Muslim population, which is expected to reach 3 billion in 2060, up from 1.8 billion in 2017, according to the latest Thomson Reuters’ State of the Global Islamic Economy Report 2018-19.

The Thomson Reuters report reveals that the penetration of Islamic banking in the GCC region surged from 31 per cent in 2008 to 45 per cent in 2017, with non-resident deposits in UAE’s Islamic banks growing by $1.14 billion in 2018 alone.

To sustain the recent pace of growth, Islamic banks will have to be increasingly competitive in targeting new customer segments in new ways. “The key segments are the millennial and Gen Z customers,” says Vince Cook, CEO of National Bank of Fujairah. “Today’s millennial customers are tech-savvy, geared towards ease, accessibility and functionality, and capturing this discerning and demanding group is critical for Islamic banks in order to sustain their customer base,” says Cook. “In a very short time, they will comprise the majority of financial consumers and influencers.”

A study by Alvarez & Marsal Middle East showed that while young tech-savvy customers drove 45 per cent of bank revenue in 2017, they are expected to contribute as much as 75 per cent of total revenue by 2030. While conventional banking leads the way in terms of technology adoption, Islamic finance is increasingly leveraging digital banking to reach out to younger customers.

National Bank of Fujairah’s Sharia-compliant Islamic window NBF Islamic sees technology as a key area of innovation and is making a series of investments to differentiate itself. In 2018, NBF launched Ajyal, a tailor-made banking service aimed at supporting the financial needs and aspirations of the young Emiratis in the UAE.

Built with tech-savvy customers in mind, Ajyal features the best-in-class digital banking experience. Consumers can register and open an account in just three simple steps with the NBF Instant app, taking less than a minute to become an Ajyal customer. Once on boarded, customers can enjoy easy online banking access with the NBF Direct app that’s quicker, more secure and hassle-free.

The bank expects Gen Z and millennial to be key catalysts for growth, says Cook. “Millennial are a big population in the UAE and most of the banks are targeting them. Since technology is a big driver for this segment, NBF has invested in our digital platforms to specifically reach out to them,” says Cook

“NBF Islamic banking can be fully accessed within the NBF Direct online banking app – which features a new approach to online security as well as faster log-in and authorization processes” he adds.

According to recent estimates, millennial make up 36 per cent of the UAE population. Their role is going to be critical as Dubai aims to become the global capital for Islamic economy. According to the Dubai Islamic Economy Development Centre (DIEDC), the Islamic economy sector contributed 8.3 per cent to Dubai’s GDP in 2016, or Dh33 billion.



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