Islamic Banking Page 21st August 2020 Exposures of Islamic banks

The exposures of Islamic banks particularly macroeconomic constitute a “ticking time bomb” of a “billions of dollars” in “unhedged currencies and rates”.

The difficulty, complexity and expense of hedging these in the correct Islamic manner is such that as of 2015, the Islamic Development Bank “was hemorrhaging cash as if it were funding a war. It simply couldn’t swap dollars for Euros or vice versa on an ongoing basis without resorting to the conventional markets.” Regional Islamic banks in the Middle East and Malaysia and even Pakistan did not have “specialized personnel trained to understand and negotiate Sharia-compliant treasury swaps” and were not willing to hire the consultants who can do so.

The majority of Islamic banking clients are found in the Gulf States and in developed countries.

 Studies of Islamic banking customer in Malaysia and Pakistan found customer satisfaction was connected to service quality. A study of Islamic banking customers in Bangladesh found “most customers” between 25–35 years, “highly educated” and having a “durable relationship” with the bank, more knowledgeable about account than financing products.

In series of interviews conducted with Pakistani banking professionals (conventional and Islamic bankers, Shariah banking advisors, finance-using businessmen, and management consultants), noted many Islamic bankers expressed “cynicism” over the difference or lack thereof between conventional and Islamic bank products, the lack of requirements for external Shariah-compliance audits of Islamic banks in Pakistan, shariah boards lack of awareness of their banks’ failure to follow shariah compliant practices in or their power to stop these practices. However this did not deter patronage of the banks by the pious (one of whom explained that if his Islamic bank was not truly shariah compliant, ‘The sin is on their head now, not on mine! What I could do, I’ve done.’)

The Bank of London and the Middle East (BLME) have majority non-Muslim customers that receive a fixed percentage of profits, rather than an interest rate. However, critics say that sharia deposits and products are too similar to interest-rate related products, in contrast to the share of profits earned. Other explanations for the rise of non-Muslim customers in Islamic banking have been pointed towards ethical reasons in negative screening of investments like tobacco, alcohol, and arms.

One estimate of customer preference (given by a Pakistani banker) in the Pakistani banking industry, was that about 10% of customers were “strictly conventional banking clients”, 20% were strictly Shariah-compliant banking clients, and 70% would prefer Shariah-compliant banking but would use conventional banking if “there was a significant pricing difference”.

A survey of Islamic and conventional banking customers found (unsurprisingly) Islamic banking customers were more observant (having attended hajj, observing salat, growing a beard, etc.), but also had higher savings account balances than conventional bank customers, were older, better educated, had traveled more overseas, and tended to have a second account at a conventional bank.

Another study, using “official data” reported to State Bank of Pakistan, found that for lenders who had taken out both Islamic (Murabaha) financing and conventional loans, the default rate was more than twice as high on the conventional loans. Borrowers were “less likely to default during Ramadan and in big cities if the share of votes to religious-political parties’ increases, suggesting that religion – either through individual piousness or network effects – may play a role in determining loan default.”

But this is not the end of the story. Islamic banks need better Islamic products with better return, better service to their customers and their due role in country’s economy so as to move ahead in a positive manner.