Islamic banking industry must innovate

ISLAMIC banking appears headed from strength to strength in the Sultanate. Javed Ahmad, acting managing director of Bank Islam Brunei Darussalam, tells The Brunei Times' Hadi DP Mahmud how it happened and why the industry needs to innovate to sustain growth.

BT: You have said the Islamic banking market has selectively taken over the conventional market in a few markets around the globe? Could you please elaborate?

A very good example is Saudi Arabia. Saudi Arabia traditionally was very much a conventional banking market. There were some Islamic banks like Al-Rajhi Bank, they have a monopoly very much like what you heard about Bank Islam in Malaysia.

So as what you'd call 'new entrants' came, what happened was the choice available to customers were suddenly broadened. Not only that, the syariah advisors in Saudi Arabia, and these are some of the most eminent scholars, came in and endorsed that the Islamic banking proposition of the conventional banks was authentic. When scholars of that stature endorsed it, the public basically had tremendous trust in it. With that, suddenly every financial institution felt that they had to actually jump on board.

Wasn't it the same in Brunei? Acceptance levels were high to begin with when the first Islamic banking institution was set up.

In Brunei as I mentioned, and I always like to compare Brunei to Malaysia of course Malaysia is a much larger market but Brunei started Islamic banking 10 years after Malaysia, which started in the early 1980s.

When Brunei started, it was totally based on the Malaysian model. Actually, IBB, the whole setting up, in terms of Islamic course say for example TAIB, was very much to consultancy and advisory from Bank Islam. But once these institutions were established, in a conservative society like Brunei, immediately the society basically felt this is basically doing their banking activity in compliance with their faith.

As soon as the population bought in, very quickly we actually ended up being quite meaningful.

Secondly, Islamic finance is not exclusive. It is inclusive ... So when you have inclusivity, and you treat customers irrespective of race, religion, colour and creed, then customers are actually going to make sure they bank in.

Touching on how Islamic banking markets need to be more innovative, you stressed this point aplenty during the conference. Why the need for Islamic banking institutions to be more innovative?

Islamic banking is a paradigm shift. It's not about 'this is conventional, how can we Islamise it?' It is looking at, from a very different mindset and structure. When there is actually a paradigm shift, where for example, there is a focus in terms of what you call greater emphasis on investments, greater emphasis in terms of equitable contracts, what happens is that the whole Islamic principle what is the whole purpose of syariah in institutionalising what is accepted and forbidden.

There is a greater purpose. The greater purpose is, in terms of ensuring that if there is actually an opportunity to invest side by side one party has entrepreneurial skills and the other has the financial resources then putting them together and sharing the fruit of the business is going to be more attractive than providing debt.

So there is actually a total mind shift that is required. But when you look at a lot of the products, unfortunately it's just replication.

The entire traditional conventional banking system is very much based on what you call the depositor has no share in the profits, but the depositor provides a loan to the bank, whereas in a typical Islamic transaction, the depositor basically is a partner and an investor, and what he gets is basically from the pool of the returns that is generated. So that's one basic concept.

Now, I think the whole purpose is to actually start some of the debate, and really look at how it is a big challenge how do we get talent within the Islamic finance industry? A lot of talent, on the global stage, is that a lot of Islamic institutions are still very basic and are still managed more like a family business. The largest and the most profitable Islamic institution, is Al-Rahji Bank in Saudi Arabia. It makes in excess of US$2 billion in profits a year. It is predominantly family-owned, and very successful. But there are some inherent challenges when you have a family-run business.

I think what is critical for us is to make sure that how do we raise the bar, the standards, so that we will be able to attract the best of the best.

During the conference, there might have been some sort of misunderstanding, when someone says, 'well, the syariah principles are far more important'. I totally agree with that. I'm not saying that innovation means going against syariah. Innovation within the framework that we have to operate, and the day an Islamic institution runs away and is not committed to the syariah principles, then it has no basis for its existence as an Islamic institution.

So I'm not in any way trying to say that innovation means we give up our heritage, our tradition. I'm saying that innovation within those parameters. You can look at substantial investments into particular industries and so on, and you'll be able to do it in compliance with syariah. But we have to be innovative. The smaller we are, the easier it is for us to be innovative as an institution.

So I do have a lot of faith in terms of the new and innovative organisations that come out, you know, they spring up purely because there is a sense of restlessness, you can't actually be happy with the status quo. You want to come out. You want to try new things. You want to be setting the new standards. Enough people actually have that mindset.

Even in Brunei you're seeing a tremendous sense of innovation coming out of individuals who are based at the iCentre, who are one-man shows than any other organisation that I can think of. They don't have to go far on that. The Brunei Times