Mystery of Islamic banks unveiled

Do you know what makes Sharia-compliant institutions different. As the industry grows, more expats are turning to Islamic banks.

According to a recent survey by YouGovSiraj, 54 per cent of consumers in the region cannot properly differentiate between Islamic and mainstream banking.

Colin Gibson never thought he would join an Islamic bank.

As the head of communications for the International Cricket Council in Dubai, Mr Gibson found himself travelling several times a month to matches and events around the world. For months he tried to secure a car loan and while he already belonged to a well-known Western bank, he didn't have time to drop by during office hours to deal with the paperwork.

Mr Gibson was desperate to get the ball rolling. After exhausting the mainstream options, he decided to call Noor Islamic Bank based on recommendations from colleagues. He couldn't believe it when the bank said that a representative would be in his office the next morning. "They were prepared to fit into my time frame and my location," says Mr Gibson, who signed on with Noor in April. "This bank actually came out to my office on more than one occasion. When I was looking for a car loan, I went through a series of banks and the one that offered the best rates and service was an Islamic bank. Western expatriates tend to stick with what they know.

"But what I have learned from Noor is you not only receive similar banking services, but in some cases it exceeds expectations." At first, Mr Gibson was uncertain whether an Islamic bank was right for him. When he moved to Dubai from the UK about a year ago, he admits that these kinds of institutions, such as Abu Dhabi Islamic Bank, Dubai Islamic Bank and Emirates Islamic Bank, weren't on his radar.

It's a scenario most expatriates can relate to. Banks such as HSBC, Barclays and Citibank are just some of the usual suspects they tend to recognise from home. So naturally, they often go with what is familiar. According to a recent survey conducted by YouGovSiraj, 54 per cent of consumers in the region still cannot properly differentiate between Islamic and conventional banking services. The survey included 2,268 locals and expatriates above the age of 18 in the UAE, Saudi Arabia and Egypt. Respondents who didn't use Islamic banks said they avoided the institutions either because they were unaware of Islamic banking principles or believed that these institutions were only for people of a certain religious belief.

Meanwhile, in Standard and Poor's Islamic Finance Outlook 2010, the US-based financial services company reported that assets of the top 500 Islamic banks expanded 28.6 per cent to US$822 billion (Dh3 trillion) in 2009. The industry now represents a total of $1tn worldwide and there are more than 300 Islamic banks in 51 countries. Indeed, Sharia-compliant institutions are spreading their wings. But despite the numbers, Islamic banking still remains a mystery for many Westerners. This reality was one topic of discussion at this week's International Islamic Finance Forum in Abu Dhabi.

The two-day event, hosted by Abu Dhabi Islamic Bank, brought together dozens of key representatives with the common goal of expanding the brand and bringing Islamic banking into the 21st century. Simon Eedle, the head of Islamic banking for Credit Agricole CIB, attended the conference as one of three representatives on the keynote panel. After more than 66 years in the region, he says that the corporate and investment bank is poised for tremendous growth in the next few years.

"If you think about it, 23 per cent of the [world's] population is Muslim, and less than one half of 1 per cent of assets are Sharia controlled," Mr Eedle says. "But beyond that, as the banks continue to grow, Westerners will use these banks if it gives them something that they don't get from a conventional bank, whether that's more social responsibility, access to funds or at a very basic level such as a good credit card. If you are non-Muslim, you just have more choice and competition for services."

While membership in Islamic banks is not limited to Muslims, they are supported by five basic pillars: no interest, no uncertain speculation, no financing of companies involved with goods or services deemed haram, such as weapons, pork or gambling, the sharing of profit and loss and the understanding that all financial transactions must be backed by tangible assets. Mr Eedle says that most Islamic banks offer similar services to mainstream banks, but often with a slightly different approach.

Rather than interest, customers with savings accounts will instead receive money in the form of profits made by the bank. In the case of mortgages, the institution will actually purchase the property and subsequently sell it to the client at a higher price. The buyer then pays off the higher price in equal installments over a fixed term, which is similar in cost to what customers could expect to shell out in interest with standard banks.

"The assets are actually owned by the bank, as you are repaying it to support the financing," Mr Eedle says. "So for some customers, it may be better to use this form of mortgage. It's far more difficult to foreclose because of the common principles. That said, don't go into a financial transaction thinking you don't have to pay just because it's Islamic." There are other advantages that prospective clients should be aware of. In the case of off-plan properties, many Islamic banks will not begin charging the client until the home has been completed. With the construction problems faced by so many expatriates in the past couple of years, this particular feature could be a life saver. But for Mr Eedle, the most redeeming aspect of these institutions is the attentive and ethical treatment of its customers.

"Fifty years ago, banks were there to be the conduits for money," he says. "You had a mission in society to facilitate this financing. In the last 20 years that ethic has been lost to an extent, and it became more about pure profitability. I think Islamic banking's core principles are more in line with fairness and equality. "Water companies have to make money, but they can't turn the water off. Banks have to lend and I believe in the worst days of excess, banks lost sight of what their core functions in society really are."

Hussain Al Qemzi, the group chief executive officer of Noor Investment Group and Noor Islamic Bank, is of a similar mind. "Our non-Muslim clients are appreciating the 'less risky alternative' to banking, especially since the onset of the global credit crisis over a year ago," he says. "This highlighted gaps within Western risk management practices. Non-Muslim clients most value the transparency and straightforward way Sharia products are delivered."

Since joining Noor, Mr Gibson says he agrees that Islamic banks provide excellent service. After signing on for the car loan, he also applied for a credit card with Noor Islamic Bank. And just as he didn't have to visit the branch for the loan, a representative of the bank brought the card to him just before he left on a business trip to the Caribbean. "Every transaction has been treated well," he says. "To be honest, the deals and programmes they present are as good as any, but what attracted me was the ability to receive professional service."

As the industry continues to evolve and grow, the future is bright for Islamic banking. But there are issues that any future client should know. Because these institutions don't offer interest, and instead share their profits with clients, the symbiotic relationship can also swing the other way. In other words, account holders could technically lose money in their savings accounts, although instances such as these are very unlikely. When it comes to credit and debit cards, clients should be aware that some cards may not function in venues selling goods deemed to be haram, such as alcohol or pork.

Finally, the sukuk, or an Islamic bond, which gives the holder a common undivided share in a group of assets, has not always been secure. In May of last year, a Kuwaiti firm, Investment Dar, missed a payment on a $100 million sukuk, while a year later Saudi Arabia's Saad Group defaulted on a sukuk worth $650m. So far, none of these issues have affected Mr Gibson. He happily remains a client in both the mainstream and Islamic banking systems, although he credits the latter for helping him get his hands on the steering wheel of a new Audi Q7.

"They even came out with me to purchase the car, if you can believe it," he says. "Joining an Islamic bank seemed like a daunting prospect because it was unfamiliar. It isn't daunting and it's not unfamiliar. And the service you receive is equal or better."