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Lifting the veil off Islamic banking

Industry analysts said many customers are opting for Islamic banking

Gulf News

If you are like most people, you likely don't read the fine print on your banking products or monthly statement, and discussions with your bank branch manager leave you scratching your head in confusion.

Industry analysts said many dissatisfied customers are leaving their banks and moving toward what they perceive to be a safer and more transparent banking option—Islamic banks.

Strangely, a recent YouGov survey of consumer banking preferences in the region revealed that 54 per cent of people do not understand the difference between Islamic and conventional banks. Why? They both offer similar products and services.

This should sound an alarm bell for Islamic banks that are trying to differentiate themselves in the market with a renewed emphasis on the basic ethics at the heart of the Islamic banking model.

Many people are under the impression that Islamic banks are for Muslims only, a personal finance expert told me last week. I was a little surprised. This was like saying only the French are allowed to eat mille-feuille (sacrebleu!).

I was not too convinced with her solution either: Re-naming them "ethical" rather than Islamic bank, because that was essentially the crux of it, so more customers would understand the products they are buying.

There are differences between the Islamic banking model and the ethical banking concepts applied in the West. The Islamic ideas of asset-backed and no-interest investments and prohibiting dealing in activities that Islam deems unlawful is different from ethical investing in green projects for instance.

A lack of understanding the Islamic banking system is a major barrier for considering this option, so Islamic banks need to step up their communication game.

A joint survey by YouGov and Cashy showed that one-third of respondents claimed to be currently using Islamic banking products and services.

The good news is that half of those not currently using Islamic banking products appear open to the possibility.

Popular among youth

Islamic banks are also more popular among Emiratis, Arab expats, and younger customers under 25 years old, the survey revealed. Islamic banks should be talking to these existing and potential customers if they want to be understood and differentiated in the market.

When I first read the statistic about 54 per cent of people are unable to tell the difference between conventional and Islamic banks I thought, "Pffftt, do some research." But that is not entirely fair.

Unless you and I had economics degrees from Harvard, figuring out how conventional and Islamic banks work or differ doesn't exactly come intuitively.

So do some homework before you shop around for a bank. Ask for assistance from representatives of both bank types. Experts love to throw in jargon so make sure you ask them to explain things so you understand.

It doesn't make you less intelligent if they can't break down concepts or products to the customer it is intended for. If the Jargonese still goes over your head, ask them to explain it to you like they would explain it to a ten-year old, it's not condescending, it just forces bankers to come down to the non-expert's level.

Do your own research online as well but make sure the websites are reliable.

Make sure you understand some of the common terms in Islamic banking: profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah) and leasing (ljarah).

It is a misconception that Islamic banks cater to the needs of the Muslim community only. In fact it is a system of banking that is consistent with Islamic principles and economics.

After the global recession highlighted the failures of capitalism, the world has looked into Islamic banking as a viable alternative system, so there is no reason to peg it as exclusively serving Muslims.

"It's all about education and offering a viable product," said Dr Hatim Al Tahir, Director of the Islamic Finance Knowledge Centre, to Gulf News. Banks should move to educate customers by providing information on websites, bulletins, reports, and product briefings, he said.

You can also look up some useful websites:, the Islamic finance programme at Harvard university website, glossary section of your local Islamic bank, he said.