The Islamic banking industry is steadily transitioning from infancy towards maturity with impressive double-digit growth in Islamic assets recorded year on year. Although the scale, compared to the overall banking asset base, is still small, Islamic banks are taking market share from their conventional counterparts in key GCC countries where Islamic banking has strong governmental support, such as the UAE.

It is common thinking that the 2008 financial crisis shook the global banking industry and forced banks to scale down and reposition. However, despite the doom and gloom, there is reason for Islamic banks to be positive. As financial analysts assess the reasons for the crisis, an understanding of the ethical values that underpin Islamic banking have helped Islamic banks to capture opportunities from a client base able to appreciate the benefits of a financial system that has built in protections against the excesses and high risks that sparked the crisis.

There can always be a debate about what Islamic banks are doing well, or need to do better. However, there can be no argument that the adoption rate of Islamic transaction banking solutions has consistently increased over the recent past. The uptake is apparent across all client segments, from large well-established corporations to small and medium-sized enterprises. The range of transaction banking solutions offered by Islamic banks is today more extensive, as they address short-term working capital financing requirements, manage domestic or international trade and add value through payments, receivables, liquidity management and electronic banking solutions.

This is due to several factors including (a) an increased level of awareness by customers on the Islamic products available in the market, (b) the higher degree of effort by coverage teams to educate clients about Islamic finance, and (c) a more progressive approach towards servicing client needs by newly established Islamic banks compared to peers who, although they have been around much longer, do not have a similar mindset.

This has created a positive, competitive environment where the less active players are pushed into action to adopt the innovative products and services, enhanced customer centricity and efficient solution delivery, demonstrated by the more aggressive players in the market. As a result, not only has the Islamic banking industry as a whole benefited but also the most important component of the equation, the customer.

In order to illustrate how Islamic banks are introducing innovation and value addition in the industry, I wish to highlight two initiatives Noor Bank’s Global Transaction Services (GTS) team has successfully implemented recently.

Islamic factoring

One of the areas where banks add value to clients is to optimise their working capital cycle by providing short -facilities. These can be offered under various structures. One popular mechanism offered by conventional banks, is a ‘factoring’ facility where a supplier is extended a credit line against a buyer invoice assigned to the bank. The facility can be with, or without, recourse to the supplier. Also, the buyer receivables can be covered through credit insurance to mitigate some of the underlying risks.

Islamic banks have traditionally not ventured into these advanced supply chain optimisation solutions, mainly due to high daily transaction volumes, complex Sharia-compliant documentation, the controls required to manage risks, and the large investments needed in dedicated platform and back-end resources for seamless delivery.

Noor Bank, however, is one of few Islamic players in the market that has successfully developed and implemented a Sharia-compliant factoring solution for corporate and SME clients through appropriate investments in platform, people and processes. The steadily growing client base and portfolio size, is indicative of how successfully this innovative Islamic trade finance solution is addressing the needs of customers.

Online commodity murabaha settlements

A large amount of financing done by Islamic banks uses the commodity murabaha structure, which involves buying and selling of physical commodities at an agreed profit with payments deferred over a period. Traditionally the settlement for these transactions, by Islamic banks, is done on the London Metal Exchange. However, the Dubai Multi Commodities Centre (DMCC) has also developed a platform (Tradeflow) that offers a central, online registry of ownership for commodities in the UAE. Noor Bank was the first bank to partner with DMCC to finalise a structure that enables commodity murabaha settlement transactions to be conducted online using Tradeflow for financing extended to Corporate and SME clients.

The structure is innovative and offers an alternative to LME settlements for Islamic banks. It also supports a higher degree of process digitisation, shorter turnaround time and better cut-offs for clients with same day processing. Additionally, the platform allows for greater Sharia-compliance as the goods are in existence in the UAE, and are accessible for inspection and full possession.

Noor Bank’s has pioneered work on this solution, and now other Islamic banks are gradually following suit. It is a clear demonstration of Noor Bank’s industry leadership and commitment to supporting initiatives that help position Dubai as the capital of Islamic economy.

— The writer is Head of GTS & Corporate Strategy, Noor Bank