Can Islamic Banking and Finance Organizations Win Non-Muslim Patrons

Zaman Khan

BSc. Business Administration

Northern Arizona University

June 2016

Abstract

The rapid pace of technological advancement coupled with the forces of globalization is

contributing to a burgeoning middle class across the globe. The majority of this growth is expected to

take place in the developing nations of Asia, the Middle-East, and North Africa. Although a significant

portion of the estimated one billion people that will earn their way into the global middle class this

decade (Kharas, H. 2010) are of the Muslim faith, there are hundreds of millions that will not be. This

population and economic boom means lots of new business for regional banks. Islamic banks are

established institutions throughout the region and enjoy high levels of success and patronage from their

Muslim customers, but, the question if they can appeal to the large population of non-Muslims in these

regions and beyond, and how, is what this paper examines. In light of the changing dialogue about

wealth inequality and the pitfalls of capitalism across the globe, Islamic banking and finance

organizations need to position themselves to attract the emerging markets. It has been found that non-

Muslims are of the opinion that Islamic Banking is a strictly Muslim endeavor (Bley and Kuehn 2004),

due to lack of understanding and Islam centric branding (Dar and Presley). This paper reviews some of

the available literature on non-Muslim perceptions towards Islamic banking and offers a unique solution

to help Islamic finance organizations appeal to Non-Muslim bank customers across the globe.

Introduction

Crisis- The Catalyst

The global financial crisis of 2008 highlighted the unsustainable lending practices of

conventional finance organizations across the west as “too big to fail” firms failed and set a domino

effect into action through the global economy and revealed its flimsy stature. The crisis is often

characterized as having been caused by risky investments and high interest rates, but there isn’t a

consensus among financial experts as to the exact impact of each contributing factor. As experts studied

what led to the Global Recession they indirectly shed light on Islamic banking. Since Sharia-Compliant

banks were prohibited from engaging in speculative activities and issuing interest backed loans, Islamic

banks weathered the credit crunch better than conventional competitors and began to be touted by

some in the mainstream media as a safer and more sustainable form of banking than the conventional

model. These assertions were later backed by studies that indicated Islamic banks handled financial

stress tests better than conventional banks (M. Cihak, H. Hesse, 2010), further fortifying the notion that

Islamic banking was a veritable alternative to the conventional banks. Islamic Banking began to be

heralded as a more sustainable, equitable, and ethical financial alternative to the boom-bust cyclic

pattern that is now recognized as a byproduct of capitalism. Critics have tried to argue that Islamic

financial services are merely superficially different, and, that underneath operate similarly to

conventional banks; whether Islamic banking is substantially different from conventional banking or not

is not the focus of this paper, rather, this paper focuses on whether or not non-Muslims can be won

over from conventional banks and how.

Foundations of Islamic Finance-

Islamic Finance and Banking principles are derived primarily from three sources: the Quran,

Hadith, and scholarly consensus. The Quran, believed by Muslims to be the literal word of God, contains

varied content of spiritual, ethical, and practical nature that covers vast aspects of life and society,

essentially forming the basic rules of life and governance for both of the major branches of Islam (Shiite

& Sunni). Of relevance, the Quran clearly prohibits taking or giving interest payments (Quran; 2:275,

3:130).

The Hadith are the vast records of the Prophet Mohammad’s teachings and life as recorded by

his successors; first orally, and then written. In many instances the Hadith offer insight into the Quranic

injunctions as they record the Prophet’s explanations and practical application of his own understanding

of the Quran. While some Hadith are an explicit prohibition of certain transactions that were

commonplace in the time of the Prophet, a lack of prohibition or even recorded participation in other

forms of transactions by the Prophet are considered by Muslim scholars to be a direct, or indirect,

endorsement of said transactions.

Both branches of Islam and their scholars prohibit dealing in interest due to the clear Quranic

terminology and inherited Scholarly tradition. Unlike the Shiites, Sunnis don’t have a central authority

and neither is there a formal regulatory body of scholars who form a consensus on financial rulings. The

process is more organic and bottom-up in Sunni Islam where the people choose the scholars and elevate

their popularity according to their ability to renovate orthodoxy. Although there are outliers, the climate

of Muslim belief and practice remains fairly constant and center-right, often with little room for

disagreement.

Islamic Finance can be boiled down to a few basic tenants from the scriptural sources that

together form the foundation of any Islamic finance organization. The core principles are: avoiding

interest, equity/fairness, Islamic morality, and corporate/social responsibility. The practical application

of these tenants are most apparent as the Profit and Loss Agreement, refraining from unethical

endeavors -deemed Haram-(pork, porn, etc.), avoiding speculation and unnecessary risk, and investing

in society. Though the exact application of these principles can vary somewhat, there is a general

pattern of behavior that can be observed in Islamic finance organizations across the globe.

Western Views on Interest-

Though Christianity and Judaism have traditionally banned Interest and usury to some degree

(Exodus 22:25–27, Leviticus 25:36–37 and Deuteronomy 23:20–21), the practice of lending on interest

became more widespread in the middle ages as the catholic church began to lose power to the

protestant reformation. Europe began to break from traditional interpretations and take more liberal

meaning from the term Usury, differentiating it from interest, and often pushing the acceptable limit

further back. With the Enlightenment, European powers started institutionalizing the separation of

church and state, electing rationalism as the authority on governance rather than divine revelation. Prior

to that, usury was frowned upon and even punishable, though prevalent as a tool for wealthy investors

to benefit off of loans as loan sharks. The Enlightenment paved the way for Interest to be used as a

financial instrument in the open and without persecution. Interest based banking now comprises the

supermajority of money lending across the globe. Despite -or due to- the prevalence and systemic

nature of interest based banking, there has been modern research and criticism in the west that raises

ethical and sustainability issues with the practice.

Professor Margrit Kennedy writes: “Exponential growth in the physical realm usually ends with

the death of the host and the organism on which it depends. Based on interest and compound interest,

our money doubles at regular intervals, i.e., it follows an exponential growth pattern. This explains why

we are in trouble with our monetary system today. Interest, in fact, acts like a cancer in our social

structure,“ (Interest and Inflation Free Money, ch1 pg6). In her book “Occupy Money” (2012), Kennedy’s

research reveals that even common purchases by consumers contain massive interest payments that

can be traced backwards from retailer, through manufacturer, to raw materials themselves. She asserts

that 35-40% of the cost of an item goes to interest payments. This, she argues, is 35%-40% of the GDP

that goes to the top wealth holders. Elsewhere, she reveals that more than 70% of rent costs in

Germany simply cover interest-related payments. Kennedy goes on to assert that in the United States,

the top 1% own 42% of the wealth while the bottom 80% own merely 5% of the wealth, this she argues

is due to hidden interest payments on all purchases that constantly syphon money to the top 10% of

wealth holders.

Noted political commentator and former US Secretary of Labor Robert Reich writes on his blog:

“Once you have wealth, it generates its own income as the value of that wealth increases over time,

generating dividends and interest (emphasis added), and then even more when those assets are sold.

This is why wealth inequality is compounding faster than income inequality. The richest top 1% own 40%

of the nation’s wealth. The bottom 80% own just 7%,” (2016).

The frustration experienced by the consumer due to growing income inequality is apparent in

the form of different movements sprouting up across the globe. Modern populist movements like

Occupy Wall-street and the nearly successful primary bid for democratic nominee by self-proclaimed

socialist Bernie Sanders -who rallied massive crowds to his equality platform against the “1%”- reveal a

grassroots receptiveness to wealth inequality arguments. Bernie Sanders often referenced the

stagnation of relative income and the shrinking middleclass witnessed across decades despite massive

growth to the US economy. The relationship between inflation, interest, boom-bust cycles, and interest

as a mechanism to enrich those with excess capital, has been documented by many western researchers

(Minsky 1977, Bernante and Gertler 1990, Greenwald and Stiglitz 1990) and is now an accepted part of

Keynesian economic models.

LITERATURE REVIEW

In “Islamic Finance: A Western Perspective,” Dar and Presley (1999) analyzed the terminology

employed by Muslim scholars and the marketing materials utilized by Islamic Finance Organizations.

They make a compelling argument to support their findings; that Islamic Finance organizations have

neglected to utilize the wealth of research in the western tradition that is critical of interest and its

effects. This, Dar and Presley argue, isn’t doing Islamic Finance organizations any favors in winning over

people receptive to the cause of interest-free banking. They assert that the narrative told by Islamic

finance organizations needs to be empirical and draw upon the wealth of western scholarship on the

topic in order to gain additional support, legitimacy, and market share.

In support of Dar and Presley, Bley and Kuehn (2004) found that non-Muslims view Islamic

banking as catering to Muslims only and offering little to nothing of value to non-Muslims. Bley and

Kuehn conducted a survey of business student’s perceptions and understanding of the two banking

systems: conventional and Islamic. They found that non-Muslim students understood little about Islamic

banking and held the view that Islamic finance was intended for Muslims. Their study also revealed that

non-Muslim business students did not believe Sharia-complaint products and services to be superior to

the conventional model in any way, nor offering a unique value for non-Muslim consumers. This points

out that a lack of the empirical argument is perpetuating ignorance of the interest-free concept and its

alleged superiority.

A study done in Malaysia (Amin, Isa: 2008) strengthens the findings of Bley and Kuehn’s 2004

study that non-Muslims understand very little about Islamic Banking, its intentions, differences, or

alleged benefits. Compounded by the other studies that measure non-Muslim sentiments and

knowledge of Islamic banking, it is evident that non-Muslims are grossly unaware of the Islamic banking

contention, we can assume, because of the non-empirical and exclusionist religious terminology that

Islamic banks use to win their target market -Muslims. Besides this, the study confirmed other findings

that Muslims and non-Muslims both have similar performance expectations from their banks.

Studies done by Metawa and Almossawi (1998), and Naser, Jamal and Al-Khatib (1999) have

confirmed that the primary reason that Muslims choose Islamic banks is strict adherence to religious

interpretations. This, however, does not speak to the millions of Muslims living in non-Muslim countries

with insufficient Sharia-compliant banking products and services or a total lack thereof. Many Muslims

without access to Islamic finance options are pressured to use conventional banks and make use of the

countless Fatwas (religious rulings) issued by major Islamic Judicial bodies that instruct religious

followers on how to navigate the conventional financial system. These studies make it abundantly clear

that In countries with the Islamic banking option, Muslims chose Islamic banks on the grounds that a

particular scholar or body of scholars, private or government, have endorsed the institution as “Halal”

(religiously permissible).

Philip Gerrard and J. Cunningham’s 1997 study found a few things of far reaching implications.

First, that neither Muslims nor non-Muslims understand the financial operations of Islamic banks or how

they differ from conventional banks. This supports the findings of Dar and Presley that the terminology

circulating in Muslim communities is non-empirical and shrouded in religion rather than practical

terminology that translates into commonly understood transactions and banking operations. Also, this

supports the findings by Bley and Kuhn that there is a lack of understanding about the Islamic banking

concept among non-Muslims. Second, Gerrard and Cunningham found that Muslim and non-Muslim

bank patrons prefer nearly identical performance standards. Lastly, their study found that Muslims were

far more likely to keep their money in a bank that didn’t pay profit on deposits compared to Non-

Muslims. This supports the findings from independent studies (Metawa and Almossawi (1998), and

Naser, Jamal and Al-Khatib (1999)) that the majority of Muslims aren’t preoccupied with steady returns

as much as they are with religious permissibility, while Non-Muslims assume the status quo of interest

and desire profitable interest rates on deposits. This difference in expected returns on deposits appears

to be the largest single difference in banking habits/expectations between Muslim and Non-Muslim

bank patrons.

Haron, Ahmad and Planisek (1994) conducted a study of banking preferences among Muslims

and non-Muslims in Malaysia and gathered from their data that there were insignificant and negligible

differences between the two group’s bank selection and satisfaction criteria. Non-Muslim and Muslims

both preferred banks for factors such as speed, effectiveness, customer service, and proximity.

Synopsis

Studies focused on selection and satisfaction criteria preferred by Muslim and non-Muslims

overlooked the initial “Islamic” qualifier that Muslims require to patronize banks. However, these

studies have been helpful in establishing that Muslims and non-Muslims are similar enough after the

Islamic badge is established. Both groups look to the same factors when selecting and remaining with

banks; reputability, proximity, customer service excellence, and product/services. Of relevance to

selection criteria by Muslims are the findings by multiple studies that have independently verified that

Muslims choose Islamic banks for religious reasons. Once the Islamic brand reputability is established,

Muslims look to the same factors as non-Muslims when choosing between Islamic finance organizations;

namely proximity, products, customer service levels. The largest difference in satisfaction criteria

between the two groups are expected profits on deposits.

Multiple studies have found that non-Muslims understand very little about Islamic banking. They

also find Islamic banking to be inferior, and not concerning non-Muslims. This reveals a disparity

between their understanding of Islamic banking principles, and the belief of some that Interest is a

detriment to global financial sustainability. There is an emerging demographic of non-Muslims that are

critical of capitalism to varying degrees that Islamic banks have failed to attract by using terminology

that isn’t empirical or universally appealing. There is a two part marketing/branding problem; the

“Islamic” name that is advertised to attract Muslim bank patrons is being viewed as exclusively for

Muslims by non-Muslims, and the marketing terminology is draped in religion rather than data which is

alienating non-Muslims. This does little to convince non-Muslims that Islamic Finance is an alternative

financial model that offers any worldly benefits to other than Muslims. It also does nothing to spark

debate about the pitfalls of interest based banking, further keeping Muslim and non-Muslim in the dark

about the empirical argument for interest-free banking, which Muslims believe is superior and their

responsibility to disseminate among mankind.

Since there is ample scholarly work on the negative effects of interest, speculation, and

unethical lending practices common to conventional banks done by western thinkers, and there is also a

growing body of disgruntled capitalists that want change but don’t know of the competing models,

Islamic banks need to employ secular terminology to attract attention, gain legitimacy, and win over

customers to position themselves for future growth.

The Problem

The problem facing Islamic Finance Organizations is that there is potential to reach a large

audience of non-Muslims across the globe who are growing frustrated with capitalism, but Islamic banks

have yet to communicate to that audience in neutral terminology. These non-Muslims possess little-to-

no understanding of Islamic banking concepts because Islamic Banks have to-date utilized religion-

specific jargon. Consequently, Muslims too are unable to describe the practical differences between the

banks because the narrative has focused on religion rather than financial operations, in turn, preventing

ardent believers from articulating the “superior financial model” to potential new customers and

curbing the organic spread of the ideas. The fact that so few Muslims understand the differences is also

leading to a loss of the target demographic as more and more middle-class Muslims are patronizing

conventional because it is seen as superior.

Another integral part of the problem is that in order to attract the Muslim target audience,

Islamic Banks have traditionally advertised themselves as Islamic by including the word “Islamic” in their

very name. This has alienated non-Muslims en mass and as long as the Islamic banks are named as such,

will continue to alienate them. In order for Islamic banks to appear neutral, they must shed the “Islamic”

in their name, but find a way to retain their Muslim patrons. A solution that excludes the established

Islamic Banks will potentially fail to gather momentum. Therefore, the solution must do something

substantive for the Islamic banks already in operation, the banks with “Islamic” names, in addition to

just creating a hypothetical solution.

Solution

The solution supported by the exhaustive review of literature on the topic is that the Islamic

banking establishment and leaders (experts, scholars, big banks, coalitions) work together to create two

separate international regulatory boards that work more like a single –two part- international regulatory

board; part secular, and part Islamic. This time they must incorporate non-Muslim opinion, data,

support, and foster partnerships with existing bank/organizations to legitimize their efforts and expedite

growth in the new markets. The secular regulatory board must be endorsed by a coalition of Muslim

scholars or run the risk of losing legitimacy with Muslims. This necessitates that the secular regulatory

board operate directly under Islamic financial principles. The two organizations will offer one

internationally accredited seal of approval each; one secular, and one Islamic. The names of the

respective bodies should reflect their intentions; one secular, and one Islamic. This will help prevent

alienating either demographic. Something of this nature is already prevalent in conventional banks

operating in Muslim majority regions and bolsters the solution provided in this paper. Many large

conventional banks have hired Muslim scholars and financial experts in order to tailor Sharia compliant

products for their potential Muslims patrons. This is viewed as whitewashing the interest in a cloak of

Islamic, an issue that isn’t taken lightly, due to the strict and prohibitive rhetoric utilized in the Quran

and Hadith about interest and its implications.

The intention of the secular international body is that they will partner with Muslim and non-

Muslim organizations across the globe that promote the interest-free banking agenda using the

empirical argument. The marketing campaign will be on a platform of equality, fairness, and

sustainability while drawing upon all available secular/empirical arguments at their disposal. The secular

seal of approval will used to endorse Islamic financial firms in order to broaden their appeal to

disenfranchised capitalists that yearn for a more sustainable and sustainable global economy.

This solution offers existent Islamic banks the option of retaining their name as they expand into

non-Muslim markets through the use of the secular seal of approval that legitimizes it as a sustainable

and fair bank, meshing with the sentiment of non-Muslims that are receptive to wealth inequality

arguments and critical of capitalism’s extremes. Should a bank choose a religion neutral name as they

venture into non-Muslim markets, they can utilize the Islamic banking seal-of-approval to open them up

to the Muslim demographic while still appearing to be a conventional bank.

This allows established financial organizations the option of venturing out by themselves with

their original or new name, or, in partnership with another organization with a religion-neutral name.

This solution works for established Islamic banks that wish to operate independently with their names

and yet be available to non-Muslim customers by utilizing the secular seal of financial sustainability.

There is a wealth of research and historic evidence (industrial, political, and humanitarian

organizations) to support that such an undertaking has been done and is often successful. Educated and

involved consumers are familiar with the seal or stamp the appeals to them and seek it out in all sectors

of consumption: vegans, organic, kosher, Halal, recyclable, contains nuts, country of origin, etc. This

solution yields two organizations with two stamps unified in vision and goal, the seals hidden from the

uninterested masses but apparent to the seeker, one religious seal to attract Muslims to a “halal” bank,

one secular seal to attract non-Muslims to Islamic financial concepts supported by secular/empirical

evidence. This solution offers opportunities for investment and growth for all players, new or

established, in new regions or familiar, for emerging markets and underserved demographics, evidently

the only viable solution.

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