Session 3: Is it time to stop calling it Islamic Finance?

The Islamic finance industry is mature enough to shift away from the „Islamic‟ branding but the authenticity could be better monitored with or without the label if there were an independent organization in charge of assigning sharia quality ratings. This was the message from Moinuddin Malim, CEO of Mashreq Al Islami at the Thomson Reuters Islamic Finance Gateway Focus Session held earlier this week on Oct 23.

Malim‟s idea is based on the increasing maturity of the Islamic finance industry that continues to see growth at twice the rate of the conventional finance industry even in more mature markets such as the Gulf Cooperation Council (GCC) countries. In other markets, consumers sometimes get confused about the terminology.

This is particularly concerning in non-Muslim majority markets where regulators have to be sold on the fact that Islamic banks face the same risks as conventional markets, but provide an opportunity to improve financial markets. However, these markets currently rely upon a leader committed to Islamic finance or a large enough Muslim population demanding Islamic finance. In markets where these are absent, the confusion about the Islamic label becomes an additional hurdle to win regulatory changes that will allow Islamic banks to operate on a level playing field.

The different terminology was adopted earlier in its history, but the industry should not rely on it as a key selling point. If there were a way to demonstrate quality of the internal sharia governance like a rating from an independent organization, it would be unnecessary because the substance of how Islamic banking operates would provide the benefit to consumers and the “Islamic‟ label would not add further value.

Malim: against for-profit sharia advisory firms

One area that Malim views as a weakness in the current sharia governance system is the development of for-profit sharia advisory firms that operate like law firms. Malim believes that the sharia advisory side of the business should not be done for profit, and regardless of how it is coordinated, the cost should be borne by the bank and not passed along to customers in the form of higher costs.

The value Islamic banks present to customers is that they change the structure of products to incorporate an asset, and connect transactions to underlying business, as well as limit financing to some industries. This is one area where Islamic banks overlap with ethical finance, an area growing since the global financial crisis. Encouraging growth in this area will be positive for Islamic finance and if they have a way to demonstrate the quality of their sharia governance, the industry can take a step forward by dropping the use of “Islamic‟ and focus on what the firms offer, not the source of its guiding principles.