An average person on the street now asks the question whether the Islamic Banking concept is one way of taking advantage of their faith. For the purists, the question goes even further — they see a vague line separating conventional and Islamic banking.
We know that the main selling point is that it is Sharia compliant. It adheres to prohibition of interest and avoids doing business with forbidden sectors such as alcohol and gambling. But how really compliant the industry is?
To some customers, the vagueness is even more when they open an account in the Sharia compliant banking system where the validity of the operation is unclear. They want to deal with genuine Islamic banking, not with a concept that is a mirror image of the existing set of rules already used by conventional banking.
To start with, the Islamic banking's benchmark is LIBOR, which is an interest-based concept, developed years ago. It needs to develop its own and not copy existing structures which are not Sharia compliant. For many people who I talked to here in Oman, the practice is a direct breach of compliant laws and is widely abused.
Here in Oman, the word 'interest rate' is used by conventional banking and 'profit rate' is coined by Islamic banks. This is exactly where the genuine confusion exists for ordinary people on the street. What is the difference, they ask? What they see is Sharia compliant system is taking the format of conventional banking by cloning the loan product. For some customers, Islamic banking needs to develop a method based on a brand new structure instead of adopting Western models.
For example, investors in Sharia compliance instruments struggle to find meaning in words like Sukuk (Islamic bonds). For that matter, the so called experts of sharia compliance have failed to restructure Sukuk from conventional operation to Islamic.
Currently, there are some $10 billion worth of Sukuk which have completely dried up because Islamic banks around the world have been structuring them incorrectly. Bankers now find out that they have to raise them the same way as conventional bonds, which is going back where they started.
Authentic Sukuk issues should involve the company targeting investors first with a business proposal and inviting them to invest in the company or project. The company would also say how much it expected to generate from the project and the size of a potential return, payable regularly.
This will interest many first-time investors in Oman to help the drive towards self-employment. Not simply taking the money, in whatever form it is, and buy a car, only to find out it is no different from conventional banking because you pay back more than what the car is worth. What some customers now find out is that the Sharia compliance system is not a real alternative but an escape route to relieve the guilt of their faith.
Another thing is that different countries have some variations of Islamic banking which adds to further confusion for the customers. For example, conflicts of Fatwa (legal opinions of religious scholars). The Sharia procedures of the same product differ among banks around the world. There is no consistency and it seems as if one Islamic bank claims to be more compliant than the other. We already see these differences right here in Oman. It puts the credibility of Islamic banking at risk and it will be questioned further by an ordinary customer.
There are interbank disputes in the country involving sharia compliance, like problems with syndicated finance which customers are not aware of. The lack of standardisation and coherence within the Islamic banking will be a test not only for the faith of customers but their intelligence. Transparency about where exactly Islamic banks are getting the funds from and where they invest the customers' deposits is another issue. Oman has only two full fledged Islamic Banks. Though it is too early, it will be interesting to see how profitable the two banks will be five years from now. Their profitability will depend on whether the customers will be convinced by the authenticity of what is offered to them.
Customers are also wary of the Islamic banking products offered by conventional financial institutions in the so called Islamic windows. It is an operational schizophrenia where one hand holds what is deemed as Sharia compliant and the other as non-Islamic.
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