As Oman's first Islamic bank is set to commence operation in few weeks, I would like to know whether Sharia-compliant banks will be able to offer loans at a lower cost? What are the advantages of an Islamic banking customer viz-a-viz its conventional counter-parts?
Salem al Habsi, Seeb (by e-mail)
A: When pricing their products, Islamic banks will have to consider various factors, viz. rate-ceilings imposed by the Central Bank; cost of funding; operating costs; volume of transactions and competitive conditions in the banking industry. Rate-ceilings imposed by the Central Bank apply to both conventional and Islamic Banks, hence this factor cannot influence the pricing of Islamic bank's loan favourably or unfavorably. Cost of funding for an Islamic bank is likely to be higher than a conventional bank which may have been in existence for a longer period, has a network of branches and a large customer base.
A new Islamic bank will need to develop its brand name, open branches and attract customers with a fresh start and may have to offer higher profit rates to attract new customers. This will result in higher cost of funding for Islamic banks. Operating costs are also expected to be higher for Islamic banks being new to the market. They're hiring staff at a premium to the market. Also establishing new business is generally costlier than existing business. Additionally, Islamic banks are required to hire Sharia' Scholars to work on their Sharia' Board, Sharia' Auditors and Sharia' Compliance staff, which the conventional banks are not required to hire for delivery of their products and services.
These higher operating costs for Islamic banks will squeeze their profit margins even further. Volume of transactions for Islamic banks are expected to be low in the initial years, resulting in higher unit cost of offering products to the customers.
Since all of these factors work in favor of the existing conventional banks, they give them an advantage over Islamic banks in pricing their products more competitively. When Islamic banks will enter the market, the conventional banks would like to defend their territories, markets and customers and given the advantages in cost they enjoy over Islamic banks, they can price their products quite aggressively to ensure they retain the market share.
On the other hand, Islamic banks can follow the "market penetration strategy" and price their products lower to attract new customers and win market share.
In the initial years therefore, they may incur operating losses to gain market share. If Islamic banks follow this strategy, it will benefit the customers since their products will be priced lower than their conventional counterpart.
The biggest advantage the customer of an Islamic bank enjoys is faith-based, giving him the satisfaction that he is dealing with Sharia-compliant products and services. Economically or financially, the pricing of products offered by both Islamic and conventional banks is likely to be at par, in order for them to stay competitive in the market.
Can you give me some insights into the qualification required to become an employee of an Islamic bank? Is there any specialised course for Islamic banking professionals? If so, give me contacts of those institutions offering such programmes within the country of outside.
Ibrahim Ali Khan, Sohar (by e-mail)
A: Staff in Islamic banks are required to be proficient both in banking and Islamic Modes of Financing with some knowledge of Fiqh-ul-Muamalat. There are several institutions around the world which offer professional qualifications in Islamic Finance, some of which are listed below:
DIFC –based Universities like CAS School, INCEIF Malaysia, CIMA Islamic Finance Certification programme UK, various universities in the UK offering diplomas or graduate programmes in Islamic Finance, Institute of Islamic Banking & Insurance UK, Dar-ul-Ulum, Karachi and University of Karachi.
Due to shortage of people properly qualified in Islamic Finance, most Islamic banks hire professionals from conventional banks and train them in Islamic banking. Various training organisations have therefore, sprung up to address training needs of staff in Islamic banks.