The role of Islamic banking in the west; opportunity or threat?

The role of Islamic banking in the west; opportunity or threat?

By Abdul Waheed Jamal

The concept of Islamic Banking

In the past Islamic banking was considered a non viable and old fashioned form of banking for the western world. This has change drastically due to the large amounts of Muslims livings in the west, demanding banking techniques in compliance with Islamic law. Furthermore, also as an increasingly number of people are very dissatisfied about the banking services on offer, seeing it as unethical. Consequently, Islamic banking, with its morale values, is meeting societies changing needs. Over the years small piecemeal changes in the banking industry have led to the acceptance of Islamic banking from a “niche sector to the mainstream of global finance”[1].The dramatic growth of Islamic banking in the western world has shocked the trading capitals from Frankfurt to London. Financial analysts “estimate that Islamic banking is worth from $200m to $500m.”[2] Islamic banking has the same principle as conventional banking except that it operates in accordance within the rules of Islamic law which prohibit the collection and payment of interest and investing in businesses that are considered unlawful such as businesses that invest in alcohol, gambling, tobacco and pornography.

So how does Islamic banking work without dealing with interest?

The idea is not to have polarization of wealth however, to generate without wealth exploiting others. The main principle of Islamic banking is that all forms of interest are forbidden, therefore it works on the principle of risk sharing. For instance, the customer and the bank will together share the risk of any investment on mutually-agreed terms and then thereafter they divide the profits between them. Islamic banking is considered as having an ‘ethical identity’ because both the customer and the bank receive profits together. Islamic finance is becoming a confident part of the new global world of venture capital, ethical investment and profit-and-loss sharing.

Islamic banking is here, in the West, to stay but what are its opportunities and its threats in relation to the West? One of the main opportunities is its great potential. The Islamic banking industry is very new, with only 300 banks worldwide but expanding at an enormous rate. According to Standard & Poor’s, the growth rate of Islamic banking services “outpaced that of conventional banking during the past decade, making it one of the most dynamic areas in international finance.”[3]

The institutions, the structures and mechanisms are untested. With Islamic banking in the West, it can only help the economy of the country it operates in by bringing in more investment, for example; introduction of Islamic bonds .“This is an increasingly global and liquid market, the potential benefits are enormous as a UK government, that will be great news for the city of London “[4]. If the west continues to welcome Islamic Banking not only will it challenge mainstream interest banking, giving the consumers an advantage as they have more financial products to choose from. However, it will also increase competition in the banking industry which will result in more dynamic innovated financial products. For instance, there could be an influx of fairer and ‘ethical’ financial products “more conventional international banks, such as Citibank, HSBC and UBS, are converting some of their services to interest-free Islamic finance models.”[5]

The establishment of Islamic banking has facilitated western conventional banks access into new markets with many introducing Islamic finance with its ethical nature appeals to Muslims and non Muslims. “We want to make the concept of this kind of ethical investment available to the West, "Everybody, non-Muslims included, can take advantage of Islamic finance products." [6]

Islamic Banking; an opportunity for Western-based banks

Islamic banking gives conventional banks the opportunity to access more market share in the European market. With Islamic banking mainly concentrated in the Middle East and South East Asia. The European market is relatively untapped. Many western banks are producing their own Islamic banking products to tap into these new markets “more conventional such as HSBC are converting some of their services to interest-free Islamic finance ”[7]. With an increasing Muslim minority living in Europe then ever before and societies attitudes changing becoming more ethical towards banking probably due to huge debts, and the increasing credit crisis. There is an opportunity for Islamic banking with its prohibition of interest and ethical standards. “British banks have only just begun to target Britain’s two million-strong Muslim population with culturally attuned financial products. Islamic Bank opened its doors in 2004, joining HSBC’s Amanah Finance unit. Lloyds this year extended a pilot Islamic mortgage to its entire stable of 2,000 branches.” Banks are hoping to attract business from Britain's two million Muslims, many of whom do not use established banking services because they are in conflict with Islamic law. Research carried out by the British bank Lloyds TSB conveyed “more than three-quarters of British Muslims wanted banking services that fitted with their faith.”[8] It presents conventional banks with their long tradition and knowledge, a great opportunity and challenge offering Islamic financial products to the 27 million western Muslims living in the west, and increasing their market share and consequently long term profit.

If western mainstream banks can merge with Islamic banks or produce their own products then they have access to bigger markets in Muslim countries, and other countries with emerging economies such as India and China by offering them Islamic finance where there is demand for it. "There is enormous potential for Islamic finance to expand and develop," the financial secretary said. "Many leading international banks, most of which have offices in Hong Kong, devote considerable resources to creating and servicing a variety of Islamic financial products to meet this demand."[9]

With the huge capital inflow from foreign investors in countries such as China , India and the United Arab Emirates. Western banks merging with Islamic banks or acquiring knowledge management and intellectual property. With the brand they have can be the pioneers to offer this facility in these countries putting them in a privileged position as they will have competitor advantage, more customers and thus increase existing profit.

Most Islamic banks are situated in the wealthy Gulf states of the Middle East and notably South Asia. However, with the Islamic banks operating in these countries who are already in an oligopoly market as they have been established for years. Affectively, it has become extremely difficult for Western banks to take a slice of the market. However, the most attractive potential markets are in Turkey and North Africa , Indonesia and among Europe's Muslims which have not really been penetrated yet and where there is huge demand for Islamic finance. For instance, Indonesia, the most populous Muslim nation in the world with more than 190 million Muslims, still is way behind in the development of Islamic finance, compared to its close neighbor Malaysia which has emerged as a center for the industry's development. Therefore, with western banks like HSBC already operating in countries like Turkey and Indonesia. It only needs to introduce Islamic financial products with its conventional financial products to gain access to both markets. If western banks can do this they can have a new income stream and gain the Muslim market.

Weakness of Islamic Banking in the West

Although Islamic banking offers the west a big opportunity, yet its has its threats to.
One of the biggest hindrances in the new industry is the lack of recognised universal worldwide standards and shortage of suitable qualified scholars to differ between the permissibility of products to see if it complies with Islamic law.

Both of these factors t are hampering its growth and development in the west. The demand for Islamic finance in the west is enormous, yet the industry is suffering because of the lack of supply of sufficient scholars, who sit on the supervisory boards of the banks that provide Islamic financial products [10]” a lack of Islamic scholars and global standards for Islamic finance could hamper British efforts to become a hub for the industry “

For every industry to be successful they have to have the demand for the product and the ability to supply the product efficiently. In regard, to Islamic banking simply they do not have the supply of scholars to determined permissibility of products or the global standards the industry needs. This can have very sinister problems as without global standards Islamic finance is based on opinion of scholars so it can result in disagreements of permissibility of products. For instance, “a product may be acceptable to one scholar could be considered un Islamic by another, sometimes with the same jurisdiction“[11]. Therefore, in order for the industry not only in the west but, the world to develop the need for global standardisation is intensifying. If global standards occur it will result in Islamic finance being more efficient as their will be standard opinions which banks can follow leading to better products and efficiency.


Another notion is to maximize Islamic banking potential is to change the name from Islamic to ethical banking. I believe in the west the name Islamic may have negative conations, people may link it to funding terrorism or ‘political Islam‘. So this is seen as a threat to Islamic banking in the west. With Islamic banking being quite ethical by nature unlike conventional banking products if the bankers changed the name and expand the ethical frontier. They can really tap into and create a bigger market for Islamic banking because it will dispel some of the misunderstanding and convey to the public that it is not only a Muslim only club, but also for the wider community. Thus they can turn this threat of brand image communication to an opportunity.
“Islamic law is about an ethical way of life and appeals to many people, 20% of people enquiring about Islamic products in one area are non-Muslim."[12] In the west, the potential for Islamic banking is there however, the challenge will be to operationalise Islamic banking products making it a method widely accepted among a constituency which transcends Muslim communities. If Islamic banking has to be embraced by the wider communities it will result in having a commercial and practical impact and create secondary markets in the non-Muslim countries. One way of doing this is to change the name to unsure it becomes more appealing to wider communities and not tie it down to a single market.

Islamic banking has developed significantly in the Middle East, yet it is only beginning to emerge in the West. Western government policy will have “ obvious implications for its development“. One of the constraints which is affecting Islamic banking is politics, because of this development in the west in terms of Islamic banking has varied. Countries which have been quite supportive tend to see Islamic finance as a way of acquiring capital from the oil rich Gulf states. Whereas, in contrast countries that are hostile to its advancement have a “mistaken view that Islamic finance is somehow linked to Islamic militants“[13]. Consequently, Islamic finance is viewed with suspicion and therefore little or no encouragement is give to it so it may prosper. Some Western countries like the United Kingdom have been quite supportive of Islamic finance. It has made allowances such as abolishing the double stamp duty on Islamic mortgages and authorising the operation of two Islamic banks. Mr Balls the city minister recently in a speech at a Financial Services Authority conference. "Domestically, we will do everything we can to promote new ways for British Muslims to bank, save and borrow using Islamic finance products,"
"I believe there are great potential advantages for the UK government issuing (Islamic law ) compliant government debt.”[14] On the other hand, other Western countries such as France and Germany, who have the resources to accommodate Islamic banking and the demand for it to be successful are quite reluctant to encourage its development. This has resulting in little progress made in these countries. Therefore, the political ideology and polices a country follows will have implications on Islamic banking being either supporting or restricting .

Is Islamic Banking here to stay?

In conclusion, my view is that Islamic banking is here in the West to stay, it is more an opportunity than a threat for the Western financial system. It has great scope and potential to offer a distinctively Islamic form of capitalism that may co-exist and interact with Western capitalism. It is unique in its nature as it prohibits interest and is entirely based on a risk-sharing concept giving it an ethical facade. It has many strengths; such as being a new form of banking, it is increasingly global and has a liquid market with new structures and mechanisms which are untested. With its great expansion there is still markets that are untapped such as Europe, Northern Africa and Asia. Conventional banks have started to take advantage of Gulf oil wealth by offering Islamic banking products and producing Islamic products to tap into new markets. However, Islamic banking does have its threats that stern its development in the West such as, little or no global standards along with a lack of Islamic scholars in the West to see if products comply with Islamic law. The demand is there but the supply is not. Along, with negative connotations, with the name not appealing to wider communities and leading to misunderstanding, there is a reluctance of some Western countries to aid its development. In my view, it has benefits for the West along with constraints. I believe the opportunities certainly outweigh its weaknesses therefore Islamic banking should be encouraged and facilitated not hindered.


By Abdul Waheed Jamal



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