Islamic banking needs new rules

The UAE Central Bank should introduce separate laws and regulations for Islamic banking services to help promote and expand the sector, said CEO of Emirates Islamic Bank (EIB). Ebrahim Fayez Al Shamsi told Emirates Business he considers lack of a proper legal framework as a major obstacle facing the expansion of Islamic financial services in the UAE. The long-time expert in Islamic banking also spoke about the growth in the sector and the differences that have emerged between the large groups of financial institutions offering Islamic products.

How do you account for differences between Islamic scholars on some Shariah-compliant financial products?

I do not think there are differences on the principles of Islamic financial and economic concepts. However, we have two kinds of Islamic financial institutions, the first are those who believe in Islamic financial services and want to introduce Islamic financial services based on the core idea and jurisdiction of Shariah. The other types are those who have found Islamic financial services a profitable business and are just trying to benefit from this trend for commercial reasons. The difference between the two types has created a gap between Islamic financial products because the first group is trying to offer products that were originally created according to Islamic principles, while the other group tries to turn conventional financial products to be Shariah complaint. This has led to the creation of two types of Islamic advisory boards in financial institutions.

There are boards that focus on Shariah principles and are making sure that any financial product is based on these principles, while the other group is introducing justifications for how financial products can be compliant with Islamic rules. In fact, this should be the responsibility of the top management of Islamic financial institutions who select members of advisory boards.

The management should select highly-educated Islamic scholars who are professional and have excellent understanding of Islamic financial and economic services. There are some unqualified advisory boards behind Islamic products who have a bad reputation in the community and this negatively impacts the whole sector. There is also a shortage in the number of Islamic economic scholars, but this shortage cannot be an excuse to compromise the main principles.

Some have suggested establishing a global advisory board for Islamic financial services. Do you think this would be a good idea?

The idea is good, but who will select the members of this board? For example, will it be the central banks or the Islamic financial institutions? How will this global advisory board work? In my opinion, I think Islamic financial institutions should select the members of this board and the selection should be careful to ensure that every member is well qualified because the members will introduce guidelines for all Islamic financial institutions around the world.

The other issue is that all financial institutions will continue to need their advisory boards because we are facing daily needs for Shariah advice from the board. For example, if a customer needs a specially tailored investment scheme, we cannot wait for this global board to answer us, we need immediate fatwa [Islamic ruling] from our board to introduce such investment products. So our need for the advisory board will be continuous. However, this global advisory board can introduce guidance for different advisory boards in Islamic institutions and can also assess members of advisory board.

With this role, such a board could help in unifying fatwas and eliminating differences regarding Shariah-compliant products.

How do you think Islamic banking will grow, globally and locally?

Islamic banking services are growing at high rates – more than 25 per cent – on the regional and global levels. Increasing numbers of investors in the GCC are pushing to create Islamic financial institutions, investment companies or Islamic insurance companies. In the UAE, we are achieving high growth rates, however, the share of Islamic banking in the UAE is still low, between 15 per cent and 18 per cent, of the total banking market and less than 20 per cent of the total banking assets. The main challenge is to create a regulatory system for Islamic banking in the country. The UAE Central Bank has not introduced a set of regulations for Islamic banking and this hinders our expansion and progress. We need such regulations to streamline Islamic banking services. Islamic financial services need regulations different from conventional banking regulations because there are essential differences between the two banking systems.

All current regulations are targeting conventional banking and the Central Bank should move quickly to introduce laws and regulations for Islamic banking because the current conventional regulations represent a major obstacle to our expansion. Despite the high growth rate in Islamic banking in the country, which reached around 30 per cent annually, our market share is still low and, with the current regulations, we will not be able to achieve 50 per cent of the market share during the next five years.

Why cannot regulations for conventional banking be applied to Islamic banking?

There is a wide gap between the basics of conventional banking and Islamic banking. Conventional banking is based on financial economy as it trades in money and their main focus is lending. It is also interest-based banking, where the banks are setting fixed interest rates for their customers regardless of whether the business of those customers achieved profits or not. Islamic banking is based on the real economy as we are not offering money. We are partners with our customers through different products.

For example Musharaka, which means sharing, is an ideal alternative to interest-based financing and plays a vital role in an economy based upon Islamic principles as the bank enters a partnership with the client. Also Ijara, which means leasing, is used for two different situations, to employ the services of a person on wages given to him as a consideration for his hired services, or as a form of investment, and also as a mode of financing. Such Islamic products mean the bank is involved in the real economy and is close to changes in the markets.

In conventional banking when a customer borrows money to finance a commercial project and offers his property as a guarantee for this loan, the bank will take over the property if the customer fails to repay and this double the losses of the customer. In Islamic banking, there are a lot of other solutions to help our customers. For example, we could enter into a partnership to own this property and also give customer the right to buy back the bank's share in the property. These factors make things easier for the customer.

What are other obstacles facing the expansion of Islamic banking in the country?

The most important issue is the lack of qualified staff and professionals in Islamic banking. This is a general challenge facing all Islamic financial institutions because universities and institutes have not introduced sufficient educational programmes for Islamic banking. Even graduates need long-term practical training because there is a wide gap between theoretical education and the practice of Islamic banking. We face daily challenges in creating Shariah-compliant products for different customers and this needs well-educated professionals.

At EIB, we have our training centre, which offers different programmes for all employees, including new graduates and experienced ones. In rare occasions, we have co-operated in offering training courses for other Islamic financial institutions in the country, but actually we need our training facilities to provide new staff for our expansions and it is difficult to keep up with this target. Training on Islamic financial services has become a profitable business and I think universities and institutes, or even the Central Bank, could create specialised training programmes on Islamic finance.

If we opened up our training centre to for the public, we would see huge numbers of staff from other Islamic financial institutions attending these courses.

We are considering creating a separate training centre in the future to offer training for the Islamic financial sector. Also, there is increasing number of new Islamic products and we need sophisticated training on the structuring of new Islamic financial products. This is a huge challenge.

What is the outlook for EIB?

Our profits in 2007 doubled compared to 2006 and our profits during the first quarter of 2008 jumped 253 per cent to Dh148.6 million. The bank's total income in the first quarter of 2008 grew to Dh359.2m from Dh189.5m in the same period last year – witnessing an increase of 90 per cent.

The bank's balance sheet, including total assets, customer deposits and shareholder equity also recorded significant increases. Total assets rose 68 per cent to Dh 21.15 billion, which means that the total assets of the bank surged 11 times since launching the bank three years ago. This reflects the success of the bank's management to fulfil its commitment to shareholders and the success of the bank's strategy and ability to execute its plans. This has resulted in an on-going delivery of innovative products and service, leading to better customer experience.

What are your expansion plans for this year?
A strong first quarter has given us a sound base for the rest of the year. We aim to build on this success as well to serve all our key partners. We have entered into a partnership with Bahrain-based Al Baraka Islamic Bank and we will open our first joint branch in Syria soon. This strategic co-operation with Al Baraka will give us exposure to regional markets such as Egypt and Turkey. We are also studying other expansions in Asian and are looking for expansions in other countries. In the UAE, we will open 10 branches in different emirates this year.

PROFILE: Ebrahim Fayez Al Shamsi CEO, Emirates Islamic Bank

Ebrahim Fayez Al Shamsi has been the CEO of Emirates Islamic Bank for the past three years. He comes to the position with 35 years of experience in Islamic banking. He is also a director and board member of Dubai Islamic Bank. Since 1983, Al Shamsi has served as a director at the Kuwait-based Arab Fund for Economic and Social Development. From 1976 to 1988 he worked as assistant director general of the Abu Dhabi-based Fund for Arab Economic Development.