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Islamic consumer finance
In accordance with the rules of Sharia
As recently as a few years ago, Islamic finance existed on the margins even in the Muslim world. Now, however, it is the fastest growth segment in the financing industry in the Middle East and beyond. A major portion of this business is concentrated in the area of consumer finance. The potential market for such services includes approximately 1.3 billion Muslims worldwide.
Estimates of assets under management at the some 300 Islamic banks worldwide range from $400 billion to $1 trillion. Countries with large Muslim populations remove barriers that lead to competitive disadvantages vis-Ã -vis conventional banks by introducing new laws or amending existing ones. Likewise, Islamic organisations are laying the foundation for the future by increasing efforts to standardise practices and integrate into Western business models and regulatory systems. This has also been of direct benefit to Sharia-compliant consumer financing, which is primarily driven by a rapidly expanding middle class and their growing needs.
Interest-free financing
As a general prohibition on interest (riba) applies to all Islamic financing instruments, standard bank loans are not possible. Murabahah contracts act as consumer loans, whereas ijarah is the Islamic form of leasing.
The former represents a special type of consumer loan, with the bank in the role of intermediary. The bank purchases the commodity to be financed and then resells it at a mark-up to the customer, who then pays for it in instalments. Under Islamic law, any agreement whereby a commodity is resold and the seller is never in possession thereof is strictly forbidden.
Similar to operating leasing, the financing option ijarah is highly popular in the field of car financing. Here, the bank purchases the vehicle and transfers the right of use to the lessee, who in turn makes pre-agreed instalment payments. Unlike murabahah contracts, these payments may vary over the term of the agreement. As with murabahah, the customer acts as the agent in the purchase of the item by the financial service provider for reasons related to liability laws.
IT provides support for mass-market operations
As the Islamic finance market expands, so does the demand for modern IT concepts to support such operations. This is reflected in the growth in the number of visitors and exhibitors at established IT banking fairs such as MEFTEC in Bahrain or more recent events like the inaugural MEFX in Dubai, which was initiated by the Dubai International Financial Centre. Islamic finance is one of the main focuses of both events.
In the area of IT automation, Islamic financial service providers are often entering uncharted territory. Clerical officers at these companies still continue to perform many steps in the consumer financing process manually. Strategic management often has to make due with simple spreadsheet applications. However, as consumer finance develops into a mass-market business with a correspondingly heavy workload for banks, demand for and the actual installation of more powerful, integrated IT systems are also accelerating. As in the West, cost efficiency can only be achieved through large-scale automation.
The trend at Islamic banks and financial institutions with departments specialising in Islamic finance is towards integrated systems for processing applications and completing consumer finance transactions. Some of these are setting up new IT systems for automated processes, while others are implementing new and integrating existing functions to create a uniform workflow. This is possible, and indeed quite easy, thanks to the fact that the IT solutions available today provide even the most minor sub-processes as modular, freely combinable standard components.
In practice, a bank can map a process for a standard consumer loan just as easily as for a murabarah contract involving two changes of ownership and garnishment of salary. All contract and customer data (both Muslim and non-Muslim) is stored in a central database and serves as the basis for a wide range of uniform analyses.
On a further note, the integration of external IT systems should be quick and easy. Especially in the area of murabahah, financial institutions are increasingly employing the services of relatively new credit agencies such as the Saudi Credit Bureau and Emcredit (United Arab Emirates) to obtain information on applicants, all this in spite of garnishment of wages.
In the future, these requests could be automated. External data can be linked to application or sociodemographic information within the system, which in turn calculates the creditworthiness of the client based on these details. A preliminary decision is made automatically in under a minute, at which time the sales partner or employee is notified of this. Overall, having modern IT systems is one of the main conditions that must be in place for banks to tap the booming world market for Islamic consumer finance with its unique regional characteristics and respond flexibly to changes on the market.
(The full version of this article was published in the 9/2008 issue of "die bank".)
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