Islamic Banking Represents Significant Growth Sector for Global Financial Services Industry

Islamic banking is increasingly commanding attention in the boardrooms of financial services firms the world over. New research from TowerGroup finds that serving the financial needs of the world’s growing Muslim population represents one of the highest potential growth segments for the global financial services industry.

“Notwithstanding the undeniable underpinnings of faith in Islamic banking, at its core lies a financial services strategy that caters to the ethical preferences and common value system of the world’s rapidly growing and ethnically diverse Muslim population,” said Virginia Garcia, research director in the Financial Services Strategies & IT Investments practice at TowerGroup, and author of the research. “Already a mainstream banking strategy in many parts of the world, Islamic banking is gaining steam in Western Europe and North America, which are home to approximately 15 million and 10 million Muslims respectively.”

The challenge for financial institutions lies in adapting Western banking practices — which are based largely on the premise of charging and paying interest to customers, and are therefore not compatible with Islamic teachings.

Highlights of the research include:

• While the payment and receipt of interest (known as riba) common to Western banking practice is forbidden within Islamic law (Shariah), renting and trading of goods as well as sharing risk in the form of profit and loss are allowed.

• Though dramatically underserved from a financial services perspective, the Muslim populations of Western Europe and North America are growing at a faster rate than the general population in these regions. Until recently, banking choices were few and far between for Muslims living in the UK or the US. Accordingly, many Muslim consumers have tended not to participate in the existing banking system, or to do so reluctantly.

• Several Western banks are infusing their domestic operations with the experiences they have gleaned in serving Muslims in the Middle East or Southeast Asia. Others are embarking on entirely new and domestically- oriented Islamic banking paths. Both approaches are driving development of alternative, Shariah-compliant financial products across areas like deposit and savings accounts, bank cards and mortgages.

“In an era of growing commoditization across financial services, brand differentiation is the ultimate driver of organic growth for institutions of all types,” said Garcia. “Perhaps the most rewarding strategy of differentiation is one that serves the needs of niche markets defined around cultural and ethnic diversity.”

Garcia noted that the potential value of Islamic banking to financial institutions goes beyond meeting the needs of an underserved market, or picking up a few more customers here and there.

“Institutions have the opportunity to become the destination of choice for a loyal and enduring customer base. Few aspects of a bank’s brand differentiation will persuade a customer to consolidate their financial relationships more than his or her ethical preferences. It is also important to underscore that these new financial products and services may offer a value well beyond the Muslim community, resonating with a broader group of financial services customers,” she said.