Malawian banks should start offering Islamic Banking products
The global financial service industry has phenomenally changed within the last two decades. This change has been accompanied with the emergence of new financial products that have been created and tailored to feed a growing insatiable market of both individual and institutional investors. As a result, financial engineering or computational finance has become more prominent giving rise to financial instruments and derivatives such as Futures and Options, Currency Swaps, Credit Default Swaps (CDS) and Collaterized Debt Obligations (CDOs) just to mention a few. Relying on computational intelligence, mathematical finance, numerical methods and robust computer modelling, financial derivatives are designed and created to facilitate in trading, hedging and investment decisions and risk management.
While financial engineering has been revolutionalising the financial arena by increasingly designing complicated, risky and eventually toxic products that fuelled the recent economic bubble, Islamic Finance and Banking has been moving beyond its boundaries into new territories by providing an alternative to this very frenzied psychosis. In 2006, the Financial Services Authority (FSA, body which regulates the financial industry in the UK) estimated assets controlled by Islamic Banks globally to be worth $200-500 billion with annual growth rates ranging from 10-15%.
TheCityUK, a financial think-tank, estimated the assets to have reached $1.041 trillion in 2009 up from $947 billion in 2008 with a steady growth of 10-15% in 2010. The institution further stated that there is potential of sustained growth for over a number of years. In the UK alone, there are over 20 banks providing Islamic assets worth $19billion, with HSBC Amanah controlling the bulk of it, reports TheCityUK.
In Malawi, unofficial estimates put the Islamic financial industry to be worth at least $300 million given that most of the business fraternity are Asians of Islamic faith. Moreover, Muslims constitute at least 20% of the Malawi population, thus around 3 million. The majority of this community run Small and Medium Enterprises (SMEs) throughout the cities, mostly unbanked. There are also a number of Islamic NGOs that are providing education, health, social and welfare relief and community development. All these provide a big market for Islamic financial products.
What is most interesting is that in Western countries, the customer base for Islamic Finance is not constrained to Muslims only. Non-Muslims are attracted to Islamic financial products on the basis of ethics and environmental concern. Furthermore, Islamic banks were less affected by the recent financial crisis and global economic recession as compared to conventional banks. The key to this is that under Islamic Finance, the overarching principle is the prohibition of all forms of interest, known as Riba in Arabic.
Consequently, the Islamic financial model works on the principle of risk sharing as opposed to risk-reward in conventional finance. Thus the customer and the financial institution share the risk of investment on agreed terms dividing any profit and losses between them.
Furthermore, investments or transactions cannot be carried out in areas that are forbidden under Islamic law such as pornography, alcohol, tobacco and gambling.
With so much progress occurring in Islamic Finance, it is essential that Malawi’s financial industry should provide a scope for this crucial financial paradigm. It makes both commercial and business sense for Malawian banks to start offering the various Islamic financial products, not only to those customers of Islamic faith, but the entire clientele at large.
This is by no means a propagation of Islam as others may fear. Many of the non-Muslims in the West who buy Islamic Financial Products do not adhere to the Shariah and some could even be ardent opponents of Islam. The UK has not turned into an Islamic State by allowing banks to provide Islamic financial products. In Kenya, they have just established an Islamic Bank which is servicing all industries.
What is needed is for the Reserve Bank of Malawi to create the necessary regulatory framework within which such products can be provided. For instance in the UK, Islamic Finance is governed and regulated by the FSA under the same piece of legislation that governs conventional finance, the Financial Services and Markets Act 2000. Malawian banks cannot afford to lurk behind of this powerful source of financing. This could also be an opportunity for our economy to tap into the vast wealth of the Middle East Sheikhs who are bankrolling many businesses in the West at a time when donor aid is minimal and forex is in acute shortage.
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