What can be done to improve Islamic banking penetration rates in Asia?

The mainstreaming of Islamic finance could be underway.

While Islamic banks have long co-existed with conventional ones, bankers say there is still a lot to be done to increase the Islamic banking penetration rates across Asia. For instance, in Malaysia, a significant portion of the Islamic banks’ customer base is composed of non-Muslims, primarily because the Muslims mostly prefer to deposit their money into other non-bank institutions.

ABF: What initiatives are currently being rolled out to further integrate Islamic banking and finance not only within Muslim communities but with other markets as well?

Mohamad Safri Shahul Hamid, Senior Managing Director and Deputy CEO, CIMB Islamic
The penetration rate into the Muslim consumer market can be further improved. The bulk of the deposits in Islamic banks still comes from non-Muslims, which is somewhat understandable given that there are other primary (non-banking) avenues for the Muslims in Malaysia to save or park their money. The availability of these avenues has given the Muslims in Malaysia plenty of viable options.

Most of the products available in the Islamic market space today can fulfil the financial requirements of customers. There is also a need to improve the service delivery level, emanating from the need to comply with Shariah requirements in the execution. Therefore a balancing of delivering seamless service while complying with Shariah requirements needs to be worked on further.

Puan Fozia Amanullah, Chief Executive Officer of Alliance Islamic Bank Berhad
In Malaysia’s dual banking system, the “integration” of Islamic banking into the mainstream has long taken place. Islamic banks co-exist with their conventional counterparts, and provide Shariah-compliant options for almost every sphere of financial service. Islamic financial assets represent more than a fifth of total financial assets in the system.

For many Islamic entities that operate in this jurisdiction, a sizeable portion of their customer base is represented by non-Muslim patronage. If there were a model for effective integration of Islamic banking into the mainstream, it would be the Malaysian model.

Public policy and political will were key drivers in the growth and mainstreaming of Islamic finance. Under the ambit of the Malaysian Islamic Financial Center (MIFC) initiative, Malaysia introduced laws, regulations, fiscal benefits, infrastructure, and other overt demand stimuli to create a conducive environment for the incubation and, thereafter, rapid growth of Islamic banking.

Public awareness and outreach programs to promote Islamic banking were either fully funded or subsidized by the government. The Malaysian government itself became one of the largest customers of Islamic banking by mandating that all its financial transactions be Islamic.

Importantly, much of these efforts emphasized the viability and economic value proposition of Islamic finance rather than a push based on a faith-based agenda.

Elsewhere in the world, Saudi Arabia, Kuwait and Bahrain have Islamic banking penetration rates ranging from 27% to 48%; while other emerging Islamic banking markets have had growth rates at about twice the rate of the conventional system’s. The mainstreaming of Islamic finance is clearly already underway.

Koko T. Rachmadi, Sharia Business Unit Head, Bank OCBC NISP
In Indonesia, Islamic Banking are not only for Muslim Communities (emotional segment) but for customers who need some benefit from Islamic Products n Benefit (rational segment).

The initiatives from regulators at the moment to boost Islamic Banking assets more than 5% compared to total Banking Asset in Indonesia. Islamic Banking also include into Financial Inclusion Program n Branchless Banking Program initiate by Regulators.