An obsession with run-of-the-mill products and services has left Middle East Islamic banks closing 2011 in a comatose state with regards to innovation, according to Islamic finance gurus.
For some time observers have warned retail banks that their offering of mundane Islamic credit cards, home loans and Takaful products was unsustainable. These warnings have now reached fever pitch.
As another year looms, it seems that without radical change, Islamic banks could sleepwalk towards a crisis of customer apathy as they fail to find a better way forward other than simply mimicking conventional products.
One observer said: "They're not doing anything significantly different compared to their conventional counterparts. What they're doing is targeting different tiers of products at different tiers of society. For instance, in priority banking the predilection to match a consumer's [perceived] interests such as frequent flyer miles or shopping benefits."
Ideas like ladies-only branches and services for HNWIs have grown in prominence, as has the acceptance, on an institutional level, of structures like the Murabahah Sukuk. But banks have become too comfortable.
"The industry hasn't even scratched the surface as far as bringing innovative products to market because the banks are content with things like Islamic home loans, car finance and simple Takaful products. There's a complete lack of enthusiasm for innovation," the same observer said.
He added that Islamic banks in the Gulf have completely overlooked the potential for ideas like formal funding programs for young Arab entrepreneurs. "What would really make a difference is the provision of equity-based investment to help nurture up-and-coming projects. This would change the fabric of the economy and inspire innovation in Islamic finance rather than just extending cash loans."
More significantly, perhaps, is the chance to establish a connection with core Islamic economic principles like shared risk and self-determination.
The GCC would also stand to gain given that in the debt-riddled west, entrepreneurs and small businesses are having a hard time surviving as the high-street banks starve them of start-up money and cash flow.
Although London is positioning itself as the hub of Islamic finance outside the Muslim world, if the GCC's Islamic banks could create products that are for the SME market, the Middle East could surge ahead by stealing conventional business from beneath the noses of the west's banks.
The SME market is the greatest growth area for Islamic finance in Pakistan, with an active Modoraba sector providing investment capital for the SME segment. As a knock on the Modorabas are able to grow their retail presence in Pakistan.
Elsewhere in the Islamic world progress has stalled at the retail banking level partly because there is a growing education gap that needs to be bridged, especially among younger customers.
As a result, banks spend much of their marketing efforts informing potential consumers about Islamic finance rather than testing the water for new and exciting products.
Vikram Krishna, Emirates NBD's group head of marketing and branding, told The Islamic Globe: "Our emphasis is on education so that customers know what they're getting into. For our younger audience it's about making clear the difference between Islamic and conventional products.
Krishna said, through its subsidiary Emirates Islamic Bank, the group would be launching a series of Islamic products in the New Year. However it appears that these new products are well within the comfort zone and could never be described as innovation.
There is a new 'combi-card' that allows commuters who bank with EIB to link Dubai Metro's Nol card with Shari'ah compliant visa credit and debit cards. EIB is also developing a mobile app for Islamic banking. Both are scheduled for launch in the first quarter of 2012.
But behind the scenes, there is still one big reason the crisis of innovation in Middle East Islamic finance will eventually come to a head: the conservatism among scholars.
As the head of one Saudi Arabian Islamic bank told The Islamic Globe: "Historically, the problem has been that in the GCC there are scholars that are interested heavily in Shari'ah, but don't have the financial background."
"You have different interpretations from scholars in different countries, even in Saudi. But there's a commonality in most of the structures and products. When you're innovating and exploring untested products, that's when it becomes trickier," he said.
How soon new Islamic financial ideas are embraced in the New Year and with what prominence will be a sign of how much support innovation really has.
There are enough pressing reasons that the status quo cannot go on for much longer.
© The Islamic Globe 2011
