Islamic Financial System: Malaysia
In discussing Tabung Haji prospects, it would be useful to first analyze the future directions of Islamic financial system in Malaysia and its readiness in meeting future challenges.
Islamic Financial System
It is important to note that the world economy is witnessing radical transformation particularly in the last two decades. Geographical and cultural boundaries have increasingly been broken down with the advent of efficient communication, Internet and satellite. Rapid economic and financial changes all around can easily render yesterday’s winning business strategies obsolete. Even successful companies like ibm and General Motors have discovered that they can lose significant market share if they do not respond to fast changing business environment.
Progress in telecommunication has been the driving force in creating a huge global business landscape. Bankers, particularly Islamic bankers should take cognizance of this important development to strategize and position themselves. The notion that banks merely act as financial intermediaries between the ultimate savers, the households and the ultimate investors, the firms may no longer hold ground. Today, institutions that acquire telecommunication technology are able to encroach into the financial sector by their ability to offer products similar to banking products. It is only the state of readiness to manage the forces of competition that can ensure relevance of each individual institution, whereby in the long run, the regulatory environment which has long protected the encroachment of competition, both globally and domestically, may have to be prudently dismantled. On the other hand, technology-driven domestic banks can tap the vast opportunities in the huge global banking landscape.
To cope with increased competition, Islamic financial institutions should take advantage of the advancement of high technology in the conduct of their business. Notwithstanding the desire to be high-tech driven, they should not, however ignore the other important aspect of banking i.e. The “high-touch” aspect. This refers to the importance of being customer-oriented and customer driven in all their operations. Too many Islamic banks still design their products without customer input, only to find them rejected in the marketplace. And too many Islamic banks did not focus on consumer services, only to lose them to those who are consumer-driven.
Islamic financial institutions cannot be a passive spectator of these profound changes. Islamic financial institutions have to prepare themselves to play a more meaningful role and contribute significantly to enhance the economic wealth. Establishing an Islamic financial institution is already a no mean feat. But to sustain its commercial role in a competitive financial landscape is more challenging and daunting. One cannot afford to remain complacent. Islamic financial institutions are lagging far behind the level necessary to enable them to thrive and compete effectively in a freely competitive global environment.
Financial services, particularly banking are by nature long-haul business. Which is why there is a need for Islamic financial institutions to be adequately capitalized. An Islamic financial institution with a sound capital is able to assume greater risk and is, therefore, likely to be more willing to expand its operations and venture into new business. In view of the changing nature of financial services and the fast evolving financial landscape, size is increasingly important to compete in today’s financial world. Only large and strong Islamic financial institutions will have the capacity and ability to avail themselves of the opportunities. The future success of Islamic banking rests on the ability of this emerging sector to position itself strategically to overcome future challenges. The increasing globalization of the financial system and the prospects of further liberalization of the banking system in the time to come, both domestically and regionally, would pose challenges not only to conventional banking institutions, but also to Islamic banking.
Although size is important, but one should not ignore the other important aspect of banking, i.e. the need for an abundance of intellectual capital. Islamic banking lagged behind conventional banking and therefore has a lot catching up to do. Indeed the future of Islamic banking depends a lot on the capacity and ability of Islamic bankers to generate creative ideas and innovative products in order to convince the banking public that Islamic banking is at par if not better than the traditional banking. There is no substitute to this.
It is now commonly known that at the international level, Islamic syndication’s based on ijarah usually used the libor as the benchmark to price the product. It would be more meaningful if Islamic banks could come up and design their own reference rate rather than libor, so that Islamic banks can have their own benchmark in the pricing of its products. Relying on libor as the one and only reference rate without exploring into other Islamically-acceptable benchmarks would only prove lack of creativity and will-power. Therefore, creating an international benchmark for pricing of Islamic products is an urgent task and thus, it is timely for Islamic bankers to explore this proposition and give it the necessary attention. Malaysia is embarking on this project to establish a domestic Islamic reference rate which would serve as an indicator for investors to manage and plan their investments and for Islamic financial institutions to price their products. Unlike conventional benchmarks, which are cost-driven, the derivation of the reference rate would be sourced from the profitability trends of the spi banks.
It is time for Islamic banks to generate practical and implementable action plan that can elevate the standards of Islamic banking in the international market place. There is need for greater efforts and more effective means of networking to strengthen the relationship among Islamic banks. Strategic alliance arrangement and smart partnerships are some of the approaches that Islamic banks should seriously explore into.
Islamic banking has a bigger agenda than just providing alternative banking system to the Muslim community. It has to show that it has the dynamism and sophistication to strive for the betterment of the society, to address the ills of the nation and overcome economic imbalances. Co-operation among Islamic banks should not rest merely on operational and product development issues, but Islamic bankers should devise long-term strategies on ways and approaches to elevate the position of Islamic banking to greater heights.
Finally, the international Islamic financial system must be properly planned from now. The players must be identified, the products must be made available and the international Islamic Money Market must be in place. The institutions that shape up the financial system must be made aware of their role in the establishment of an international Islamic financial system. The next stage then is to capitalize and maximize on each others’ strengths so that Islamic banking and finance will not only prosper to benefit the Muslims but also contribute to the world as a whole. Perhaps the Islamic Development Bank and some of the international Islamic financial institutions should begin to explore the need to have at least a more structured although informal international Islamic financial system. The idea needs to be transformed into reality as early as possible.
Source: Towards Islamic Banking: Experience and Challenges, Institute of Policy Studies. Republished with permission.