Understanding Islamic Banking: The Value Proposition that Transcends Cultures

Citation

Shubber, K. (2008), "Understanding Islamic Banking: The Value Proposition that Transcends Cultures", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 1 No. 2, pp. 180-182. https://doi.org/10.1108/17538390810881026

Need for non‐Muslims to understand the thrust of Islamic business

This volume differs from many others falling within the general area of Islamic banking and finance. The book does concern itself with – among other issues – what is permissible (halal) under Islamic (Sharia) principles, as well as the workings of Islamic financial institutions, allowable financial instruments/methods, and problems of regulation.

However, the author's chief objective relates to cultural issues, so as to enable greater mutual understating, particularly on the part of leaders and managers of non‐Muslim corporations, which need to function and expand in the Muslim world. Despite the fact of being a non‐Muslim, the author has made enormous strides to assimilate not just the outward appearances of Islamic demeanour and business, but what lies beneath all that by way of history, concepts and underlying thinking.

Link with ethical investment

Quite appropriately, the author draws a noteworthy parallel between Islamic finance and ethical investment in the west, noting the overlap in their timing. It is made clear in the book that during:

[…] the past 30 years, both have grown from small beginnings to appeal to larger and larger portions of society. Islamic banking in the 1970s was a fledgling set of operations, while ethical investing was met with liberal closes of scepticism and derision. The key differentiator between these two similar principled‐based lines of thinking is that under the Islamic value‐proposition, investors are concerned with the way activities are financed, as well as simply what kinds of products are produced (p. 99).

Joseph DiVanna is a management consultant, focusing primarily on the formulation of business strategies, and advising in the process many large multi‐national corporations. Looking at books written by the author, his other major focus is the financial services industry. In this work, therefore, the author has combined his searching knowledge of the financial‐services industry with a deepening insight of Islam and Muslim societies.

Moreover, Mr DiVanna has been travelling the world. Clearly, this has given him an added advantage to understand different cultures and see how they interlink and interrelate. All this had made him invaluable in furnishing advice to corporate clients, assisting them not only to understand the totality of the environment in Muslim countries, but also in dealing with the rising number in other regions of organisations purporting to operate in accordance with the Sharia, as well as millions of Muslims living in Western Europe, North America, and other non‐Muslim parts of the globe.

The book contains five main chapters, in addition to an eight‐page introduction and a similar‐sized encapsulation of final conclusions. The first major chapter looks in some detail at the evolution of Islamic finance, considering in the process the first beginnings in modern times, as well as relevant affinities between Islam, on the one hand, and Christianity and Judaism, on the other.

Islamic values

The emphasis of the volume on Islamic values, and how these are reflected in the mission statements of Islamic financial institutions, comes out very clearly in the second chapter. In addition, the pages of this chapter describe certain types of Islamic financial products (such as mortgages, credit/debit cards), spelling out how these instruments are utilised, as well as various criticisms levels against them by Islamic scholars.

The third chapter serves the reader by expounding global variations in Islamic finance, looking in the main at five countries, namely UK, Pakistan, Iran, Bangladesh and Malaysia. In this chapter, the author considers how Islamic banks are engaged in shaping the relevant socio‐economic environment in the countries/regions where their activities are concentrated.

Elaborating this aspect, the book indicates that Islamic banking institutions have been involved in “tailoring the various elements of their value‐proposition to resonate with the needs, wants and desires of people within demographic sub‐groups … ” The author adds that Islamic banks have “three distinct strategic options: cost‐leadership, market differentiation, and micro‐segmentation” (pp. 69‐70).

A fourth chapter focuses essentially on the value‐proposition of Islamic banks. Quoting Mohamed Ariff (a well‐known writer on Islamic banking), the author stresses that the single market differentiator that is most telling in the Islamic banking value‐proposition is the concern over the viability of the project and the profitability of the operation', rather than the size of the collateral.

The book goes on to point out that Islamic banks are more willing to assess a project based on its potential to be a success rather than its collateral, and they often hedge their risk by taking on shorter term projects. An essential element in the Islamic value‐proposition is the desire to play a greater role in the community. In many cases, these institutions work in co‐operation with “government agencies, central banks, and NGO's”, in that they endeavour to be catalysts for economic development (p. 97).

The book's fifth and final chapter is focused on future prospects, in recognition of the fact that much effort and thinking are still needed in the field of Islamic banking. Several important ideas are put forward in this chapter, including dealing with the issue of brand identity, development of Sharia standards, regulation and compliance, Islamic monetary union, and electronic money.

Undoubtedly, the author should be congratulated for the enormous effort he has made to expound Islamic banking, spelling out its underlying cultural traits, and showing how the latter intertwine with other major cultures on our planet. Over 20 illustrative figures are presented in the process, in addition to several tables and a glossary of technical terms.

However, in some cases additional numerical examples (e.g. on Islamic mortgages) would be of much benefit, so as to clarify relevant instruments. It is also important to emphasise that avoidance of fixed‐interest (usury) and adoption of profit‐and‐loss sharing schemes are but two major ingredients of Islamic banking and finance, as there are others, including the avoidance of prohibited activities (gambling/casinos, pork‐related products, etc) and any misrepresentation or dishonesty in all business dealings. While the book does not ignore these latter aspects, they do deserve sufficient prominence.