19/07/2014 Talking Business with Linda Yueh

protection tax. More on those stories are the top of

the hour. Right now on BBC News, Talking Business with Linda Yueh.

Islamic finance has grown rapidly. But it is still a very small segment

of global banking. Is that set to change? Here in Singapore, I am

Linda Yueh and we are talking business.

A warm welcome to the programme. Islamic finance is ankle ending on

the basis of sharia law so earning interest is forbidden. Instead, the

customer and the bank defied the risk of any investment and then

share the profit. Our Middle East business correspondent went to find

out why it is growing so quickly. Customers at emotional Islamic banks

have been offered sharia compliant products for 40 years. A dozen new

products have been introduced over the past four years with as many

expected this year alone including a pension plan. We have developed a

pioneering sharia compliant savings and return product, using the

partnerships and a fund manager with the underlying funds are invested in

sharia compliant structures. Opening up the market so that the investors

that insist on using sharia compliant products can do more with

their money and taking on the conventional banks, they have for a

long time offered their customers a wide variety of financial products

and services. We are not Muslims so it doesn't mean that it is of

critical importance to have Islamic banking. It is more about the good

financial services than anything else. Now, multinational banks

appeared equally keen to expand their offerings in the Islamic

market as well. We have a very comprehensive suite of management

products for managing interest rate risks, but you risks, any risk that

the businessmen face in the real economy today. The Islamic finance

industry has also received a boost from financial regulators worldwide.

They have removed some of the extra cost. A religious order recently

granted access. We are able to offer clients a daily deal in a liquid

fixed income, opportunities or options to complement their equity

and real estate portfolios. The idea is that now, they are much more able

to have a diversified portfolio. According to a recent survey,

customers who use Islamic banking are happy with the transparency of

their services but criticised the lack of simplicity and lower

standard of banking and despite the recent innovations, with 60% fewer

products on offer in Islamic banks compared to traditional banks, the

sector still has a long way to go. I caught up with Adnan Yousif,

president and chief executive of Al Baraka Banking Group, one of the

largest Saudi conglomerates in the least, to find out what the

potential for growth is. Islamic banking has been in operation for

the 40 years. Although they grow very fast in these 40 years, still,

they have a long, long time to grow and to expand. We cannot compared

ourselves to that additional banks, they have been in existence bank ``

the traditional acts, they have been in existence for 300 years. What has

caused the rapid growth? There has been really fast expansion of the

sector over the past few years. First of all, the previous years,

they used to be small and then suddenly they started growing.

Countries which are operating, they show a very good growth, especially

in the Middle East. This has pushed Islamic banking ahead. Still they

continue with their 15% growth. I don't anticipate that this ratio

will be increased or will stay. It might go between ten and 12% in the

coming three or four years. That is still very fast growth. That means

the sector will double in size in seven years. Is the growth

predominately because in the Middle East or is it other outside markets

where you are beginning to see the kind of real drivers? It is outside

the Middle East. We have Indonesia, Malaysia, Singapore, they are

opening their doors for Islamic banking. We have now China, India,

all these countries are growing and also their banking activities are

growing, whether Islamic or non`Islamic. Is it also because in

the West, there has been a massive banking crisis? So, there is perhaps

a turning away from some Western banks? No, that is not the reason

for the growth of Islamic banking. Islamic banking has not been hit

with a crisis because we avoid going through a lot of things which have

been followed by the additional banks, one of them was their

attempts. `` the traditional banks, one of them was derivatives. You are

more limited in what you can do because you have to be complied with

Sharia law. Normally, most of the banking, they grow whether their

countries are growing. We anticipate that the growth will be there and as

I say that, we cannot grow very fast. One of the big mistakes

sometimes that banks do is they grow very fast, they don't learn from

their mistakes and then they repeat the same mistakes. We don't want to

do that. It sounds to me like it is a more conservative banking model,

the kind of careful expansion, if that is the case, do you not pay

huge bonuses either? We don't huge `` we don't page to check bonuses

and they don't pay me huge bonuses. `` we don't pay huge bonuses. We

don't want to repeat the same mistakes. The big institutions were

offering their senior staff big bonuses without looking to the risk

associated with the growth of their balance sheet or Bob growth of their

profits. `` all the growth of their profits. `` all the growth. What is

a reasonable amount? A reasonable amount is reasonable to your other

sheet, and reasonable to the standard in your country. Maybe 1

million in Singapore is reasonable but if you take it to America it is

not reasonable because the market there is it, the growth is big, the

balance sheet is it, therefore, you have also to see which market you

are operating in. One of the things people find interesting about

Islamic banks is it appeals to non`Muslims as well. Why do you

think that might be the case? Well, I think that Islamic banking, from

us, from Al Baraka Banking Group, we have a few institutions, we have

Christians dealing with us more than the Muslims. I remember that one of

our subsidiaries, the new shareholders who came and

participated were Christians. It is not just for Muslims, it is for

everybody. Everybody who believes in that kind of business, he is

welcome, whether he is Muslim or question or otherwise. You are part

of a big, red, within the business structure, how important is banking

relative to the other sectors? It is a big sector. We are trying to grow

not that fast, but we are growing very fast to enable us to the new

business for the whole group. Some people look at banking and think

this is really where you want to put your business with all the

regulation and issues that come up? But for your group, is this the main

thrust of you? I think you are right but we have to work in that

environment. You cannot be completely isolated. We have to work

within the regulation, within the environment in every country, in

every kind of area in which we are working, we have to respect also the

regulations. Globally, the Gulf region accounts

for the bulk of the industry. Non`Muslim countries are also aiming

to get a piece of this fast`growing market with untapped potential. For

instance, 80% of Islamic finance assets are in the least which makes

up just 6% of the Muslim population. I caught up with the CEO of another

group, an international standards setting body based in Bahrain to

find out how global the industry could become.

We have taken an active role. We were the first ones established. We

have Qatar and we now recently have one in Omagh. These countries have

been active. And other countries in North Africa, they are at the

developing phase. It will take time but then you have to news here which

is looking at it, Morocco which is looking at it. And other countries,

so these are evolved. If you want to offered complicated financial

products which essentially sell a tragic returns, is that something

which is developing? There are certain good products. It is not all

speculative in nature. And derivatives are speculative in

nature. We have developed standard documentation. We call it hedges in

this segment. The main thing is that... Why are you going to have

this product? One of the places where is Islamic finance is

expanding is Africa. There is a significant Muslim population but

Islamic banking is strong in both Muslims and non`slims. ``

non`Muslims. For centuries, Zanzibar island has been home to a large

Muslim community and today, almost 9090% of the inhabitants at here

strongly to Islam. Among its teaching, the Koran, which prohibits

borrowing money that comes with interest. As a result, the majority

of Muslims shun financial services. Now several conventional banks have

opened doors for Islamic banking. It is all part of the effort to meet

the needs of this market. According to experts, Islamic banking adhere

strictly to sharia law so the customer and bank must share the

risk and, like other conventional banks where customers bear the full

risks, throw in interest payments. The services offered for use real

assets such as buildings as collateral were as conventional

banks use real and virtual assets. Two things may become to this

service: My faith, because I am working with the system free of

worries about doing things contrary to God's instructions, and secondly,

a benefit from business transactions because I pay fewer. Almost a decade

ago, some of these banks had a terrible start but now, some have

more than 36,000 customers with estimated assets of over $3 million.

Islamic banks do not require their clients to be Muslims. We are

targeting everyone. We do not target Muslims only. The instance, we have

several non`Muslim climates. And it is not here only. Even in countries

like Malaysia, statistics showed 60% of customers are non`Muslim. Even

here, regular banks are providing Islamic financial products to

attract both Muslims and non`Muslims. As of now, already six

banks offer these services making competition even stiffer. Now that

more banks offer products that comply with Islam, it is also

widening the opportunities for people to access financial services

and, in time, that helps boost financial inclusion in the country.

What are the challenges for banks? Is there a restricted set of

mortgages or pension? To find out the challenges for commercial banks,

I sat down with the chief executive of a bank based in Malaysia and the

chief executive of the Islamic bank of Asia. If I were a customer coming

to your bank, what financial products would you have on offer?

Our bank is universal. We offer consumer banking products. So

basically, anything you would get if you work `` walked into a bank

except the products are complied with sharia law? What about you? Our

model is different. We are a merchant bank based in Singapore

with strong connectivity with the Middle East so we're trying to

differentiate around the middle east. Our product and services are a

direct investment providing equity and we work with companies around

our adviser services, capital markets advisory and be also work

with wealth management providers as well. If I own the business and I

came to your bank, why would I choose your bank, where you are

offering a partnership versus the next bank down the road? We position

ourselves as a good partner. We have a good mix of the conventional

Islamic skill sets within the bank based in Singapore. We don't win

this business purely by being Islamic. A company of them will

choose us because we bring in something a little bit different. We

are a medium term partner that is not only investing, providing

capital in helping the company grow but also helping them grow their

business in the Middle East or bringing investment banking skill

sets to their business. Same question to you. Would I get the

same variety than, say, if I went to a bank next door? We do business

across 20 different jurisdictions. When customers come to us, they

simply look for value, value for money. When they come to our bank,

they get the same kind of products that carries the same value that

they would any conventional bank, anywhere in the world. The most

important thing, at the end of the day, is the difference of delivery

of this product. When you