Extent That Islamic Banks Can Gain Competitive Advantage Finance Essay - Free Essay Example

Islamic banks appear ready to embrace the next wave of market activity. The global financial crisis has opened doors to new opportunities for Islamic banks and finance. Financial institutions must asses risk, determine how client needs will best be met, and focus on long-term relationships with investors and customers (Stockmeier). Opportunities do exist for Islamic banks to not only grow, but to thrive. Across the financial sector, there are many possibilities, different areas of finance. Brokerage services, investments, long-term savings accounts and other financial products are at the disposal of Islamic banks, given they abide by Shariah law. But new business products must be examined and thought out carefully, as to not over-saturate the market and loose competitive advantage. There are opportunities valued at more than $1 trillion (USD) and the sectors of real estate, water, electricity, construction, oil and gas services will be the leading players in the field. Research is showing that France is leading the way to be the next big market for Islamic finance and banking. There is a significant Muslim population in the country and opportunities exist not only amongst the practicing Muslim population, but also with individuals who have been through the financial crisis and are seeking safer alterna tives to managing and investing their money. The government of France is in discussions regarding Islamic finance and how to integrate it into the financial system. Research shows spending on technology for Islamic banking will increase significantly in the coming years, upwards of 60 million USD. It is noted that conventional banks will turn their eyes on Islamic finance and begin to embrace it, as the financial crisis continues and institutions look to assure customers that they are acirc;â‚ ¬Ã…“safeacirc;â‚ ¬Ãƒâ€šÃ‚  and open for business. For Western conventional banks to enter Islamic banking, understanding of and adopting Shariah law is imperative. There are opportunities, however, bank systems, processes, in-house products and external products will be affected. Also, Islamic banks have become a reality in the banking and international life after it made its way in the banking environments quite different in terms of foundations and rules and mechanisms from th ose of Islamic rules and spirit (Al-Rawashadah). Islamic banks are a new experiment proved largely successful in a prevailing capitalist system where traditional banks were based on one foundation that is the interest rates. While Islamic banks have taken Islam to be the source of practicing the banking and have also taken the Islamic investment modes to guide it but complied with the legal provisions to face banking updates, according the European Journal of Sciences (Al-Rawashadah). In Islamic banking, it has been shown that the takaful market is currently concentrated in Malaysia and the Middle East. It has been on a rapid expansion and has been experiencing significant growth. There are currently more than 130 takaful companies in operation worldwide, of which nearly half are to be found in the Gulf nations of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. The takaful growth rate in these countries is well ahead of the conventional insurance market in the region. Wit h regard to takaful, the market is expected to be worth $4 billion in the next few years at the present rate of expansion, compared with about $170 million today. Western institutions are taking note and seeking to enter this market, as it has proven to be safer and more stable than conventional banks were markets collapsed (Mohammed, Faiz Azimi). However, when looking to the future for development and strategy, it is also expected that Islamic financial institutions, including banks, may encounter difficulties and heavy losses reflected in a decline in market share and pressure on the levels of profitability, given the modest capabilities and capacities of some banks as compared with traditional financial institutions that have a significant comparative advantage, particularly in the banking services (Al-Mulla, 2002). In order for Islamic banks to benefit from the positive aspects of banking services trade liberalization agreements, they will need to plan for this by identifying features of the strategy (Al-Rawashadah). In addition, Islamic banks will have to keep pace with technology and any relevant advancement of technology in financial services. According to Al-Rawashadah, acirc;â‚ ¬Ã…“The quest to keep pace with technological development must be a key target for Islamic banks to be configured to compete locally and abroad, provided that this be done, according to a deliberate strategy and a clear vision and appropriate technologies for the economic realities of the Islamic banks.acirc;â‚ ¬Ãƒâ€šÃ‚  New Aspects First, increase investment in technology so as to make a real breakthrough in Islamic banks use of modern technologies. Also, a strong focus on electronic banking services that Islamic banks find a competitive advantage in, such as Islamic banking services. And lastly, the preparation and training and development of human resources skills in dealing with the modern mechanisms in order to increase the prospects for growth and profitability of Islamic banks. (Al-Rawashadah) In some countries with a majority of Muslim population, such as Nigeria, Pakistan, Egypt and Bangladesh, the takaful market can be considered very much in the early and development stages. These are almost totally untapped markets, in which insurance penetration nears somewhere below 2% of GDP. There are estimates that the global takaful markets are growing at around 20 percent per year. The Next Steps Islamic financial institutions have been able to enter global markets successfully, with an estimated $700 billion in assets under management (Al-Salem). The size of Islamic financial dealings affects local markets in certain countries, such Malaysia, Bahrain, and Indonesia. However, its impact on global financial markets can still only be regarded as developing given its current small size (El Qorchi, 2005). In addition to meeting Islamic Code requirements and satisfying the needs of Moslem customers, the expansion of Islamic financial services to customers around the world has been helped by the growth in information technology and by the new legislation passed in many countries, both of which have made the movement of funds more flexible and created a window of opportunity for Islamic banks and financial institutions (Al Muzaini, 2005). Although few in number and slow to develop, there is strong demand for Islamic investment products. However, today, in some Muslim-dominated nations, there is a wide gap between the number of conventional or traditional institutions and the number of Islamic institutions, especially banks, operating in the various countries. Some of these latter traditional or conventional institutions are more than 200 years old, compared with the oldest Islamic institution in Kuwait, which as started only 30 years ago. An increase is expected in the number of relationships developed to establish new Islamic Banks, in the provision of licenses for Moslem-related insurance companies, and in the number of new geographic markets for Islamic banks and financial institutions, such as Malaysia (CIBAEI, 2006).