The Studies mentioned above point to Islamic banks' strong powerbase among religiously motivated customers. However, these customers are also concerned about other factors reported in the same studies. There is also a section of Muslim population who do not feel motivated enough on religious grounds to bank with interest-free banks. Instead, they may chose to bank with an Islamic bank on profitability and efficiency ground. We can see this in the Jordan case, where 75% customers of an Islamic bank also have accounts in conventional banks 'to diversify their investments' (Naser et al. 1999). In addition, many conventional commercial banks in Muslim countries find it profitable to run an Islamic banking unit or subsidiary to keep existing religiously motivated customers from switching to Islamic banks as well as attract new customers from the Islamic banking clientele. Furthermore, financial institutions from outside the Islamic world have also established dedicated Islamic banking units (see, for example, Moore 1997 and Warde 2000 for a discussion on this issue). Giant global banks like HSBC, Citicorp, ABN Amro etc. have now Islamic Banking units both in Muslim countries and in Europe.
The fact outlined above has points to the challenges that Islamic banks are facing today. The imperatives of this situation are then to design improved products in terms of reduced cost and efficient distribution for the clients who are now having wider choices than before.
E. Utilisation of full potential of untapped market
Muslims constitute over one fifth of the world population of 6 billion (Weller 2001). There are more than 55 independent countries where Muslims are in majority. Moreover, outside the Muslim world there live millions of Muslims in America, Europe, Africa and Australia. The mere size of Muslim population is indicative to the huge potential of the market. In order to cater for the financial need of over a billion people, we need thousands of specialised interest-free financial institutions and many of well-developed local and international markets. As compared to the need, the Islamic finance industry is utilising only a fraction of its true potential (Wilson 2000). A more professional approach has been recommended in Wilson (2000) to penetrate into the untapped market, as whatever easiest part of the market is available has already been covered.
Putting aside the religious zeal of the customers, Islamic banks can also find it profitable to offer their products to the non-Muslim clients. If they target the Muslim population only, they will not be able to attain general acceptability in some countries, like Malaysia and Nigeria, where non-Muslims constitute around 30 to 40 per cent of the population. This may lead to loss of potential business with a high proportion of the population. And Islamic financial organisations outside the Muslim world have to target whole of the local population to achieve critical mas in the host country so as to compete with the local institutions. After all, everybody looks for better business deals available around. In some Muslim countries Islamic banks have experienced a rise in their market share from 2 percent in 1970s to around 15 percent by the middle of 1990s (Babai 1995). This rise in market share is meant to benefit not only the Muslims but also the humanity in general, given the ethical aspect of the business.
Bearing the above considerations in mind, Islamic banks need to design products in order to capture the hithetro untapped potential of Muslim savings and investment as well as to reach to all sections of a society, high net worth, middle or lower middle class, and Muslims and non-Muslims alike.
F. Developing a true face of Islamic finance
Although characteristics of risk sharing and variable returns distinguish Islamic banks from conventional banks in theory, heavy reliance on fixed returns modes describes the actual practice of Islamic banks. At the outset of theoretical development, Islamic banks were perceived to conform to one of the two models : the two-tier mudharabah model and the two-window model: (Iqbal and Mirakhor 1999). The two-tier mudharabah requires that both funds mobilisation and utilisation be on the basis of mudharabah (Siddiqi 1980, 1982; Chapra 1985; Uzair 1980). On the other hand, the two-window model requires the balance sheet of a bank be divided into two windows, one for the demand deposits with 100 percent reserves being held and the other for investment accounts with no reserve being held at the bank (Khan 1986). In both the cases, the major tool of operation is mudharabah or musharakah, the profit and loss sharing arrangements, on the both sides of the balance sheet. Although IAIB (1997) reports that the share of variable returns modes are in the rise, more than 70% of the total assets still represent banks' engagement with fixed returns modes like murabahah and its variants and ijarah. Profit and Loss Sharing (PLS) modes have been unpopular among practitioners as well clients for one reason or the other. One of the pioneering scholars has recently expressed his disappointment with current practices of Islamic banks (Siddiqi 2000). He envisaged Islamic banks principally working on the basis of Profit and Loss sharing modes like musharakah and mudharabah (Siddiqi 1983).
Some writers consider the perception of Islamic banks functioning principally on the basis of profit and loss sharing modes as an outcome of purely normative approach. This is, however, 'not warranted by the social sciences methodology of observation and interpretation' (Kahf 1999). According to this viewpoint, the present market situation warrants wise and profitable use of funds without unnecessary overemphasis on certain modes of financing. Even if we accept this view, excessive reliance on fixed return modes may cause loss to comparative advantage for Islamic banks in the long run. Eventually, they would 'lose their distinctive features and tend to resemble conventional banks' (Errico and Farahbaksh 1998). Therefore, scholars have warned that if this trend of relying on fixed return modes ramains, Islamic banks would loose ground against conventional banks as they are also offering products with similar, if not the same, characteristics. In order to gain competitive advantage and product differentiation, Islamic banks had better evolve mechanisms for successful application of variable returns modes (Tag el-Din 1999).
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