By: Hj Zaharuddin Hj Abd Rahman*
This article was published in NST (21 sept 2005)
Recent development has seen banking industries thrusting ahead with the introduction of varieties of new products offering appealing features. On the contrary however, a random survey reveals that some people are not very pleased with the performance of Islamic Banks. One critical aspect in particular highlighted :
- The high profit rate charged by Islamic Bank for their financing product as compared to the interest rate charged by Conventional Bank. This factor is claimed to be the crucial factor leading to customers repelling from taking up financing from Islamic Bank.
This article will respond to the above-mentioned critic. To begin, lets look at the following facts:-
a) Islamic Bank is a profit driven company offering Shariah approved financial services and products and is not a welfare institution where services are rendered for free.
b) Islamic Bank is obligated to fulfill its duty to investors who are not merely subsidizing the institution and who like any other investor yearn for good return in investment.
c) Islamic Bank needs to pay the salary of its staff competitively with the market, which means that profit making is vital to enable the salary payment. Staff is fundamental in driving the Bank towards efficiency and competitiveness.
d) Islamic Bank has to cover the operational costs of its premises, tools and equipments. Therefore, how would an Islamic Bank survive, develop and expand if they are expected to provide its services for free or at a very low price ?
Surely, based on the above facts, it is clear that the nature of an Islamic Bank is actually similar to other business institutions. The following explanations answer the issue of why the Islamic Banks Financing rate is averagely higher than the Conventional.
1) The priceless value of Halal
A Muslim entrepreneur once told me about his experience in London where the price of a slaughtered chicken is much higher than the one, which is not being slaughtered and that Muslims consistently kept buying the expensive slaughtered chicken in order to ensure that their food are halal.
The above analogy shows that even though the Islamic Banks products are quite expensive (for some products only). However these are priced as such considering that these products have gone through the Shariah screening process and verified as halal.
On the other hand, although Muslim nowadays are very much concern of not eating pork (khinzir) or non-slaughtered chickens and etc, there are those that seems to pay less attention to their income, whether it is coming from halal sources or not and not hesitant to use the not halal income to purchase their daily foodstuff which according to Shariah is prohibited, similar to the prohibition of eating non-slaughtered chicken.
2) The Professional Shariah Screening and Auditing.
The Islamic Bank essentials requires Shariah screening and approval for its products and activities. This is an additional Shariah benchmarking and thus an additional cost, considering the time and expertise involved. One must realize that this Shariah approved products are priceless in value and cannot be valued by any amount of money and that Shariah approved financial products have been acknowledged as not only beneficial to mankind but also socially ethical products.
3) The highly potential players in the market.
Islamic Banks are highly potential players in the market. This is well acknowledged by Tan Sri Dato Dr Zeti Akhtar Aziz in her statement at Putrajaya on 22nd June 2005.
..Since 2000, the domestic Islamic Banking industry has been growing at an average rate of 18% per annum in terms of assets. As at end-2004, total assets of the Islamic Banking sector increased to RM 94.6 billion, accounting for 10.5% of the total assets in the banking system. The market share of Islamic deposits and financing also increased to 11.2% and 11.3% respectively.
Deliberating her point, Tan Sri Dato Dr Zeti adds that: Bank Negara Malaysia, in charting the next stage of development for the Islamic Banking industry; envisage that the relative significance of their market share will increase to 20% by the year 2010.
Thus, as the small players continue to grow, the financing rates offered may be averagely higher than those of the large and well-established players. This situation is equitable to the prices offered by retail seller and hypermarket, whereby retail sellers price is higher as compared to hypermarket prices.
4) Lastly, it is important to understand that the financing rate charged by the Islamic Banks today is actually low and competitive to the rate offered by the Conventional Banks. Furthermore, if one detailed out the calculations, it may reveal that Islamic Banks are actually offering comparatively lower rate, for example when comparing between Interest rate offered by Conventional Banks in their Home loan products and profit rate from the Home Financing-i under Bai Bithaman Ajil (BBA) concept by Islamic Banks. One will learn that, Home-Financing-i offers fixed selling prices and the contractual profit rate (under this concept) will never change from the beginning of the payment period to the last settlement by the customer.
On the other hand, the home loan offered by Conventional banks are seemingly very attractive as the rate charged in the first year is relatively low. However, the rate for the remaining years will fluctuate as it is dependence on the Base Lending Rate (BLR) in the market. For example if the current BLR is 6 %, therefore the rate is equal to 6.25 % as the rate is equal to BLR + 0.25 %. What if BLR rises to 11 % or higher as has happened in the past Malaysian economic crisis ?
On the contrary, this will not occur in Islamic Banks because the selling price has already been fixed and agreed in the contractual agreement by both parties. The Islamic Banks profit rate does not have any relation to the BLR rate, thus it will not increase. In fact, it may even be reduced if the Islamic Banks were to provide rebate (ibra).
We can now see competitive profit rate from Islamic Banks as the Islamic market reaches critical mass such as Car Financing-i under Al-Ijarah Thumma Al-Bai (AITAB) concept whereby customers are offered 2.5 % for the imported cars, which is very competitive if not better than the current interest rate offered by Conventional Banks.
In conclusion, considerations and supports from all are essentially needed to enable Islamic Banks to reach and go beyond the target set up by government. If we are willing to make the sacrifice today, we will not regret to see that our future generations will be able to enjoy competitive Islamic Banking products with very competitive pricing besides the assurance and guarantee that it is halal.
* The writer is a Manager, Shariah Compliant Department, RHB Islamic Bank Berhad