I have previously talked about how Fintech companies with social impacts could be more viable business models, but all of this got me thinking whether it would be possible to apply the same theory to banking – could Financial Services be more viable if, as a sector, if we were to see more ethical banking?
It seems like in the past couple of decades our banks have hit the headlines all too frequently, more often than not for the wrong reasons. In the UK, we seem to have well and truly lost confidence and trust in our financial services, and this has only got worse since the recession in 2008. If banks can demonstrate more ethical business models, they may just be able to regain some of that and increase their integrity.
Since the recession, our banks have been ‘forced’ to demonstrate good business practices by the introduction of more regulatory bodies, but growing up my mother taught me that a good deed meant more if it was performed without the need to be asked. On this note, leading banks could learn a lot from the cultural values that are firmly implemented at the core of Islamic banking.
Profit vs integrity
Through the implementation of products, processes and policies that are driven by cultural values like honesty and transparency, Islamic banking has seemingly done the impossible; created an ethical route to Financial Services. Yet, frustratingly, the thing that makes Islamic banking such an attractive proposition is also what has ultimately made it tough it to compete in the marketplace.
In fact, despite a formal history exceeding 60 years, Financial institutions that comply with Sharia laws only manage 1% of assets globally. The reality is that some of Islamic banking’s key ethical principles, such as no interest/mortgages, have ultimately made it inaccessible to a large proportion of consumers, consequently making it extremely tough for Sharia-compliant models to compete.
No interest (Riba)
Sharia-compliant banks cannot charge interest on their products. This is because of the principle that the banks can’t charge someone interest because they had access to money that the clients didn’t. And money can’t create money, which will result in rich becoming richer and the poor becoming poorer. Lending can be only against tangible assets.
No uncertainty (Gharar)
Institutions have to be transparent to their customers regarding the products they are being sold. There cannot be an open-ended or uncertain contractual relationship between a Sharia-compliant institution and its customers. In the west, this is now being enforced under conduct-based regulations.
This is clearly prohibited under Sharia laws. But this is not just about not lending to a casino business (gambling). Products that are based on making money in an uncertain situation (speculating) like derivatives (futures, forwards, options etc.) are also prohibited.
Following these principles may well have led to the avoidance of THAT 2008 credit crunch, but now, doing so comes with various overheads.
Islamic Financial Institutions (IFI) need to be savvier and more innovative than their non-Islamic counterparties to remain competitive. In the UK, there are only five Islamic banking entities, and only one of them provides products for retail customers, which aren’t competitive on returns when compared to high street banks.
Regulation and standardisation
There is no central body to regulate and support IFIs as we have the FCA in the UK for banks. This often leads to a lack of awareness with the institutions that want to understand this space better. Also, interfacing between Islamic and Non-Islamic Financial Institutions is quite challenging without the standardisation of products and operational processes. Most IFIs self-certify with certain authorities or with a panel of experts in the field.
The above two points have led to a poor liquidity for Islamic banking products, with low volumes and transactions. This is also worsened by inefficient back office processes that are yet to be upgraded to 21st century standards.
Digital banking has now been evolving in the west for almost a decade but, despite this, Islamic banks are still yet to break through in this area. Most records are still paper-based and information exchange remains unautomated.
The Yielders approach
We may have just found an answer to some of these questions in property investment platform, Yielders, which last year secured the first Islamic banking certification, also becoming first Sharia-compliant Fintech firm in the west.
Yielders has developed a proposition that looks pretty innovative, pragmatic and competitive in a low yield environment. In the process, they might well have set themselves on a path to pioneer viable Islamic Fintech in the UK and possibly in the west.
Their revolutionary platform is transforming Islamic financial services and allows users to make hassle-free property investments from as little as £100, with projected returns that exceed those available through traditional banks. Crucially, for minimal risk, all of Yielders assets are entirely pre-funded. There’s no interest, no mortgage and a secondary market provides an exit route. Their model is as transparent as it possibly could be.
The founder laying the foundations
Yielders was founded in 2015 by Irfan Khan, who has previously worked for leading industry names including HSBC, Barclays, Royal Bank of Scotland and Aviva. His passion to bring to light the principles behind Islamic banking and make them work in a western context was the driving force behind Yielders.
Over the years, Irfan has seen and understood the challenges that Islamic Financial Institutions (IFIs) have had in the UK and wanted to change the landscape. The key issue for Irfan with existing IFIs in the UK is that they have only ever targeted the Muslim community. None of the IFIs in the UK have a non-Muslim name for example. The problem here is that Muslims in the UK only account for around 5% of the population, which makes it very difficult for IFIs that are unwilling to market their products to non-muslims.
In Irfan’s opinion, they establish themselves in the west with almost an acceptance that their products wouldn’t be competitive enough for the non-Muslim world, and they would play the ‘ethical-product’ marketing route with their Muslim customers. Irfan has turned this approach on its head by establishing Yielders as a western financial institution that also complies with Sharia principles and fits the lifestyles of all. This, he believes, will attract more western customers who the traditional IFIs haven’t even bothered targeting.
Irfan is taking a ‘ground up’ approach with a Fintech hat on. IFIs operating in the west have often attempted to ‘shoe-horn’ their products into the western markets. At Yielders, Irfan can be more innovative with his products as he has structured them to be compliant with Sharia laws. However, he doesn’t think this is possible in a traditional IFI (yet) that lacks the agility of a Fintech firm.
As a result, he is able to offer competitive returns on his products that are currently focused on real estate, but could be extended to ISAs, SIPs etc in the future. Yielders currently offer up to 6% net yield (without leverage) plus capital appreciation. This, along with the platform’s commitment to inclusivity, makes it a very practical and differentiated proposition.
Reaping the rewards
In the past year, Yielders has won the esteemed Islamic Economy Award for Money and Finance, presented by the crown prince of Dubai, been nominated for Crowdfunding Platform of the Year at the 2018 Property Wire Awards, while Technical Lead, Marwa Adawy was also named on the Women In Fintech Powerlist 2017.
During the time I spent with Irfan, it also became apparent that, apart from agile product innovation, innovative data sourcing/interfacing is needed in order for back office operations to function more efficiently, which will help IFIs to run on a lower cost base. As operational costs decrease, more competitive product pricing can be introduced which will bring liquidity to the market. Fintech could also improve interfacing and interactions between IFIs and Non-IFIs through various API and data exchange technologies and automate back office processes.
There are a few steps that the banking world, driven by capitalistic ideals, can take to become more principles/values-based, some of which would mirror those already taken within Islamic banking. A few more players in Islamic Fintech could spark a new wave of opportunities both in the West and in the Islamic world.