Islamic Financial Institutions Re'al Prochaska, Mai Lee, Melike Birlik

Background Islamic banking makes money and lends capital like conventional banking, however, it also adheres to Islamic laws. It focuses more on risk-sharing instead of risk-transfer. There are more rules when it comes to transactions because just lending money at interest goes against the Islamic laws.

Growth of Banking Assets According to Global Finance Magazine, research shows that Islamic financial institutions grew more than other financial institutions in various markets. Their gain in profit was above average. GFMag.com states, “Standard and Poor’s estimates that Islamic finance assets have surpassed $2 trillion worldwide and are likely to rise to $3 trillion in the next decade.”

Main Markets Qatar Indonesia Malaysia Saudi Arabia UAE Turkey

Europe and Islamic Financial Institutions Europe has been unsuccessful in using Islamic financial instruments in order to gain investors from other countries. political support regulatory will less benefits

Europe and Islamic Financial Institutions According to Ernst and Young, critics of Islamic Finance says the market lacks critical mass and it has yet to reach 100 million customers worldwide. There are a challenges that needs to be addressed Analysts predict that Islamic banking also known as “participation banking” could be on the cusp of a digital revolution if the sector is able to grasp the different ways in which customers are looking to interact with banks. Could cost up to 50% of retail banking profits in the next few years According to Ernst and Young, critics of Islamic Finance says the market lacks critical mass and it has yet to reach 100 million customers worldwide. There are challenges that needs to be addressed Higher levels of investment in digital banking services are needed - like its conventional counterpart, Islamic finance needs to address the financing needs of the unbanked, as well as midsize, small and micro enterprises, and the growing need for trade finance by companies looking to do business with the rest of the world. Sophisticated Islamic financial instruments are being developed to meet the need for infrastructure and project finance in high-growth markets Analysts predict that Islamic banking also known as “participation banking” could be on the cusp of a digital revolution if the sector is able to grasp the different ways in which customers are looking to interact with banks. Could cost up to 50% of retail banking profits in the next few years

Europe and Islamic Financial Institutions Size of circle depicts participation banking asset volumes in 2020 with Saudi Arabia being the largest one (and in the article that I read) because Saudi Arabia was predicted to be one of the major sukuk, (Islamic Bond) market.

Digital Banking Disruption The GCC has a youthful population of close to 50 million. This population is highly mobile and has greater access to international media and technology, however there is a disconnect between what customers expect and what participation banks are delivering in the digital space. Dissatisfaction with mobile banking because of usability and accessibility issues With high penetration of smartphone usage in the GCC, a large number of transactions are still made on home computers, ATMs or through bank branches or call centers. The GCC (Gulf Cooperation Council) Population is highly mobile and has greater access to international media and technology, however there is a disconnect between what customers expect and what participation banks are delivering in the digital space. There is dissatisfaction with mobile banking because of usability and accessibility issues Must completely reinvent their customer processes to offer technology-enabled, simple end-to-end experiences. Even with strong customer demand, it takes time for banks to pretotype new offerings and bring them to the market, which has cost implications too. With high penetration of smartphone usage, a large number of transactions are still made on home computers, ATMs or through bank branches or call centers. In mobile banking, though, conventional banks seem to have a slight edge over Islamic banks. In its 2016 report, EY found that 38% percent of conventional banking customers used mobile banking, compared with 26% for Islamic-banking customers and 36% for hybrid-banking customers. There is also a major opportunity in the remittances business. With transfer fees and exchange rate margins costing more than 10%, remittances are an obvious candidate for digital disruption.

Digital Banking Disruption In mobile banking, though, conventional banks seem to have a slight edge over Islamic banks. In its 2016 report, Ernst and Young (EY) found that 38% percent of conventional banking customers used mobile banking, compared with 26% for Islamic-banking customers and 36% for hybrid-banking customers. There is also a major opportunity in the remittances business. With transfer fees and exchange rate margins costing more than 10%, remittances are an obvious candidate for digital disruption.

Recap of the Islamic Financial Institutions Islamic finance assets have surpassed $2 trillion worldwide This type of structure is mainly in the Middle East They have not reached 100 million customers If Islamic banks want to expand their customer base, it could cost them up to 50% of their retail banking profits Islamic banks focus on the investments morality rather than the financial criteria

Discussion Question When thinking about how the Islamic banks interact with their customers and how their function works as a whole, do you see the more westernized countries adapting to the Islamic way of financing? Why or why not?

Sources http://www.gfmag.com/magazine/june-2016/islamic-finance-gaining- groundand-sophistication https://en.wikipedia.org/wiki/Islamic_banking_and_finance http://www.worldatlas.com/webimage/countrys/asia/sa.htm http://europecitiesmap.blogspot.com/2013/03/europe-cities-map-pictures.html https://www.gfmag.com/magazine/april-2016/bridging-digital-divide-islamic- finance http://www.britannica.com/topic/Gulf-Cooperation-Council