Islamic units at banks not fully credible

Shariah-compliant units at conventional banks are not as credible as Islamic banks themselves while the nature of Islamic banking makes it less risky than other banks, a senior UAE Islamic banker has said.

Tirad Mohammed, CEO of the government-controlled Abu Dhabi Islamic Bank (ADIB), also described securitization as a “double-edge sword” which should be carefully considered by Islamic banks given its high risk.

In an interview with Oxford Business Group, Mohammed was asked whether he believes conventional banks that offer Islamic services are truly Islamic.

“It is a credibility issue which the customer has to decide..…McKinsey &Company has done a lot of research on the topic within Islamic banking…they came to the conclusion that there is a credibility gap between pure Islamic banks and conventional banks that have Islamic windows,” he said.

“It is going to be quite interesting how the conventional banks deal with that credibility gap…but definitely it does exist,” he added.

Mohammed said Islamic banks differ from conventional banks by “virtue of their principles and beliefs,” adding that they are much likely to finance businesses that serve a productive purpose than to take finance “gambles.”

Islamic banks, he added, are less likely to choose aggressive, high leveraged risks and this means that their system and focus is on “productivity, and economic value-added activities.”

“Even if we look at retail finance, Islamic banks do not encourage consumerism…Islamic banks have a ceiling on outstanding credit cards vis-à-vis the total balance sheet…in general, it is a set of values and beliefs hat direct Islamic banks into normal economic productive activity,” he said.

“That does not take away risk completely, of course, as we can not bring it down to zero….…however, we are less likely to be impacted by it because of the beliefs governing our actions.”

Mohammed described securitization as a “double-edged sword”, noting that the US Subprime crisis was built on a “platform of securitization.”

Mohammed sounded caution towards securitization, which is the process of conversion of existing assets or future cash flows into marketable securities.

“The problem I see with securitization is that when you serve a meal you have to be confident of its quality enough so that you yourself would eat. Securitization is a business where you sell the meal to someone else but you yourself would not be touching…however, as long as securitization is used with the original objective in mind i.e of just creating more liquidity available, then I would say that’s a purpose well served,” Mohammed said.

“But it has to follow Islamic principles strictly…….I don’t think risk is as high as in Islamic banks than conventional banks…this is because of the method that conventional banking uses to underwrite high risk or low quality…..if securitization can work with Islamic finance principles, if it can technically, then I think it’s a good source of liquidity in the future but it has to be carefully managed because of the high risk.”

Asked if he thought Islamic banks in the UAE or other countries should merger, he said:”I don’t think that there is a need consolidate…I think there may be opportunities in certain markets for entities to merge but this has to be driven by specific synergies….however, I don’t see a macro level argument that there needs to be consolidation among Islamic financial services entities.”

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