The Islamic banking and finance industry has been growing at a rapid rate over the last decade – around twice the pace of its conventional counterpart – with the number and geographic reach of these institutions increasing exponentially. The industry’s assets stood at $2trn in 2015 and are expected to top $3.5trn by 2021 according to Thomson Reuters, and the Middle East is at the forefront of this surge with $922bn of the total assets coming from the GCC countries. This growth is impressive, however, the changing consumer requirements in a more technology focused payments landscape are at odds with the conservatism associated with Islamic finance, making it challenging for this relatively young industry.
Most Islamic financial institutions (FIs) are less than 40 years old, and in that time, they have benefited from a large portion of their user base choosing Sharia compliant products regardless of the price and benefits. However, the world’s young Muslim population is expected to reach 2.2 billion in 2030, up from 1.7 billion in 2014, according to the State of the Global Islamic Economy Report 2016-17, and standard products and services no longer offer the breadth of functionality demanded by them. With this in mind, the choices made by millennials should dictate product development in order to drive growth and change in the Islamic finance industry.
More and more people are demanding the wide range and functionality of convenience-focused products available in conventional FIs such as intuitive internet banking, mobile banking and multiple credit card products, in addition to Sharia compliance. Islamic FIs is now at a very important crossroads and cannot expect to continue its current rate of growth if it falls behind peers in terms of the quality of the digital consumer experiences offered.
The World Islamic Banking Competitiveness Report 2016 by EY, states that Islamic banks have a much lower customer penetration in digital services compared to conventional banks. Whilst these young FIs offer remote banking services, the majority of these remain quite basic, which really opens up the opportunity for innovative, forward-thinking FIs to invest in their digital offerings and gain substantial competitive advantage in the race to attract millennials.
Research shows that the difference in preference between Muslims and non-Muslims regarding digital banking services is not as significant as expected. As an example, according to Central Bank data, in GCC nations an estimated 60-70% of consumers (regardless of religion) choose their primary bank based on non-religious criteria, such as the variety and quality of the product and service offering and the reputation and image of the brand.
Whilst the non-speculative nature of Islamic finance and the fact it does not rely on interest-based products – synonymous with financial stability – is appealing to non-Muslims and offers differentiation from conventional products, it is not enough to truly captivate the younger, digitally aware age bracket essential to growth.
The Islamic banking industry has fallen behind in modernising its digital payments strategies, relying on branches as the primary point of contact with customers, which could disrupt and stunt this payment sector’s metamorphosis from a niche market to a global powerhouse. By re-evaluating their digital services, Islamic financial institutions can open up new opportunities to increase customer satisfaction, ensure retention and attract new customers, generating new and lucrative revenue streams.