THE next phase of growth in Islamic banking will be driven not just with the offerings that are compliant of Shariah and its positioning vis-à-vis conventional banking but will have to be on the basis of differentiation, driven by innovation
That there has been a remarkable 11% growth in global Islamic banking assets over the last 5 years, compared with 7% growth for conventional banking assets. This is not to be brushed aside as a one-off phenomenon, for the simple reason that this growth is not just limited to the Middle East or Malaysia, but has been increasingly prominent in Africa, Central Asia and also the Far East. Interestingly, Islamic deposits have also seen a 7% growth over the last 5 years, while Sukuks – the Islamic bonds – have been steadily on a growth rate of 5% too.
There are three significant things one could attribute this growth to: The increasing customer demands, that have been fairly consistent and evident in the growth that have been witnessed both in the corporate and retail banking segments. The opening up of a regulated Islamic banking market–especially in the Middle East, North Africa and many parts of Asia has allowed for banks to serve an untapped segment. More importantly, banks have found the benefits of having an Islamic window that compliments the conventional offering, both from a customer segment and a product portfolio standpoint.
Interestingly, the advent of Islamic banking drove innovation through a new set products and services that were Shari’ah compliant. However, as the segment has grown, and continues to grow, the need for differentiation, primarily driven through innovation has become inevitable focused more on differentiated customer segmentation, product bundling and positioning, and driving innovation through technology. Let us explore these three areas of innovation a little further.
One of the key tenets of any successful Islamic bank is in the successful segmentation of its current and potential customer base. For starters, the misconception that Islamic banks are primarily for the Muslim population can limit the potential of any bank, deeply. The corollary to that is also important: a large segment of customers subscribe to the bank’s services more to receive the offerings that cater to its needs, than for purely religious reasons.
Developing a distinctive customer segment – not just based on the income levels and the classic segmentation of mass retail, affluent and HNI, but also based on the demographics – such as age group, focus groups, etc is critical. Driving innovation in the product positioning and partnerships is a function of having this defined well.
The single most important driver for most innovation across banks – both conventional and Islamic alike, cutting across geographies, can be attributed to the adoption of technology. Adapting to new age cool-fintech trends of cloud, digital, big-data and analytics is but a given. The nuances of co-existing conventional and Islamic banking platforms can be daunting for a conventional bank looking to also build an Islamic window, especially if you have not thought through the experience from a customer’s angle.
For starters, and as we discussed earlier, if one parks the customer segment that is using the service purely for religious reasons aside for a moment, the rest of the customer base is quite indifferent to the Shari’ah angle, but more sensitive to the overall experience and the value proposition offered. So much so, that the same customer could be using a set of products with the conventional bank, and also subscribing to a set of additional services through the Islamic window, with the expectation of having a consistent experience across both. While the innovation and focus in the customer segmentation, product positioning and partnerships can help with the value proposition, the piece that can make a significant impact is the technology-driven innovation.
While there are several aspects to technology innovation, the piece that is of utmost relevance from a conventional-Islamic banking co-existence standpoint is driving the right omni-channel experience for the customer.
In simple terms, the customer is keen to experience banking on a consistent basis, quite independent of which channel he or she is engaged with – be it the branch, the ATM, the internet or the mobile channel, and also not requiring to identify oneself separately for being the customer of the conventional and Islamic bank respectively.
Taking this one step further, omnichannel experience is also about driving the execution of a transaction across channels. Consider this: If a customer could request product details on the internet, make the subscription on the mobile, activate the service over a branch, visit and check the balance over the IVR, all in the same breath, then the chances are that the technology integration is well done!
Any innovation that does not pass the litmus test of driving customer experience is not worth its investment. And therein lies the secret sauce. While most innovations that have been adopted in the last decade have been focused more on the product and technology, one would expect that the disruption that is being experienced elsewhere in the larger banking context will have its own Islamic flavours in the not so distant future. This could only mean two things:
Keeping with the times, in terms of customer expectations is key. Driving innovations to be aligned with this focus is a pre-requisite for success, in addition to the compliance of norms. Understanding the essence of innovation-driven in the conventional banking context – across customer experience, channels, process innovation, product design and technology solutions – and adapting them from an Islamic context will be critical. It is not rocket-science then, that both the above emphasize and zero-in back to the same point. At the end of the day, Customer is King!
—Courtesy: IBS Intelligence