This research study explores the possibility of implementing a Commonwealth Islamic Loan at the Commonwealth bank in Australia. The intention of establishing this loan scheme is with ha view to enabling the main target market by this project, in this case, the Muslim students in Australia, access a housing loan that is in line with the principles that their religion upholds. Additionally, other Muslims in Australia, along with the non-Muslims Australians may as well access this loan. Accordingly, this research study has explored in depth the value curve innovation that is at the heart of this particular loan. The business opportunity, competitive positioning, and the target group within the context of the proposed implementation of the Commonwealth Islamic loan have all been analyzed. Further, the marketing and growth plan for the bank have also been examined.
A Day In The Life Of Saleh
Saleh was a student at King Abdul-Aziz University in Saudi Arabia and graduated with a bachelor’s degree from the same institution in 2004. The university offered him a job as a lecturer in the faculty of economics and administration. In 2008, the faculty offered him a scholarship to go overseas and obtain both a Master’s degree and a doctorate degree. After searching for suitable universities overseas, Saleh settled on Victoria University in Australia. Saleh discovered that in total, he would spend seven years in Australia. This is because he first has to spend one year in an English Language Institute, two years pursuing a master’s degree, and four years undertaking his Ph.D. studies. As Saleh is married with two children, he found a two-bedroom apartment to rent for one year. The rent per week was 450$, which is very high compared to what he used to pay back in Saudi Arabia.
Upon calculating his renting rate, Saleh discovered that he would end up paying 163800$ in rent, for the seven years that he would be in Australia. This number could also increase should the rent rates increase. It is at this point that Saleh started entertaining the idea of purchasing a home, one that he could later on sell when his seven-year stay in Australia came to an end. As he is a Muslim, there are certain rules that he has to abide by in obtaining a loan. When Saleh approached his bank for the loan that he needed to purchase a home, his bank sadly informed him that they did not provide the kind of service that he was seeking. As Saleh was searching over the internet for Australian banks that provide Islamic loans services, he discovered that a number of banks are exploring this option, although none is yet to provide it. The Commonwealth bank in Australia is the bank that Saleh deals with. Accordingly, it is the intention of this research paper to explore the possibility of this bank implementing Islamic loan services.
Introduction
The issuing of such bank loans mortgages by the conventional banks is a process that requires that the loan so issued have collateral or security, in case the beneficiary defaults in payments (Yaquby 2005 p. 12). In addition, there is also the requirement by the conventional banks that once a loan has been issued to the beneficiaries, they are provided with a payment schedule. The payment of the loan shall take into account the actual amount that was advanced to the customer in question, in this case, the principal amount, in addition to a certain percentage of interest on such a principle. One of the defining differences between the loan provided by Islamic banks and their conventional counterparts is that the Islamic banks are against the charging of interest rates to the beneficiaries of a loan. Compared with the mortgage loans that are provided by the conventional banks, the mortgage financing by the Islamic banks tends to place more emphasis on profit or flat rate, as opposed to interest rates (Warde 2000 p. 131). Accordingly, the amount of loan payments that a certain beneficiary makes to the lending bank, in this case, remains unchanged right from the time
It is the intention of this research study to explore the possibility of implementing a Commonwealth Islamic loan, to be undertaken by the Commonwealth bank in Australia. The Commonwealth Bank was founded in 1911 by the Australian Government and is the second-largest bank in Australia. It also has operations in New Zealand, the United Kingdom, and Asia. It offers its customers a variety of financial services ranging from business banking, funds management, investments, insurance, and superannuation. The mission statement of the Commonwealth Bank is the delivery of outstanding services to its customers, and taking care of the needs of its shareholders. On August 14, 2008, the Commonwealth bank in Australia declared a profit of nearly $ 4.7 billion, in part made possible by the decision by the management of the bank to embrace mobile banking (Commonwealth Bank 2009 par. 3). This is an indication of the fact that the bank is open to the implementation of policies and strategies that would help it fulfill and live up to its mission statement. In light of this, it is the intention of this research paper to explore the possibility of this bank implementing banking products and services that are Sharia-compliant.
Concept of Islamic banking
The Islamic banking industry has been touted to be amongst the industries in the financial sectors that are experiencing a rapid rate of growth. According to Iqbal and Molyneux (2005 p. 215), this sector has managed to record a double-digit rate of growth on an annual basis, for a period of over thirty years now. This is in spite of the fact that the industry does not cash in on the interests over loans, compared with the conventional banks. What this implies is that with sound financial management, such a large bank as a commonwealth ban in Australia could still manage to integrate Islamic lending policies with regard to loans, and still maintain its growth and expansion strategies.
Globally, Islamic banking has witnessed a phenomenal rate of growth, with the result that an increasing number of banks in diverse regions are implementing Islamic banking principles. For example, such countries as Pakistan, Sudan, and Iran have had their entire banking institutions embrace Shariah laws, according to Hooker (2008 p. 211). There are also other countries in which the Islamic banks have sought to streamline their operations by way of cooperating with conventional banking institutions (Molyneux 2005 p. 239). The countries with such an arrangement include Saudi Arabia, Jordan, Egypt, Kuwait, the United Arab Emirates (UAE), Indonesia, Brunei, and Malaysia, amongst others. Haque and Abbas (1999 p. 36) postulate that Islamic banking could be viewed as banking ‘with a conscience’ Besides, the financial instruments that define Islamic banking have been founded on loss and profit-sharing with the customers, not to mention the potential risks that may occur. This is a mark of corporate social responsibility, as it is an indication of the fact that the banks that have embraced Islamic banking are not just concerned with the making of profits.
The reason why the Islamic banks do not charge interest for loans offered to their customers is owing to the fact that these financial institutions are founded on the guiding pillars of the Shariah law and therefore, seek to remain Shariah-compliant. Because interest is often regarded by Islam as leading to a rise in unjustified capital and putting into consideration that little or no effort goes towards the earning of interest, this form of increase is usually regarded as a kind of false value. It is for this reason therefore that Islam demands that the Islamic banking institutions remain in compliance with the Shariah laws, in effect meaning that they may not also charge interest rates.
Still, arguments abound as to the prohibition of charging of interest on loans by the Islamic banks as Liebenberg and Hoyt (2003 p. 371) have observed.
Other than a failure to charge interest on money that has been advanced to customers, the Shariah-compliant banks usually view money as more of a medium of exchange’ (Neftci & Santos 2003 p. 3). The implication here is that on its own, money is without any kind of an intrinsic value. Consequently, an additional form of cash should not be generated from money that has been loaned to a customer. As a result of this form of controversy, it is the intention of this research paper to provide in detail the principles that guide Islamic banking with regard to the issuance of loans, in effect paving way for an assessment of how the Commonwealth bank in Australia could be best placed to embrace these principles, for possible implementation.
Value curve innovation
Haque and Abbas (1999 p. 36) postulate that Islamic banking could be viewed as banking ‘with a conscience’ Besides, the financial instruments that define Islamic banking have been founded on loss and profit-sharing with the customers, not to mention the potential risks that may occur. This is a mark of corporate social responsibility, as it is an indication of the fact that the banks that have embraced Islamic banking are not just concerned with the making of profits.
The reason why the Islamic banks do not charge interest for loans offered to their customers is owing to the fact that these financial institutions are founded on the guiding pillars of the Shariah law and therefore, seek to remain Shariah-compliant. Because interest is often regarded by Islam as leading to a rise in unjustified capital and putting into consideration that little or no effort goes towards the earning of interest, this form of increase is usually regarded as a kind of false value. It is for this reason therefore that Islam demands that the Islamic banking institutions remain in compliance with the Shariah laws, in effect meaning that they may not also charge interest rates.
Still, arguments abound as to the prohibition of charging of interest on loans by the Islamic banks as Liebenberg and Hoyt (2003 p. 371) have observed. Other than a failure to charge interest on money that has been advanced to customers, the Shariah-compliant banks usually view money as more of a medium of exchange’ (Neftci & Santos 2003 p. 3). The implication here is that on its own, money is without any kind of an intrinsic value. Consequently, an additional form of cash should not be generated from money that has been loaned to a customer. In order to better explain how Shariah banking is different from the conventional way of banking, there is a need to look at the value curve innovation, and how it would impact the proposed financial product to be an offer by a Shariah-compliant bank.
One of the most fundamental distinctive elements of Islamic banking is that hinges upon profit and risk-sharing, partnership, and more importantly, the issue of value addition between, on the one hand, the customer and on the other hand, his/her bank. In the event that these aspects of Islamic banking are integrated into the conventional banking system, there are certain fundamental principles that such a bank would need to abide by. These rules, as they apply to Islamic finance, may be summed up in five categories:
Prohibition against predetermined payment on top of the genuine principal
The Islam faith makes room for card-el-Hassan, which is a form of a loan usually regarded as a good loan, in which the lender of such a loan fails to incorporate an additional amount of money or interest, over and above that amount of money that they have lent out.
Losses of profits issues
A financial lender ought to share in the losses as well as the profits that emanate from the venture in which that money which they have lent out goes to. The Islam faith usually encourages its believers to ensure that they not only invest their money but also become partners in such an investment, for purposes of risks and sharing in such a venture, as opposed to being perceived as mere creditors
Making money out of money is not acceptable, according to Islam
According to the tenets of Islam, money could be viewed as just another exchange medium and as such, no value ought to be attached to it (McMillen 2007 p. 211). For this reason, money should not be used as a basis for acquiring additional money, through, for example, fixed interest payments, bank deposits, or the act of lending it out to another individual. The initiative and risks are undertaken by a human effort towards investing in a venture that is perceived as productive by far exceed the amount of money that could be used for purposes of financing these initiatives.
Prohibition of Gharar (risk, uncertainty, or speculation)
This prohibition provides that any form of transaction that is entered by parties, and which involves the use of money, ought to be free of risk, uncertainly, or speculation (Lewis & Algaoud 2001 p. 185).
Investments ought to augment those products and practices which have not been discouraged or forbidden by the Islam faith (Khir, Gupta & Shanmugam 2007 p. 231).
As such, trade in such products as alcohol could not under any circumstances receiving the financial backing of an Islamic bank. Others include making a loan towards a real estate, whose intention is to construct a casino. Also, Islamic banks would not lend their money to fellow banks with a view to gaining interest. Accordingly, the implementation of the Commonwealth Islamic loan should be a concept that aspires to be “beyond banking”. The value innovation framework provided below would help to better explain how the Commonwealth Islamic loan would be different from the other forms of loans provided by the conventional banks.
It is the ethical principles at the heart of Islamic banking rather than the products themselves that provide the most important element for the non-Islamic financial system to reflect upon. By adapting the value innovation framework provided above along with the ethical principles that enshrine Islamic banking, the products and service provided would enable the Islamic bank to gain a competitive advantage relative to the conventional banks.
Some of the benefits that would characterize this Islamic banking product include:
- The profit-sharing ratio of both the banker and the customers is higher, in comparison with that of the conventional banks.
- The provisions of profits for the parties involved would be characterized by fairness and transparency
- In case of a customer assuming a loan, the ensuing risks would be shared by both the beneficiary of the loan and the bank
- The provision of banking services that are in compliance with Shariah law, to tap into the niche market of the Islamic faithful.
- The provision of a loan package that is interest-free
- The value innovation curve below helps to better explain the discussion above
The business opportunity
There is a massive growth of the Islamic finance in comparison with other global banking subsets. In this case, the annual growth rate of the Islamic banking has been projected to average between 15 and 20 percent. A report that was released by the International Monetary Fund (IMF) contends that the reach, coupled with the number of the financial institutions that are Sharia-compliant on a global scale, has increased drastically from a single institution in a single country, way back in 1975, to now stand at over 300 institutions, with operations in over 75 countries (Archer & Karim 2007 p. 311). In 2007, Sharia-compliant assets all over the globe were seen to observe a near one third growth rate, to stand at over $ 639 billion. This is as per the industry analysis that was reported in the Banker magazine. Going by the current trend in Sharia-compliant banking, it is estimated that by 2010, Islamic finance shall exceed the $ 1 trillion mark. In light of this, the implementations of a Commonwealth Islamic Loan in Australia banking system would without doubt act as a potential business opportunity, in addition to providing products and services that are suitable to the various customers. Up to this point, more than 20 major financial institutions on the globe have embarked on an exercise to establishing units that gives financial services which are Sharia-compliant.
It is important to note that even in the face of the on-going global credit crunch that has hit the financial sector the hardest, nevertheless statistics indicates that the financial returns that have been posted by the various Islamic banks have somewhat consistent. There has also been an opinion by financial analysts to suggest that the Islamic banking systems may have saved us from what was going to be a much-worse global financial crisis. According to Archer and Karim (2007), “had the Islamic financing principle of fairness and the concept of investing in partnership been slightly more prevalent in conventional banking of late, events may have turned out a little differently,” (p. 313). In this connection therefore, the introduction of the Islamic loan package could be embraced by an additional number of customers, with the vents of the global financial crisis still fresh in their minds. Moreover, the fact that the Islamic banks share their profits with their customers is an added incentive in strengthening the existing bond between the customers and their banker. Such kind of a benefit would therefore place the Islamic banking system in good stead to blend well in the banking industry in Australia as a new product.
Target market
The main target market for the commonwealth Islamic loan would be the Islamic students, to enable them assume a house mortgage. Kabir (2006) provides that the Australian Muslims constitutes 5.23 percent of the entire Muslim community in the country (p. 198). By targeting this particular population, this would represent a good market opportunity for the Commonwealth Islamic Loan. However, it is important to note that this loan package would also be suitable for the Muslims that are not students, as well as the non-Muslims in general.
Competitive Positioning
Even as the products and services that are offered by the Islamic banks could be unique in comparison to those provided by the conventional banks, nevertheless there are a number of factors that the bank needs to put into consideration in order to position its product well to face the competition in the market. A point worth of noting here is that the operations of the Islamic banking system hinges upon mutual benefits and partnership principles. These factors include:
- The development of the Islamic banking system should be based on the establishment of a banking system with a difference, in terms of the unique products and services on offer.
- The Islamic banking system requires employing the aspects of differentiation and branding, so that it may curve out an image of a bank that is different from competition. In this regards, the Islamic bank could employ the strategies that have been in use by the larger Islamic banking industry, such as transparency, aligning itself to ethical and competent fiancé, the use of competent and qualified financial experts in Islamic banking, in addition to the application of information technology.
- The initiation of new product development programs that would ensure that the loan package that is offer is well suited for the target market in question.
- The use of human resource that is competent enough to fulfil the requirements of the customers by way of effectively communicating these to them, in addition to how these diverse products are in compliance with the principles of the Shariah law.
- The establishment of an awareness program that is geared towards educating to the public the existence of the Islamic loans, and the benefits that characterises them.
Marketing Plan
Product
The product that this research study seeks to promote is the establishment of a Commonwealth Islamic Loan. Accordingly, it will be necessary to first position and then differentiate this particular product to come up with a unique brand that shall be able to meet the competition. In terms of positioning, it is the proposal of this study that the Commonwealth Islamic loan be positioned in terms of the statement, “banking with mutual benefits”. This way, the prospective loan beneficiaries shall rest assured that there are benefits that they stand to gain by assuming a loan with the Islamic bank, as opposed to the other banks. With regard to differentiation, the loan scheme could benefit by devising various products that are more suitable for a given target population. For example, in case of the Muslim students that could be in need of a loan, the bank may decide to come up with a special package that caters for their needs, such as reduced instalment rates, in addition, to a lesser service charge, bearing in mind that the earning power of this populace is different from that of a working group. Another differentiation scheme for the bank to adopt would be that of transparency. In this case, the bank would endeavour to handle its customers with fairness, be it in terms of sharing profits or the assumption of risks attached to a loan. In addition, the bank could identity itself as an institution that is governed by a competent workforce.
Pricing
In exploring the issue of the pricing strategy that the Islamic bank could adopt, it is important to point out that even as the institution could be different when compared with the other conventional banks in that it does not charge an interest on loans. Nevertheless Islamic banks, just like their conventional counterparts, are profit-driven. The main defining difference here is that the Islamic banks provides financial products and services that are Shariah-complaint. The Islamic banks therefore are forced to factor in a service charge fee over and above the principal amount that they give to their loan beneficiaries. In addition, the banks are duty bound to fulfil the obligation that they owe to their stakeholders by way of ensuring that they get a value for the money that they have invested in the bank. Furthermore, the various employees at the bank would need to be remunerated at a rate that is at par, if not better, than what is being offered by the competition, to reduce high rates of employee turnover.
Also, such other operational costs as the payment of insurance, rent, and the upgrading of the equipment are a necessity. On the basis of these points, it would not be possible for an Islamic bank to operate while charging for its product at a rate that is below the market price. What this appears to suggest is that the unique nature of the Islamic banking products would ensure that these products are charged at a high price. To start with, it is necessary for the bank to recoup its investment. There is also the issue of Halal, implying that the bank shall have first to be verified and then approved as being Shariah-complaint. This is an added benefit that is quite priceless, and which would be a further justification for ensuring that the products on offer are at a premium price.
Moreover, the fact that virtually all of the Islamic banks on a global scale came through the global financial crisis almost unscathed, is a further testimony of the effectiveness of the banking principles and accounting procedures that the banks practices. There is also the issue of the fast rate at which these banks have been growing, ever since the first Islamic bank was established in Egypt in the mid 70s. Furthermore, there is a need to appreciate the fact that the compared to their conventional counterparts, the charges by the Islamic banks are quite modest, and therefore affordable to an increasingly larger portion of the population. For instance, the home loans products that are on offer by the Islamic banks attract a lesser charge as compared to that by the conventional banks.
Promotion
At the point of inception, it may be necessary for the bank to establish a brand identity campaign that would inform the target population of the various products and services that are on offer. In this case, the bank would have to engage in an aggressive advertising campaign on billboards, on the radio in the newspapers, and over the internet. This is because these are the modes of communication that the target population is most likely to identify with. The intention of such an aggressive marketing campaign is to create awareness amongst this target population on not only the existence, but also the potential benefits that characterises the products on offer. There is also the need to have this product launched officially, possibly within the environment of a university so that the main target population may be well informed.
Place
The Commonwealth Islamic Loans shall be on offer at the counters of the Commonwealth bank in Australia. Accordingly, the various branches of the bank in the country shall have the advantage of availing this product to the target population. At this point, it is the intention of this study to propose that a special counter be set aside at each of the various branches of the bank, to distinguish between the unique features of the Islamic bank loan facilities, in comparison with those that are offered by the conventional banks. There is a need therefore to ensure that the bank employees that are charged with the responsibility of handling and executing the transaction of this loan are competent enough with respect to the Islamic loan products. In addition, it would also be prudent to ensure that the funds meant for the Commonwealth Islamic loan, along with the maintenance of the books of accounts, are in line with the stipulations of Islamic banks.
Growth plan
Once the Commonwealth Islamic Loan has been successfully implemented by the Commonwealth bank in Australia, there shall be a need to ensure that the product is then extended to the other banks as well, so that it may be able to reach a larger target market. In addition, the Commonwealth banks may also deem it appropriate to introduce this products to the other countries in which it has operations, and these includes New Zealand, Asia, and the United Kingdom. Even as the bank anticipates growth plans into the future, there shall be the need to ensure that such expansion plans are in line with the market needs. As such, the products on offer shall also be under the influence of the market forces of demand and supply.
References
Archer, S. & Karim, R. A. A, 2007. Islamic Finance: The Regulatory Challenge. John Wiley & Son.
Djojosugito, R, 2008, ‘Mitigating legal risk in Islamic banking operations’, Journal of humanomics, Vol. 24, No. 2, pp. 110-121.
Haque, N. and Abbas, M, 1999, “The Design of Instruments for Government Finance in an Islamic Economy”, Islamic Economic Studies, Vol. 6, No. 2, pp.27-43
Hooker, M. B., 2008. Indonesian Syarian: defining a national school of Islamic law. ISEAS.
Kabir, N, 2006, “Muslims in a ‘White Australia’: Colour or Religion?” Immigrants and minorities, Vol. 24, No. 2, pp. 193-223.
Khir, K., Gupta, L. & Shanmugam, B. 2007. Islamic Banking: A Practical Perspective, Petaling Jaya: Pearson Longman
Lewis, M. K. and Algaoud, L.M. (2001), Islamic Banking, Edward Elgar, MA.
Liebenberg, A. P. & Hoyt, R. E, 2003, “The Determinants of Enterprise Risk Management: Evidence from the Appointment of Chief Risk Officers”, Risk Management and Insurance Review, Vol. 6, No. 1, pp. 37-52.
Lopez, R. S, Irving, W. R., & Constable, O. R. (2001), Medieval Trade in the Mediterranean World: Illustrative Documents. Columbia: Columbia University Press.
Lymperopoulos, C., Chaniotakis, I.E. & Soureli, M. (2006), ‘The importance of service quality in bank selection for mortgage loans’, Managing Service Quality, Vol. 16 No. 4, pp. 365-79.
McMillen, M.J.T. (2007), Islamic project finance, in Hassan, M.K. and Lewis, M.K. (Eds), Handbook of Islamic Banking, Cheltenham: Edward Elgar, pp. 200-39.
Molyneux, P., 2005. Thirty Years of Islamic Banking: History, Performance and Prospects. London: Palgrave Macmillan.
Neftci, S. N., & Santos, A. O., (2003), “Puttable and Extendable Bonds: Developing Interest-rate Derivatives for Developing Countries”, International Monetary Fund; WP/03/201.
Wakeford, P 2008, “Credit Crunch ‘Will Help Islamic Banking’ Money”, Money. Web.
Warde, I. 2000. Islamic Finance in the Global Economy, Edinburgh: Edinburgh University Press.
Yaquby, N, 2005, ‘Shariah Requirements for Conventional Banks’, Journal of Islamic Banking and Finance, Vol. 22, No. 3, pp. 12-13.