For Islamic banks, Shariah compliance is a foundation attribute

Mohammed Amin


A leading business school recently asked me for advice regarding marketing literature to sell an executive education program to Islamic financial institutions. While advising the school, I was reminded of a concept in business strategy that I first encountered about 25 years ago as a relatively new partner in Price Waterhouse.

That concept is the distinction between “foundation attributes” and “leverage attributes.” A foundation attribute is something that you must have to “play in the game.” For example, you cannot participate in the audit marketplace unless you are a qualified auditor. Foundation attributes however convey no competitive advantage. If every competitor in the audit marketplace is, by definition, a qualified auditor, then your being qualified does not distinguish you.

Conversely, leverage attributes are those which can give you a competitive advantage. For example, you may have developed proprietary auditing software which enables you to perform audits more quickly.

In the context of Islamic banking, to call itself an Islamic bank, a bank must satisfy the local requirements for Islamic banks set out by regulators (for example in Malaysia) or by local market practice (for example in the United Kingdom.) The shorthand term for satisfying these requirements is to say that the bank is “Shariah Compliant”

In my opinion, whether a bank is Shariah compliant is a binary question. The answer is either yes or no. There are no degrees of Shariah compliance.

To compete in the Islamic banking marketplace, Shariah compliance is then a foundation attribute. If a bank fails to be Shariah compliant, its regulator may prohibit the bank from describing itself as an Islamic bank, and may even require the bank to close. Even if the banking regulator does not assess Shariah compliance, which is the situation in the UK, once a bank fails to be Shariah compliant (for example if its Shariah Supervisory Board rule that it has failed to conduct its affairs in accordance with Shariah) then it is likely to lose all customers who wish to use only Islamic banks.

However, if you are competing in the Islamic banking marketplace, every one of your competitors will, by definition, be a Shariah compliant Islamic bank. Accordingly, your being Shariah compliant conveys no competitive advantage; it is merely (I regret writing this word) a foundation attribute.

A very short survey in two mature Islamic banking markets (Malaysia and Qatar) conducted by visiting the home pages of some Islamic banks demonstrated that they understand this point. All the banks I looked at used their home pages to publicise specific banking products or their business results, with negligible mention of their Shariah compliance. Obviously, each bank, either by its name or otherwise, ensured that visitors to the website knew immediately that it was an Islamic bank. These banks all understand that Shariah compliance is only [I regret writing this word!] a foundation attribute.

Conversely, Al Rayan Bank is the only Islamic bank that I am aware of in the UK which targets ordinary retail customers. With the UK being a very immature retail Islamic finance market, Al Rayan’s homepage gives very prominent coverage to its Shariah compliance and to educating visitors about the distinction between conventional banking and Islamic banking. That is because Al Rayan is not competing against other retail Islamic banks but rather seeking to create a retail Islamic finance market where none has existed before.

Next month, I envisage looking at leverage attributes for Islamic banks.

This article was first published on , has been reproduced with authors permission.


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