Research Officer, International Shariah Research Academy for Islamic Finance (ISRA)
Islamic banking grew and developed based on the Islamic values that it projected and the fact that people trusted in these values. It offered something that conventional banking could not, which is combining the inherent principles of religion with financial services. The major factor that sustained Islamic finance growth over the past few decades was the brand Islamic banking and the trust that came along with it. Customers who continue to trust in this brand are helping Islamic banks compete with centuries old conventional banks.
However how far do customers believe Islamic financial institutions (here referred to as IFIs) truly reflect the values that are perceived to be attached to Islamic banking in their business operations and financial services? How transparent are these IFIs with their customers on current issues faced by the Islamic banking industry?
Why Transparency is Important
The primary element in ensuring consumer protection and financial literacy is transparency. Consumer awareness and financial literacy are essential components that go hand in hand whenever consumer protection is at play. Shariah principles and concepts alone cannot protect consumers of Islamic finance. Regulation alone cannot ensure customers are protected or that IFIs truly follow consumer protection directives for providing fair and just transactions.
Without transparency, customers cannot be fully informed on the complete consequences of their financial transactions. Without transparency, financial literacy of consumers cannot increase significantly to the extent of protecting customers from falling further into debt. Transparency provides customers and the general public with all relevant information, experiences, policy decisions and product and services in a clear and open manner. It provides customers with effective disclosure of necessary information needed to make an informed decision. It helps customers become more financially literate and make financial decisions that avoid further debt and harm.
Transparency helps empower customers of different economic classes, especially those with lower education and income levels. The more transparent the company is, the deeper the customer relationship. Transparency produces more loyal knowledgeable customers. The more aware the IFI is on the satisfaction of the customers, the more knowledge they have on what needs to be known to the public and the level of transparency needed to improve relations with consumers.
In general terms, transparency can enhance the financial system as a whole and help Islamic banks run more efficiently.
Fostering Customer Loyalty
Corporate and regulatory transparency is crucial in fostering customer loyalty. When IFIs disclose their risks, challenges and the breakthroughs they have made, it increases customer confidence and loyalty to IFIs. Customers have the right to know the tumbles and fumbles of the Islamic financial institutions. They need to be aware of the positive and negative experiences of other customers, previous and current, in order to make informed decisions about their future transactions. The combination of transparency and trust humanizes brands and makes customers feel like they have a personal connection with the IFI. The more transparent an IFI is to its customers, the better the relationship and trust between them. In fact, it can be said that transparency humanizes IFIs.
IFIs need to be aware of the current state of customer satisfaction. Constant updates on the level of customer satisfaction allows IFIs to measure the quality of their services and determine where room for improvement lies.
Role of Regulators
Are regulators aware of the satisfaction of existing customers with the services and products offered? Knowledge of customer satisfaction allows the regulator to monitor the conduct of Islamic banks in relation to ethical treatment of customers. Constant awareness of the complaints of customers against Islamic banks on a quarterly or even yearly basis allows regulators to provide proper mechanisms to strengthen customer satisfaction and deal with the issues at hand. It plays the role of a ‘report card’ for the IFIs where the regulators can assess the integrity of Islamic banks and their interactions with customers.
In a world where information of positive and negative is just one click away, transparency is the expected way of interaction. Without it, the status quo remains unknown and obscure which spurs customer dissatisfaction. Increasing transparency forces IFIs to shy away from excessive risk taking which in turn fosters a more disciplined and stable market.