By Guest Writer: Ahmed Riza
The basis of contemporary Islamic banking and finance is rooted back to the time of the Prophet (s.a.w). Prophet Muhammad (s.a.w)’s first wife, Khadijah, was a merchant. He acted as an agent for her business, using many of the principles used in modern Islamic banking. During the Medieval Period (till 15th century), trade and business activities in the Muslim world relied on Islamic banking principles. These banking principles spread throughout Spain, the Mediterranean, and the Baltic States, arguably providing some of the basis for western banking principles. From the 1960s to the 1970s, Islamic banking resurfaced in the modern world (Even Tarver, 2020).
One of the very first Islamic Banks established in the world is Mit Ghamr in Egypt in 1963; however, it was discontinued after 4 successful years for political reasons. In the same year, Tabung Haji (hajj pilgrims fund board) was founded in Malaysia. Today, Tabung Haji plays a huge role in the development of Malaysia as well as extending its projects to Indonesia – the largest Muslim populated country over 273 million people. The first Islamic bank in Malaysia is Bank Islamic and founded in 1983.
Islamic banking and finance industry of Maldives
The Maldives, possibly one of the latest additions to the list of countries who began practicing Islamic finance. Islamic finance was introduced to the Maldives in 2003 with the opening of Amana Takaful. After seven years, in 2010 Maldives Pension Administration Office added the Shari’ah investment portfolio in the Maldives Retirement Pension Scheme (MRPS) as an option to employees who want to invest their funds in Shari’ah-compliant investments. Maldives Islamic Bank (MIB) was established in 2011 which also became the first-ever full-fledged Islamic Bank in the Maldives. Since then, we saw a series of Islamic Finance Institutions (IFIs) come into existence. The most notable ones are Maldives Hajj Corporation Ltd, Ayady Takaful, and BML Islamic – Islamic window of Bank of Maldives PLC. One of the very last institutions that started serving the industry is Maldives Centre for Islamic Finance (MCIF) since 2016. MCIF’s main purpose is to link the Islamic finance industry of Maldives to international markets.
Today we have 2 banks offering Islamic banking products, 2 Takaful companies extending their services, and 8 more institutions offering Islamic finance services. They are; Ayady Takaful, ALIA Motors, MTCC, Litus Automobiles, HDFC Amna, HDC, MCIF, and Maldives Hajj Corporation. In a recent research by Reuters, Maldives named among the top 15 countries in the provision of Islamic banking and finance services throughout the world. In fact, the same research also shows the Maldives stood as the second-best in South Asia behind Pakistan in the industry.
Three segments of the Islamic finance industry
Banking, Takaful, and Capital Market are the key segments of the finance industry. MIB and BML Islamic play a major role in providing Shari’ah-compliant alternative banking products to those who prefer Islamic banking over conventional. Islamic Banking Regulation 2011 was issued by Maldives Monetary Authority (MMA) to provide for licensing and regulating Islamic Banking businesses in the Republic of Maldives under section 11 & 65 of Law No. 24/2010 (Maldives Banking Act). In a dual-banking system, the Islamic banking industry has grown tremendously in double digits over the years. It has shown that there is a huge potential for Islamic banking to prosper in the Maldives. Combining the two Islamic banks, it comprises at least 12% market share of the banking industry of the Maldives based on deposits. BML Islamic and MIB provide a wide range of deposits and financing products to personal and business customers. Out of those products, most common and well-known among the public are housing and consumer financing facilities.
Takaful Industry complements the banking industry and the wider industry as a whole. Since 2003 Amana Takaful is the sole provider of Takaful (Islamic insurance) till the emergence of Ayady Takaful (Islamic window of Allied Insurance – largest insurance provider in the Maldives) in 2014. Based on total assets, at the end of 2019, the Takaful industry comprises a notable 20% of the whole Insurance industry in the Maldives. A wide array of General Takaful and Family Takaful products are available to businesses and individuals through these two players.
Capital market is part of the financial market where modes of raising finances are long term compared to the money market – which provides short-term options. Capital Market Development Authority (CMDA) is an independent institution established under the Maldives Securities Act 2/2006 for developing and regulating the capital market in the Maldives. The capital and securities market of Maldives was launched in 2008 with a market capitalization of MVR2.9 billion. As of now, it has 9 listed companies with a market capitalization of over MVR16 billion. It has been a decade since the inception of the capital market in the Maldives, however, there are not many transactions or activities done in the capital market so far. Indeed, the Maldives Stock Exchange (MSE) plays a vital role in the capital market. Former CEO of MSE Mr. Hassan Latheef mentioned in one of his articles published in 2017 in Corporate Maldives website, that it needs full support from the government and other stakeholders to grow especially investing heavily in IT solutions and he also thinks it is vital to increase financial intermediation in order to improve the economic landscape of the Maldives which alone cannot be achieved by the banking sector of Maldives. Believe it or not, the secondary market within the financial market is very inactive in the Maldives. This makes it quite impossible for individuals and businesses to exchange or trade their stocks, bonds, or Sukuks in order to raise liquidity for the short-term, hence the main objective of the market is not achieved.
Obstacles for growth of the Islamic finance industry in the Maldives
Surprisingly, there are a lot of limitations in the Islamic financing industry of Maldives. This area can be widely discussed in another topic perhaps, yet it is important to identify the key issues facing the industry.
First and foremost, there is a lack of skilled and qualified Maldivians in terms of Islamic banking and finance. This can be in the areas of, but not limited to, Fiqh Muamalat, Business Development, Accounting & Auditing in Islamic banking & finance, and Risk Management. Options for higher studies on these areas are very limited in the Maldives, therefore, it is vital to invest in human capital by opening to international gateways. It is time for IFIs to allocate a substantial amount for improving the human capital of the industry for training and development. One of the renowned institutions for Islamic finance education is the International Centre for Education in Islamic Finance (INCEIF) in Malaysia which was founded in 2006.
Islamic banking and finance literacy is one of the key areas related to the growth of the industry and it has been below par all these years. There is a much-needed improvement in relation to the financial literacy of Islamic banking and finance among the public and must be addressed at government and institutional level. Dr. Aishath Muneeza wrote in her article published in CPI Financial in 2018 that ‘The industry needs skilled talent from a wide range of disciplines that could learn from a well-rounded curriculum developed from a strong collaboration between academia and industry’. She also mentioned that awareness and lack of the right talent pool is the biggest hurdle facing the growth of Islamic finance today.
Competitiveness in the banking industry has never been as good as the public wanted and makes it no surprise that customers do not really benefit from the industry’s competitive advantage. Currently, we have 7 commercial banks, and the majority of them seem disconnected to the rest of the industry. The level of their participation in the economy is vital for the overall growth of the Maldivian economy. Nonetheless, BML and MIB are the only two banks that have been serving the wider community inclusive of individuals and businesses. Meanwhile, competitiveness among the two Islamic banks is weak too as they do not compete nor complement each other and neither provide any differentiated products at the moment. In fact, there is no Islamic Inter-Bank Money Market (IIMM) which further hinders the growth of the industry.
The availability of Islamic banking products in the market is limited and most products are mirror products to conventional banking. There are no significant differences in the eye of the public in terms of products and services availability. Therefore, it is vital to furnish products that are specific to Islamic banks and demanded in the economy such as products related to the production of agricultural goods and fishing industry. Islamic banking specialists believe that Salam and Istisna contracts can do wonders for those industries, however, they are currently not practiced in our Islamic banks.
One of the limitations in the Islamic banking and finance industry of Maldives is the lack of investment opportunities for individuals, businesses, and the government itself. Under the umbrella of Islamic banking and finance, there are only a few prospects that we can invest together there is a lack of awareness among the public about the existence of them. At the moment, a customer can invest only in a general investment account in an Islamic bank or buy a Sukuk from a financial institution – which is rarely issued in the Maldives.
Last but not least, IT is an area of concern in this particular industry. System issues are evident that customers do not have real-time information available. Generally speaking, the Islamic banking industry in the Maldives has not integrated well enough to meet the current needs of the customers whether it is in terms of online banking, cards, or other activities.
Islamic banking and finance industry of Maldives is going through its infant stage. Many institutions have emerged a little less than 2 decades ago. In fact, the government took initiative in establishing the first-ever Islamic bank in 2011. Nonetheless, to move from infant to growth stage and to accommodate the public needs the industry itself needs a good governance system. Hence, Central Bank could play a more active role in developing the industry in collaboration with the industry players in the private and public sectors. Working together, the banking sector, capital market, and Takaful industry might be able to deliver something big in the future to the public for investments and consumption. To gain the most from the industry certain areas need to be harnessed i.e. investing on skilled and qualified labor, improving Islamic banking and finance literacy, allowing customers to enjoy the competition and gain from investment opportunities, introducing differentiated products than conventional and further investments in IT as banking needs to be digitalized to reach out each and every customer irrespective of the location they live.
About the writer: Ahmed Riza holds a MSc in Finance and a Bachelors of Hospitality and Tourism Management. With 10 years of experience in corporate sector in tourism and banking, he is a also a part-time lecturer in hospitality, tourism, accounts and finance since 2011.
Featured Image: Ahmed Riza