The Customer Effect
How JPMorgan thinks of Islamic banking
- JPMorgan has offered Islamic investment banking services for a decade, with heightened demand from Asian markets
- Islamic banking is a new area for fintech; the challenge is to optimize the technology while still following Shariah-compliant processes
Islamic banking, or banking according to Islamic principles, is a growing industry globally, with an estimated asset value surpassing $920 billion. Among the central tenets are the prohibition of interest (“riba”) when lending or accepting money. Investments in companies involved in gambling, alcoholic beverages or pork products are also not allowed. Based out of Dubai, JPMorgan has offered Islamic investment banking services for a decade. Hussein Hassan has been the bank's global head of Islamic finance for four years. He was previously global head of Islamic restructuring at UBS, and led Islamic finance at Deutsche Bank. Tearsheet caught up with Hassan to discuss how the bank designed its Islamic banking products, and future paths for Islamic banking alongside fast-advancing technology. From a practical point of view, Islamic investment banking starts from the conventional banking system, minus what would be considered problematic from an Islamic point of view; the main component would be the prohibition of interest. JPMorgan's offerings cover asset management, corporate and investment banking products. What's the state of Islamic banking today? The solutions have been used have been used in Islamic world for centuries but in the context of banking, it’s relatively new -- about 40 years. Forty years is not really enough time to develop a mature system, and there’s still a long ways to go, especially when you keep in mind that the conventional banking system has been around for centuries.
How did you have to rethink the process when designing the product offering? We’ve tried many different ways of doing it. If we are developing a bond, for example, there needs to be a sukuk. A sukuk is an Islamic bond that’s set up to generate returns to investors while remaining compliant with Islamic law which doesn’t allow riba or interest. The sukuk holders each have undivided ownership of the underlying asset. How do you issue an Islamic bond? Firstly, you need to understand the credit -- the credit story. We also need to know the investor base that we are looking for. It’s everything we would normally do in the conventional bond, and then we need to figure out one extra thing which is how do we actually structure the bond to be Shariah compliant and what does that mean. The key factors in the bond are that you borrow money or you raise this money through issuing a note or a certificate, and you pay back the principal plus interest. The principal is not a problem [from an Islamic banking perspective], but how do you pay that interest in a Shariah-compliant manner? In a sukuk you have to find a way of introducing into the process the sale of an asset or the lease of an asset or something that’s similar to be able to justify this. It's considered more like a profit on a sale or a lease of a building. That’s an extra bit but everything else remains the same. And they also need to engage with a group of [Sharia law] scholars. Which regions or countries generate the most demand for Islamic banking products? We see the key pockets of demand in the Middle East, and in Asia, particularly Malaysia and Indonesia. Malaysia is a lot more advanced in a number of areas, because the regulator and and the government have made it a priority in their national development. There are a lot of investments from the Middle East into the U.S.; some of this requires financing and investing to be done in an Islamic way. We have also recently gotten interest from U.S.-based investors. What about fintech? Does it have a role in helping to make processes run better? As online banking is becoming more popular, it’s an area where more and more people are paying attention. Islamic banking is not mature but not new; one way it can catch up is through more investments in technology. But this is an area which is still a relatively new area [for fintech], and the market is trying to figure out the best way of doing it. Due to the Islamic aspect to all of this, there’s an extra layer of review that’s being done that we don’t think about when doing conventional banking. When you’re doing blockchain and using smart contracts, for example, you have to have an extra layer of review to ensure nothing is problematic from an Islamic principles perspective, and that slows down the response time. Looking ahead, what’s the enduring feature of Islamic banking when thought of as a form of values-based financial services? After the crisis of 2007 and 2008, there was an opportunity to learn from more ethically-based systems. People are talking about whether socially-responsible investments should be part and parcel of Islamic banking, and maybe that’s where the industry might move. Already, investors and investment managers are incorporating those principles and they have been gaining traction.