Islamic finance and social media

In his latest column at Gulf News, Rushdi Siddiqui named several sources (including Sharing Risk, for which I am greatly appreciative) that have provided the coverage and analysis of the Islamic fnance industry. He also presented an open challenge to bloggers:

How can Islamic finance, especially at consumer retail, take advantage of the social networking phenomenon for awareness, education, and greater market penetration?

My first response is that many players in the Islamic finance industry can benefit if social media is used more widely, although there are limitations to the role that social media can play in developing the industry. For example, the needed product innovations can only be encouraged and sketched out in rough form on a blog such as this one.

However, there are many areas where Islamic financial institutions can use social media to reach out to potential consumers, critics and other industry participants that can begin to widen the debate on the industy, as well as provide responses to the challenges in and critiques of Islamic finance. This is not an academic argument either. There are many people--Muslims included--who believe that Islamic finance has been co-opted by multinational banks that have little care for the principles of Islamic finance except to the degree they can be managed to create another profit center for the banks.

There are other Muslims who believe that the Islamic finance industry is entirely superfluous because it adheres to rigidly to the prohibition of riba (whose equivalence with interest has been questioned by a few non-industry scholars like the late Sheikh Tantawi of Al Azhar University in Egypt). In the view of some, Islamic finance is an unnecessary layer within finance that does little to advance the social goals of Islam, while adding additional costs that enrich the bankers that develop and promote it.

Even within the industry, there are critics like John Sandwick who argue that the Islamic finance industry can add value, but efforts by many institutions has been counterproductive. In The National's article on Gulf Finance House, Mr. Sandwick is quoted: "For years GFH relied simply on overcharging investors for investments and pocketing the difference as its revenue, but neglected to create businesses that had steady income". The basis of his argument is that the focus exclusively on the real estate-backed private equity projects left the industry's customers over-charged for risky financial products but lacking in the bread and butter of asset management: fixed income and money market products.

With critics writing and speaking about Islamic finance being too permissive, or too concerned with creating solutions for problems which don't exist, or being too focused on developing products that serve the bank's interests over the investors, it can almost seem that there are no supporters of the industry except for the bankers, layers and asset managers who are profiting from its creation. However, this would be a mistake. There are many Muslims who do view interest as riba and who do find Islamic financial products valuable because otherwise they would not be able to buy a house or a car or finance their businesses or invest for retirement. For this subset of Muslims, the conventional alternative is not an alternative at all. That being said, most have questions about whether the industry as it exists today is truly serving up a Shari'ah-compliant alternative to conventional finance, but use still use it because there exists no other alternative.

Weaving through these contradictory views towards Islamic finance is challenging enough and with a severe recession underway in many parts of the world, it is even more challenging for Islamic financial institutions to market themselves to potential consumers[1] and attract the skeptics into even a discussion about what is necessary to make the products offered into a realistic alternative to cost-conscious consumers. In this area, the canned press releases and articles that 'cut and paste' from these press releases do the industry a disservice and push away more people than they attract. The opposite approach from the canned news--"persuading" consumers to switch to Islamic finance by questioning the religiosity of Muslims who use conventional finance--is equally ineffective and (fortunately) is rarely employed by mainstream Islamic financial institutions.

Now that the problem has been defined, is there a solution that includes the use of social media? Let's redefine the groups that Islamic financial institutions and think tanks need to appeal to if they are to continue the rapid growth of the last decade:

• Muslims who think Islamic finance is too close to conventional finance;
  
• Muslims who think Islamic finance is unnecessary and enriches no one but the bankers who offer it;
  
• Muslims who find conventional banks totally off limits and who use Islamic banks, but would like them to shift their focus away from replications of conventional products;
  
• Muslims who use Islamic banks and are happy with them;
  
• Muslims and non-Muslims who have heard, but don't understand the terms "Islamic" and "finance" used together; and,
  
• Non-Muslims who wonder whether Islamic finance is just applicable to Muslims or could be an alternative to the conventional banks in the wake of the financial crisis.

These groups can overlap somehow, but in general they all require different approaches for Islamic finance institutions to reach. A one-page ad in a newspaper or magazine may reach the Muslims who already use Islamic finance and are looking for reassurance about the banks' commitment to Shari'ah-compliance or it may reach Muslims who are outside the financial system looking for a Shari'ah-compliant alternative. However, they are unlikely to reach those Muslims and non-Muslims who are unaware of Islamic finance or are skeptical of industry for one reason or another. Social media can provide a way to reach out in a more detailed, engaging way. It can start a two way discussion, whether through a blog where people can comment and the blogger can respond; it can be shorter, as in a Twitter page where the Islamic financial institution can announce new initatives, link to articles that address a particular area of interest to the bank's audience, or it can make people aware of press releases from the bank.

The area I know most about in social media is blogging. I'm no expert in marketing in general, but I have been writing this blog for more than four years now and I've found ways to reach an ever growing audience of people with some interest in Islamic finance (or who just stumbled on this blog and became interested). The blogging format can be used as a way to attract attention as well as to share opinions and news with a broad, largely anonymous audience who are free to turn it into a dialogue.

One aspect of blogging makes it useful for Islamic financial institutions who wish to provide information within an effort to develop its business is its informality, the lack of space limits and the absence of restrictions designed to create an unbiased perspective. Traditional academic journal articles and mainstream media provide a valuable service, but they adhere to a relatively rigid, formal format and are expected to be neutral and unbiased. They fail when they step outside of these guidelines. In general, blogging fails to be interesting when it remains hemmed in and tries to compete with the better funded media and academic publications. It succeeds where it steps outside of these guidelines and uses the interactivity that blogging can have to create an ongoing dialogue with the audience.

To take a specific (hypothetical) example, think of a Western Islamic bank operating in a country where Muslims make up a very small share of the population and many have integrated into the society and, with hesitation, use conventional banks because they provide the services necessary at a reasonable cost. These consumers by and large may have a nagging feeling about conventional banking and would feel more comfortable if there were a Shari'ah-compliant alternative to conventional banks, but they don't have faith that the Islamic banks are Shari'ah-compliant. These banks all use murabaha and ijara which seem indistinguishable from conventional mortgages for their home financing products and they cost more than conventional banks. They may even sell the mortgages on to a national housing finance agency, which packages them into securities along with conventional mortgages to sell to investors. How would a blog be able to help the Islamic banks convince these consumers that the additional cost is justified and that the structures they use are not just interest in disguise, but are in fact designed to comply with the prohibition of riba?

The bank could launch a blog where it describe in plain English how and why the mortgages are designed the way they are. It could highlight the differences between the ijara mortgage from a conventional mortgage. For example, it could explain how the product it offers differs because if the consumer became unable to make its payments, the bank would have recourse only to the home being financed and not the consumers' other assets, as a conventional mortgage might. It could explain the rationale for this structure being that the ijara contract stipulates that the owner (the bank) is purchasing a home and leasing it to the customer and the customer is gradually buying the home and during the period where the bank owns the property, it is responsible for maintenance and upkeep. It could describe that because the bank is acting as the lessor, if the customer can't make its lease payments on the home, the bank will sell the house and that is why it cannot go after the customer's other assets like a conventional mortgage provider would. In exchange, there are additional costs to the bank like the opportunity cost of foregoing the right to attach the customer's other assets to the mortgage or the risk that the home is worth less than the value of the mortgage and therefore the bank charges higher rent to offset this risk.

This gives the bank an opportunity to directly talk to consumers and explain the differences between its product and a conventional mortgage and explain the reasons for the additional costs of an Islamic mortgage. This is only one way that Islamic finance institutions can use social media to reach out to consumers. It would not be able to have as detailed and lengthy discussion (or take the perspective of "here's why our product is better") if it were writing an article for publication in a newspaper. The bank would also get the benefit of a broader audience than a newspaper, which is only in front of the subscribers of the newspaper, who are often clustered in one area and share specific demographic traits that may not be that of the potential consumers of the bank's products.

There are many other ways that Islamic financial institutions can use blogs and other social media and it takes a creative impulse to 'do something new' that many banks (conventional and Islamic) may lack. However, the challenges that Islamic financial institutions (not to mention the rest of the Islamic finance infrastructure from think tanks to individuals interested or working in the field to academics to Shari'ah scholars) face in explaining why things work the way they do and how they can be improved call for new ways of reaching out. Social media is a powerful tool because it has a much larger audience and is better at fostering a broad dialogue if done well. Though I was mentioned in the article as being one of the people working in social media (and might face greater competition for attention if more blogs are out there), I think it would benefit the industry and its consumers and skeptics if there were greater depth in the social media area talking about Islamic finance.

Anyone who has comments, criticism or their own perspective should feel free to comment on this post and I will do my best to respond. Or I can be reached the more 'old fashioned' way by email at blake@sharingrisk.org.

[1] For those who are interested in marketing approaches for Islamic banks, in July this year, I reviewed a book that was written by Paul McNamara, Brilliant Marketing for Islamic Banks".