Islamic consumer banking has been developing very well. For a while, Islamic Finance institutions have been developing a wide range of financial products that can compete with conventional finance products.
The Islamic banking industry has acted as a backbone of growth in a number of countries in today’s developing globe. Many countries have begun to expand without incurring debt following the concept of non-interest loans. This helps the economy by sharing profits and risks between all parties involved.
Over the last five years, the Islamic banking industry has expanded. The Islamic banking market’s existing assets are estimated to be worth around $2.8 trillion. In recent years, Islamic banks have come up with some innovative ideas, such as:
- Increasing deposit
- Improving the clients’ service quality
- Increasing the number of banking services available
- Capital preservation
- Social and humanitarian services
What is Consumer Banking?
Consumer Banking or Retail Banking refers to the financial services to individual consumers rather than institutional customers, such as companies, corporations, and/or financial institutions. In contrast to private banking customers, retail customers are not high-net-worth individuals. Consumer banking deals with customers directly.
Islamic consumer banking offers the following services:
In order to mobilise deposits, Islamic consumer banks offer a variety of products to individuals. Islamic banks have used four different types of underlying contracts to collect deposits from their customers. The underlying contracts include wadia, mudaraba, qard, and commodity murabaha (tawarruq). Islamic consumer banks have three types of deposit accounts:
- current account;
- savings account;
- and fixed term deposit account.
Furthermore, Islamic consumer banks provide investment accounts that are based on profit and loss sharing principles. In an investment account, the bank works as a fund manager and earns money from the fund management services, while the account holders have a chance to earn higher returns due to the possibility of capital loss risk. In the investment account, there are two kinds of accounts namely unrestricted investment account (URIA) and restricted investment account (RIA).
The nature of retail banking activities, particularly consumer banking, is very voluminous and transactional, with a mass-market focus. The following are the most well-known and basic products for the retail consumer market:
Many Islamic banks around the world offer murabaha, bay’ bi thaman ajil (delayed payment sale), musharakah mutanaqisah (diminishing partnership), ijarah (lease), or istisna (construction required sale) models as the structures for Islamic home financing.
Vehicle/ car financing
Vehicle financing is another prominent product offered by Islamic banks in the retail banking sector. The Islamic hire purchase, or al-ijarah thumma al bay’ (often referred to as AITAB), is the most popular structure. Different phrases, such as al-ijarah wa iqtina or al- ijarah muntahiyah bi al tamlik, are used in some countries to refer to a lease contract (ijarah).
In this structure, the ownership is transferred to the consumer at the end of the lease term.
Unlike other types of financing, such as home and car financing, personal financing does not require the acquisition of an asset. Rather, it meets the financial demands of consumers who require cash or liquidity for a variety of reasons and objectives, including education, medical treatment, pilgrimage, marriage, and debt repayment.
Many Islamic commercial banks provide personal financing packages based on bay’ al inah and commodities murabahah (tawarruq) contracts to meet the diverse demands of the customers.
Credit cards that are Islamic
Islamic alternative structures to traditional credit card facilities are another major and popular component of Islamic retail financing. Bay al inah, ujrah, and tawarruq are the most prevalent Islamic credit card structures. However, there have been some contemporary controversies about the use of bay al inah concepts. As an alternative to bay al inah, several banks are employing the tawarruq concept.
Islamic banks have been an alternative for Muslims to opt for financial services based on Islamic principles. The Islamic finance scholars and practitioners have put so much effort into developing Islamic finance and banking to cater for the needs of Muslims. In recent years, Islamic banking products have attracted non-Muslim customers too. This could be a positive sign for the Islamic banking industry’s further expansion.
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