Challenges in Islamic financial market: Case study of HSBC bank

By on May 21, 2014

The Muslim population occupied 19.9% of the world’s population in 1990 while in 2010, the Muslims occupied 23.4% of the global population. This population grew globally at an annual average rate of 2.2% during this period. By 2030, Muslims are expected to comprise 26.4% of the world’s population (Pew Research, 2011). The density of Muslim population is concentrated in some regions of the world particularly Saudi Arabia, Kuwait, Indonesia, Pakistan, Malaysia, Bangladesh, Bahrain, Turkey, and Iran. The rising Muslim population in the world represents a growing demand not only in these countries but also across the world including non-Muslim countries also for Islamic law, Shariah-based financial products. By 2007, the Islamic banks registered their presence in 51 countries of the world (Sole, 2007).

New opportunities for HSBC bank

The growing demand for Shariah based banking from Muslims as well as non-Muslims made conventional banks to think beyond their established target market and cater to this group of customers who does not want to borrow loans at an interest and who want to refrain from investing into unethical products and activities as prescribed under Shariah (Khalid, 2014). HSBC bank was one of the first global banks to get into Islamic banking with a view to increase its revenues and profits. HSBC bank introduced Islamic banking globally in 1998 (HSBC, 2014). The government’s limit on personal lending, new support for local banks, and emphasis on growing Islamic finance created new opportunities for HSBC. Gradually, HSBC bank spread its global Islamic banking operations in Malaysia, Middle East, Indonesia, the UK, the United Arab Emirates, Bahrain, Bangladesh, Singapore, and Mauritius (HSBC, 2014).

Challenges faced by HSBC bank

However, HSBC bank could not be as successful in any other country as it was in Malaysia and started facing certain challenges resulting in low profits in other Muslim countries. Islamic banking was based on the principles of banning interest and pure monetary speculation and supported profit-making in a socially responsible manner (Pak, 2012). Analysts stated the main problem that HSBC bank faced in expanding its business in various Muslim countries is different interpretation of Islamic Law in different Muslim countries. For example, contracts drawn in the UAE were unacceptable in Brunei, taking months to resolve. Besides lack of standardization, integrity of Islamic financial products are also questioned. Some assert that Islamic financial products are merely Islamised versions of conventional ones (Pak, 2012).

Failure of HSBC bank

After a strategic review of its banking operations in the Islamic countries, HSBC bank announced its decision of closing banking operations in six countries, including the UK (HSBC, 2013). The Bank had already divested its assets in nearly 30 other countries (Wagner, 2012). HSBC decided to continue its presence in this sector only in Malaysia and Saudi Arabia and in shrunken form in Indonesia (Jenkins and Hall, 2012). Although the restructuring efforts were underway, HSBC bank failed to compete against the big Islamic banks (Wagner, 2012). HSBC bank and similar conventional banks also faced criticism from Muslim scholars for offering segregated Islamic services and not doing enough to serve Muslim clients. The local Islamic banks also complained of facing unfair competition from HSBC bank and other international players (Wagner, 2012).

HSBC’s inability to compete in the Islamic finance industry has implications for other conventional banks also. The question here is that when a leading global bank like HSBC bank can fail in Islamic financial market, how would the small players survive here? The customer base of such Islamic products is low as compared to that for the conventional financial products and in addition the costs of many Islamic products are higher because of complex structuring and legal overheads. Moreover, these are non-standardized products based upon a non-standardized law; so what can be the future of conventional players in a growing Islamic market? Will any other conventional bank in the future be willing to fill the gap created by HSBC bank and take HSBC’s position?