Creating new Islamic banking value propositions for millennials

MILLENNIALS is the term used to call the generation born between 1982 and 2004, who are known as Gen Y, a demographic cohort following Gen X or some say ‘baby boomers’. Overtly, millennials are essential for Islamic banking.

The reasons are two-fold. Firstly, millennials are the large stakeholder who determine the profit of the banks - bit by bit. Millennials represent a large population that makes a good business prospect for Islamic banking industry to consider them.

Secondly, millennials have an enhanced literacy on Islamic banking products. Millennials are prone to do a window survey before making a final purchase. They have the latest educational qualifications and digital skills - the Internet of Me. They are certainly more equipped than earlier generations to keep moving till they discover what they are looking for - choosing products that have an enhanced value proposition (VP) that fit into their plans.

Thus, I draw your attention this week on concepts of new Islamic banking VP for millennials. Three questions are in need of answers.

Question #1: What is meant by the term VP?

Question #2: What are the new growing VPs that relate to millennials?

Question #3: Are there any rising issues related to VPs?

By definition, VP is defined as the benefits that Islamic banking products or services provide to customers by being different to or better than their conventional peers. It can be an improved quality of service, technological advancement and better banking hours, to mention some.

For instance, Bank Islam Malaysia Berhad (BIMB) has a simple VP for its Baiti Home Financing - to be able to offer a payment holiday (every November and December). In a dual banking framework, customers always face a choice when visiting one to another bank’s branch for better decision. Thus, the Islamic bank’s VP must be distinct and not offered by their conventional peers. This is best considered by BIMB.

BIMB first introduced a socalled ‘Islamic’ VP beginning from 1983. At that time, the bank offers some VPs to its products like the use of a flat rate mechanism and the application of Shariah principles. The VPs, somehow, are confined to the following:

#1: The prohibition of interest (riba). The current practice of conventional home loan, for instance, involves the lending activities in which the creditor charges the debtor an addition to the amount borrowed, which is tantamount to riba.

#2: The prohibition of excessive uncertainty (gharar). If the current contract relies on a specific occasion which may or may not take place, then a major gharar follows. Small gharar that exists in financial transactions is permitted, provided there is a genuine need.

#3: The prohibition of gambling, which is often used as a ground for rebuffing conventional insurance and derivatives. A zero-sum game, which mean one person’s gain equals to another’s loss, and vice versa.

Needless to say, these three VPs are sometimes best considered as the ‘golden principles of Islamic banking’. It is vital to keep in mind that those principles by virtue have been established in the minds of many people since the establishment of the Islamic banking system in 1983 in Malaysia besides their clear prohibitions in the Quran and the Hadith.

To remain competitive, Islamic banks need new VPs for profitability and survival in the long run. There are five (5) new VPs but which are not confined to:

#1 Affordable financing: As if I have my own bank in the future, I will try to introduce a product that would be customised for needy millennials to obtain affordable financing. The bank provides a qardhul hassan financing to the needy by establishing a special fund for the sake of the ummah’s well-being index.

#2 Enhanced ethical investment: Improved values and ethics which ensure better conduct of good finance. Islamic banks must aim to craft business activities that generate fair and equitable profit by upholding ethical and by being accountable with the customers’ money. Imprudent behaviour is controlled by a so-called ‘Islamic’ surveillance.

#3 Improved digitised banking: Islamic banks are without exception to evolve towards a service-driven VP. There are some pockets of development already in place, as all banks are eager to offer mobile banking and internet banking. This is also related to FinTech.

#4 Communal banking: Islamic banks need to allow customers to get involved to gain a deeper understanding of their behaviour and actual needs. A full understanding of their needs can help in comprehending the demand and product life cycle that determine the survival of the bank.

#5 Embrace Islamic consumerism: There is a clear argument that Islamic banks and theircustomersaretotallydifferent parties who come with different motives. Some banks, however, advertise financing products for ‘profit’ by encouraging customers to take debt for the purpose of vacation and purchasing a luxury watch. The bank’s attitude is, to a certain extent, in contradiction with the ‘Islamic consumerism’ that tells us to take a debt only out of a genuine need instead of want.

With respect to the third question, three new issues are raised.

The first issue is about the competency alignment between the staff of banks and their developed VPs. Is specific training needed to ensure the extant staff are familiar with new VPs? Does additional cost consider when VPs operationalise? I bet without the alignment it would not be possible to communicate the VPs’ benefits to the parties involved.

The second issue is about VPs cannibalisation. In this write-up, this term refers to a reduction of compliance to Shariah as a result of the introduction of a new VP by the same bank. Simply put, a new VP has a high tendency to ‘eat’ up an old VP at the expense of Shariah compliance even if the performance of the bank increases.

The third issue is about the ability of Islamic banks to communicate their new VPs to stakeholders, which has a significant impact in influencing their profit and customer base. I believe there will be a lack of understanding on the VPs in terms of concepts, targeting customers and benefits to the industry as a whole. Second opinion is usually a leeway to minimise the issue’s impact.

In all, Islamic banks have come up with different VPs that are more likely to be stable and resilient in encounteringeconomicheadwinds. Along the way, the banks are encouraged to create new VPs for their extant products and services to capture the millennials’ need better.

This necessity is fuelled by their growing but sophisticated demand of Islamic banking products, coupled with fierce competitions from non-banking institutions that have put more pressure on the banks to manage their portfolios effectively. With new VPs, the banks are able to remain firmly in the industry while the assurance of fairness for all transactions will be able to raise the millennials’ confidence to another stage where better awareness, acceptance and demand for Islamic banking products and services are highly guaranteed, at least.