Competitive interest

Yet again I have been thinking about competition. This week my interest was sparked by an announcement by First National Bank.

FNB staged a major launch of a new service that they had developed for a particular market. Yes, we hear these things all the time about things like new car loan schemes but this was slightly different. It was focussed on one particular group: Muslims.

As you may be aware there are strict rules that Muslims are required to follow when they consider financial matters. The biggest of these rules states that interest should not be earned on a loan. This does not mean that a lender cannot make a profit on a loan but it is forbidden for this to be in the form of interest, it must be something else. There is an interesting summary of this on the Wikipedia web site. Just search for Islamic banking and you’ll find an extensive summary of the various Shariah rules.

As a result of these rules in the past most Muslims in countries like Botswana have been forced to compromise their religious principles to some extent if they wanted a loan from a commercial bank.

So FNB, being utterly nice people, have introduced an Islamic banking service. The principle is actually quite simple and when it’s explained in simple terms it is actually perfectly reasonable. It goes like this. If you want a loan under this sort of scheme you simply tell the bank how much you want to borrow from them, they give it some thought and they tell you perfectly openly how much extra they are going to charge you as profit. They then divide the total amount by the number of months over which you want to pay and there you have it, your monthly repayment.

The only real difference between this and a conventional loan is that the extra money, the profit, is stated up front and is fixed. Unlike a conventional loan the repayment doesn’t change if the basic interest rate changes. If base interest rates double your repayments stay exactly the same. However on the other hand if base rates are reduced, again your repayments don’t change.

The more I think about it the more it seems like quite an attractive option for a customer. At least your repayment will remain exactly the same regardless of what happens in the financial markets. For some customers, including a lot of non-Muslims, this might be a very appealing option.

Incidentally the FNB scheme is not just open to Muslims. Anyone can apply. If this style of finance is right for you then you can apply. I somehow doubt they will be checking your knowledge of the Quran or other Islamic credentials at the door. It is a bit like the Halaal food issue. There is nothing un-Christian or un-Hindu about Halaal food, just because it happens to satisfy the requirements of a particular group. I’m not a vegetarian but I can eat vegetarian food. In the same way I can use an “Islamic” financial service without being a Muslim.

Presumably FNB being smart people will be making sure that the profit they charge on top of the basic loan amount will cover them in case interest rates goes through the roof but next time you want to borrow something it might be worth asking them for two quotes: an Islamic and a non-Islamic one.

Incidentally while writing this I have been trying to find a word to describe non-Islamic loans that isn’t insulting. “Normal” implies that Muslims are somehow abnormal. Conventional suggests that Islam is unconventional. I did think of describing non-Islamic loans as “infidel loans” but I thought that might be undiplomatic.

Earlier I suggested that FNB have introduced this scheme because they are nice people and they want to contribute towards the greater good. Well I suppose that may be the case but there is at least one other reason.

The competitive edge.

Yes, this is a new service that reaches out to a community that has perhaps not been well served in the past but it also puts them ahead of their competitors. FNB are always going to be able to describe themselves as the first bank that did this. No matter what other banks jump into this market FNB will be the pioneers and that is going to do them no harm at all in the long run.

The last time I commented on banks doing things for their own selfish interest I was criticised for suggesting that this was their only motivation. I don’t genuinely believe that but there is nothing shameful about a bank wanting to grab a large piece of the market by being innovative and addressing a need. On the contrary it is the mark of a successful business that they do such things. It’s even better if they stimulate a competitor to enter the market as well. If a second bank enters the Islamic banking arena next month then we all benefit, not just Muslims. The more aggressive, the more competitive and the more focussed on customer care a bank becomes, the better the products they offer us and the lower the charges we all face.

So, congratulations to FNB on introducing a service that may initially seem only to benefit a minority but which, with a little luck, will benefit us all.

This week’s stars!

• Theresa at BTC Corporate Services for being a star.
• Kwadiso at BBS for outstanding service.
• Grace and Eugene at FNB Industrial Branch for going the extra mile.
• Lalala at Stanbic Business Banking for being amazing.