Question

There are still conventional banks which offer Islamic banking products and services through ‘Islamic window’ in many countries by using the existing facilities and resources so as to minimize the operating costs. Although separate accounting procedures are used to differentiate the two banking systems, there could be many issues faced by these banks in offering both banking systems. Discuss THREE (3) possible issues that may arise from such leveraging which may impact on the bank’s marketing strategies and suggest possible remedies to minimize the weaknesses.

Answer 1

• The overlapping nature of Islamic & non-Islamic activities of traditional financial institutions & the commingling of their acts & services make it tough for regulators to properly monitor the risks faced by these institutions.

• Difficulties in applying the identical oversight tools & prudential ratios to financial institutions exposed to both Islamic & traditional functions whose risks are integrated in a solitary financial risk position.

• The nature of Islamic & non-Islamic actions of conventional financial institutions makes it tough & complex for them to prepare integrated financial reports given that every kind of business is subject to distinct international reporting criteria.

• Distinctions between the legal structures governing Islamic finance & conventional finance would cause uncertainties concerning the orderly resolution of traditional banks which function an Islamic window.

• The capital adequacy stipulations under the Islamic Financial Services panel vary from the Basel capital sufficiency criteria for banks & hence make it tough to combine these 2 approaches.

Generally, the decision on whether to allow Islamic windows needs the delicate balance of governmental policy with Shariah principles.

Permitting it to become more mainstream before its separation would give Islamic funds providers the advantage of developing a considered & developed niche, getting experience from the more set up conventional system.

Premature segregation may impede development of the Islamic funds sector.