Islamic banking provides financial services to both Muslims and non-Muslims. In that sense, it is similar to a conventional bank and requires meticulous studies of banking environment and business plans. It differs from other banks in assuring that all activities are in compliance with Shari’ah. The organizers of an Islamic banks need to be aware of all the legal and business issues facing a start up banks as well as be committed to Shari’ah compliance. They need to ensure that the regulatory environment in the area of operation will allow the unique services offered by the Islamic bank. For example, certain jurisdictions do not allow banks to deal with equity markets or have ownership interest in a business or property. In those cases, alternative business structures or negotiations with the regulator may be required to accommodate these restrictions.
The organizing group should be abreast of political and legal environment in their targeted area of operation for functioning of an Islamic bank. They need to study banking laws of the country and be able to seek waivers for interest free banking and tax situation to make it an even field with the commercial banks. They also need to determine to what extent the central bank of the country is ready to accommodate Islamic mode of banking.
The organizers should investigate personal and corporate tax structure of the country. The modes of Islamic financing may result in double or excessive taxation which would need to be dealt with. They need to specifically learn about ability for a bank to be a part owner of a venture, such as in Musharakah and Mudarabah contracts, or to offer security trading as most developed economies do not allow banks to conduct such activities.
Besides these, the organizing group has to study business issues to determine the feasibility of the new venture. These include market issues, investment analysis, organizational issues, and fiscal requirements. For an Islamic bank to flourish in a new region, there has to be market opportunities. The issues to be addressed are the size of the market, potential customer base, competition, and growth potential. Islamic banks also have to deal with excess liquidity since they cannot invest that into interest bearing deposits. The sponsors have to determine how that will be handled in a new market. The financial issues also include liquidity ratio requirements, interbank loans, and foreign exchange controls. The bank will also deal with human resource issues dealing with foreign ownership, expatriate workforce, and the requirements for the composition of management and board. A viable bank also has to plan ahead for startups costs, operating capital, revenue projections, and funding sources.
An additional requirement for the sponsors of an Islamic bank is their commitment to Shari’ah compliance. They need to understand that Islam is an all-encompassing system where economic life operates under the guidance of religious laws. The purpose of economic activity goes beyond mere profit making to overall good of the society based on Shari’ah framework. Islamic banks do not involve in riba, speculation, excessive uncertainty, gambling, prohibited businesses, or serve only the wealthy at the detriment of the poor and weak.
Shari’ah compliance for Islamic banks promotes risk and profit sharing instead of interest based traditional banking. Islamic banks can provide almost all the services provided by commercial banks, however, participatory mode of financing is a unique and additional service that can be used for social and economic development projects. The sponsors also need to be conversant with various services provided by the Islamic banks such as profit-sharing (Mudarabah), joint venture / profit-and-loss sharing (Musharakah) and safekeeping of goods/trustee of funds (Wadiah).
Islamic banks require management who are experienced in banking yet understand Shari’ah implications for operating such a bank. Islamic banking is a fast emerging field since it is trying to catch up with 400 years of evolution of commercial banking in a matter of few decades. New developments are constantly occurring in Islamic banking and the management needs to stay abreast of these developments for competitiveness and growth. Further, the purpose of Islamic banks is beyond simple profit making. They are trying to promote a more just economic system for the benefit of the wider society. Hence regular training, seminars, and conferences which bring them in contact with peers and increase their knowledge base are of utmost importance.
Islamic banks compete with conventional banks for mobilization of deposits and investment opportunities while maintaining Shari’ah compliance. The banking industry is also in the constant state of flux and new practices, regulations, products, and services are always emerging. The management and staff of Islamic banks need to go through regular training to learn about the changes in the industry. The Islamic banks have the additional training requirement of Shari’ah as applied to Islamic finance.
Since Islamic finance is an emerging field, there is always shortage of reputable training providers. If the bank is located in an area where there is a lack of access to training, the bank may have to set up its own training department. They could also procure the services of a trainer to travel to the bank location from time to time to deliver training.
Qualified management for Islamic banks is usually in short supply. Most of the available resources have had experience in conventional banking. When they cross over to Islamic banking they will require training to understand the unique nature and niche of the Islamic banks.
The motivation for Islamic banking business is not limited to providing banking services only. It has a higher motive of just distribution of wealth so the society as a whole can benefit from the economic activity. It is a well-established fact that Islam is not merely a religion but a complete code of life covering personal, social, political, and economic spheres. It is incumbent upon the management of Islamic banks to understand this and be committed to it. The management has the role of innovating and developing financial products to revive the just economic model of Islam. This is an ongoing challenge for the management of Islamic banks to grow their product offerings to encompass entire economic activity for the benefit of society at large.
