HOW ‘ISLAMIC’ IS ISLAMIC BANKING? A REVISIT

Abstract

It has been widely argued in the literature that there is no much difference between Islamic banks and conventional banks in terms of their regulation, operational expectations, operational dynamics and organizational structures (Asutay, 2007; Siddiqi, 1999). Taking into account this argument, the present paper attempts to deliberate the issues by giving a special attention to Islamic subsidiaries of conventional banks in Malaysia. The establishment of Islamic subsidiaries of conventional parent banks has raised many unresolved issues. Based on extensive review of the theoretical and empirical literature related to Islamic banking and Islamic economics, the present research has identified three major challenges facing Islamic banks that may contribute to the minimal level of Shariah compliance. The first challenge is the divergent objectives between the parent conventional banks and their Islamic subsidiaries. The main objective of the conventional parent bank is profit maximization (maximizing the shareholders’ wealth) while the main objective of the Islamic subsidiary (theoretically) is to comply with Shariah rulings (profit motive is only secondary). The managers who are supposed to implement and abide by the Shariah rulings have also need to follow the directives from top management that comes from the conventional parent bank. Since the Islamic subsidiary is a subset of conventional parent bank, its objectives need to converge with the objectives of the parent bank. The second challenge is the profit maximization motive of Islamic banks and finally is the managers’ background can be a challenge in the Shariah compliance process if the managers do not have indepth Shariah background.