For Pakistan, it is recommended that no new conventional banks be allowed to start their Islamic operations through an Islamic Window model
An Islamic window is a separate department within a conventional bank, which operates under strict guidance by an independent Shari’a Advisory Board to develop and offer Islamic financial products to the clients that demand such products. An Islamic Window may offer its products and services through conventional branches or dedicated Islamic branches of the conventional bank. There are three notable examples of countries where banking regulators do not allow setting up Islamic Windows.
Malaysia is perhaps the best example, though the prohibition is limited to the offering of Islamic retail banking services through Islamic Windows. Conventional investment banks, however, are allowed to offer Islamic investment banking services in the country. Consequently, major conventional banks have now set up fully-fledged Islamic banks to tap the Islamic retail banking market. The likes of CIMB, RHB, Hong Leong, Maybank have set up separately licensed Islamic banks. Similarly, Lebanon does not allow conventional banks to offer Islamic financial services. Qatar has also introduced a ban on conventional banks to set up Islamic Windows. Ethiopia, on the other hand, provides an interesting example of a country that allows Islamic banking only in the form of Islamic Windows. In other words, the existing legislation in the country does not allow the setting up of dedicated Islamic banks.
In Pakistan, there are five full-fledged Islamic banks, and another 12 conventional banks offering Islamic banking services using an Islamic Window model. The total number of Islamic branches owned by conventional banks is 268, which is more than half of the number of branches of Islamic banks in the country (524). This shows that Islamic Windows are significant in terms of their market share of Islamic banking in Pakistan. While the role that conventional banks are playing in Islamic banking in Pakistan is laudable, it must be emphasised that conventional banks take Islamic banking as a purely business proposition.
The following are some of the major concerns that people have with Islamic Windows:
1. Islamic windows are seen to have in general contributed to the development of what is known as Shari’a-light products,
2. Shari’a governance regimes in conventional banks tend to be weak. While the likes of Dubai Islamic Bank, Abu Dhabi Islamic Bank, Kuwait Finance House and Al Rajhi Bank have very strong Shari’a compliance departments, conventional banks with Islamic Windows tend to be light in terms of Shari’a governance.
3. As mentioned above, conventional banks lack real commitment to the development of Islamic banking. The managers of Islamic Windows always face a daunting challenge, as the main management tends to fear cannibalisation of their conventional business.
4. Many conservative Muslims believe that segregation of Islamic funds within conventional business is merely an accounting trick. A simple requirement for segregation of Islamic funds within conventional banks is that at any point the value of Islamic liabilities of the bank should be equal to its Islamic assets.
Given this, it is important for banking and financial regulators in the OIC countries to discourage Islamic windows. For Pakistan, it is recommended that no new conventional banks be allowed to start their Islamic operations through an Islamic Window model. This kind of protectionist approach to Islamic banking will allow the existing Islamic banks to expand their businesses. On the back of their growth, the incumbent Islamic banks must be asked to increase their capital base, which in many cases will be possible only through attracting more capital from the Gulf countries. In this way, Islamic banking can be used to attract more investment into the banking sector in Pakistan, which is indeed a very lucrative business.
The writer is a Shari’a advisor to a number of banks and financial institutions and can be contacted at [email protected]