The concept of Islamic banking originated from the Arabs in ancient times as they engaged in their trading activities. It later came to be adopted by the Muslims as an acceptable form of financing their trade. Its commercial application began in 1970 (Akram, Rafique & Alam, 2011, p. 125). Many Islamic banks are operating around the world. This paper delineates the issues and challenges of Islamic banking today comparing the Central Bank of Malaysia and Dubai Islamic Bank Pakistan Ltd.
Issues and Challenges
Dubai Islamic Bank Pakistan Ltd
Dubai Islamic Bank Pakistan Ltd operates under the Islamic banking system having its headquarter in Dubai. It offers various services and products ranging from a savings account, credit account, internet banking, and phone banking among many other functions. Even though the bank has made strides in its operations in terms of success, it is marred with various issues and challenges that continue to hold it back in various areas. The various issues will be discussed afterward
The Central Bank of Malaysia
This bank also is one of the banks in the world that follow the Islamic banking rules and doctrines. The bank’s headquarter is located in Kuala Lumpur. It is one of the banks that serve Muslim clients. Like any other bank, the Central bank of Malaysia has some challenges that it grapples with that need to be resolved.
Discussion of Issues and Challenges
Various issues and challenges face Islamic banking today. One of the challenges or issues that the bank faces is the lack of a single authority that governs the financial issues of the Islamic bank. The board sitting and formulating of policies in the Central Bank of Malaysia is different from that of the Dubai Islamic Bank Pakistan Ltd. There is a lack of uniformity in the required accounting standards to unite the bank on how it is supposed to account for its financials. This has caused a lot of controversies and confusion within the bank.
Another challenge facing Islamic banking is diversity among the scholars of the Sharia. Diversity has contributed to customer and investor uncertainty as to whether various products offered are sharia complacent. Sharia law requires that the norm of not charging interest in Islamic banking is upheld. Riba, which denotes interest in Islamic terms, is not required. However, this does not mean that there is no exchange of goods and services in the Islamic context (Akram, Rafique & Alam, 2011, p. 125). Furthermore, Islamic banks are aimed at promoting Islamic values including not investing in businesses that are considered unlawful. Businesses that engage in such practices as selling alcohol, pork and those that relate to gambling are prohibited. They are not required to be financed by Islamic banks (Hassan, 2007, p. 6461). However, some of these banks have gone against such values to provide financial services that are consistent with those of conventional banks. The two banks have incorporated some products and services in their financial services that conform to those that are offered by the conventional banks (Akram, Rafique & Alam, 2011, p. 125). The move has been agitated by the increasing competition from the conventional banks that provide other services. For instance, the Islamic Bank of Dubai Pakistan ltd has entrenched conventional services in its financial services because of the need to attract more customers besides competing with other banks that offer financial services (Hassan, 2007, p. 6461).
For instance, Islamic banks are supposed to operate on fractional reserve banking systems whereby the banks maintain a fraction of the deposits of the customers into their reserves. The cash or deposits are kept at the central bank, as it is aimed at satisfying the demand of the depositors. The funds deposited by customers in the bank are lent out to earn profits while the bank keeps a percentage of the funds known as reserve requirements, which act as bank reserves (Shah, Muhammad & Malik, 2012, p. 1022). The money lent is also deposited in other bank accounts whereby banks treat such amounts as their right. Therefore, this fractional reserve banking helps the banks to expand the supply of money. Through the process, banks can make or create more money (Balala, 2012, p. 2: Shah, Muhammad & Malik, 2012, p. 1018). In Islamic banking, the central bank issues interest-free loans to the banks to ensure that there is a purposeful productive capacity. However, this trend is changing among Islamic banks. The Islamic Bank of Dubai Pakistan Ltd is one of the banks that charge interest on the money that it lends to other banks. His approach to the fractional reserve banking system is not used as required. The Central Bank of Malaysia is also one of the banks that lend money to banks on an interest basis on the loans provided.
The shortage of skilled people or employees to work and institute changes in Islamic banking is yet another challenge that The Central Bank of Malaysia faces. Most people lack skills and knowledge in the operations of Islamic banks. The total number of Muslim scholars with knowledge and experience in Islamic banking is approximately about 250 to 300 (Shah, Muhammad & Malik, 2012, p. 1018: Obiyo, 2008, p. 232). The Central bank of Malaysia, as well as the Islamic Bank of Dubai Pakistan Ltd, are faced with the challenge of human capital. This has affected them negatively because they cannot attract skilled and experienced people to handle their issues. This shortage has to a greater extent affected their level of creativity and innovation (Gerrard & Cunningham, 1997, p.205). The banks’ values and norms are at risk of erosion if adequate measures are not taken into consideration. Therefore, there is the need for the banks to roll out training to teach many Muslim scholars on the values and norms that they need to adhere to in their financial management and accounting policies.
Islamic financial institutions are competing with conventional banking through fixations that are feared by customers, as they may make banks’ products more expensive than other conventional banks (Okumu, 2005, p. 51). The Central Bank of Malaysia and the Islamic Bank of Dubai Pakistan Ltd have indicated this challenge. They raise their interest charges often without putting in mind the objectives and the sharia law that need to govern their operations. These two banks have had challenges in implementing this financial arrangement because of differences in scholars and accounting policies that are applied by the two banks.
In conclusion, Islamic banking has come a long way. The central bank of Malaysia and the Islamic Bank of Dubai Pakistan Ltd are good examples of Islamic banks that experience controversies and challenges in their operations. The major sources of these controversies are the lack of standard accounting policies and insufficiently skilled employees among other causes. Therefore, there is a need for Islamic banks to join hands to formulate their accounting standards to ensure that they provide services that are satisfactory to their customers to trigger innovation and growth.
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