Shariah Compliance Challenges in Islamic Banking Windows
The considerable growth of Islamic Finance in the emerging markets as legitimate alternative to conventional products has triggered the interest of most of conventional financial institutions to adopt a dual-banking system and undertake Islamic financial activities to meet the demands of its clients seeking Shariah compliant products/services under the form of Islamic Windows.
Islamic Windows are operating under conventional banking umbrella and they offer Shariah compliant products and services. A typical Islamic-window “Islamic Windows” approach is a form of operating structure in a conventional bank which offers Islamic banking products and services through its conventional branches by dedicated team equipped with sufficient knowledge of Shariah aspects.
The framework of operational activities should be in-line with the rules and principles of Shariah as stated by the Shariah Supervisory Board. Such approach requires full segregation of accounts and operations, funds collected from depositors must be invested in Shariah-compliant transactions, liquidity management policy of funds should comply with Shariah law and staff employed under the Islamic-window should adhere to Islamic code of ethical conduct and should refrain from performing any roles towards conventional banking operations.
Taking into consideration that strict adherence to SSB guidelines and the standards of other regulatory bodies such as Accounting and Auditing Organization for Islamic Financial Institutions “AAOIFI” and Islamic Financial Services Board “IFSB” have a significant impact on how clients approach banking, the inadequate segregation of operations/accounts of conventional and Islamic activities, absence of Standard Operating Procedures from Shariah perspective and lack of Shariah trained staff to execute Islamic transactions create the following challenges for Islamic windows:
- Lack of clients confidence that their funds may be co-mingled with funds in the conventional interest based transaction books
- Efforts made for the innovation of investment products that meets desire of Muslims’ clients towards diversification of investments are always below expectations compared to wide-range of conventional products.
- Non-disclosure of earnings from interest-based activities and its subsequent treatment in the financial statements.
- Increase in the outstanding amount of the financed product/service against postponement of installment or rescheduling of outstanding debts.
- Cross-selling of alternative conventional products in-case of shortfall in the sale of the Islamic products.
- Utilization of conventional accounts which are subject to pre-determined interest charges as a recovery accounts of installment of Islamic finance products.
- Auto-payment option on conventional credit cards for recovery of Takaful Premium and Zakat payment.
- Acceptance of conventional insurance policies in Murabaha and Ijarah instead of Takaful policies.
From Muslim client’s perspective, failure to comply with Shariah principles is a deliberate violation of the Divine law as revealed in the Quranic injunctions and Sunnah. Thus, clients may feel guilty and sinful due to non-compliance to obligations towards the creator (Allah SWT) and subsequently ends-up the relationship with the bank. That’s why many customers do not believe in Islamic windows.
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