I personally and professionally believe that this is one of the most debilitating and time wasting debates that those within and outside the industry are having. I put it down in the same wasteful category as the debates on having a singular interpretation or application of Shariah, on having a separate benchmark rate from the conventional market, on having a separate Islamic currency from existing currencies circulating in the market and on the need for Islamic finance to be different from conventional finance in regards to product offerings.
Often time, we debate about these matters to the extent that no Islamic financial institution or activities actually exist in a particular jurisdiction in any manner, to the detriment of the Ummah especially the Muslims.
We should do away with these incessant and unproductive debates as they really do a total disservice in meeting the objectives of the industry’s stakeholders within the ambit of the maqasid al shariah (ie the objective of Shariah) of providing benefits to all mankind (ie Ummah) and preventing harm from befalling them.
We all know that the objectives of doing Islamic finance have always been to meet various stakeholders’ expectations such as maximising profit and fulfilling social responsibility for shareholders; a good place to work for employees; getting valued and trusted Shariah compliant products and services for customers; and nation building, optimum financial inclusion, effective customer protection, defending systemic integrity and promoting equitable wealth distribution for government as well as regulators.
All these objectives must be met without compromise when we undertake Islamic finance activities which is the intermediation between the haves and have nots across the different consumer segments, in particular, jurisdiction in a manner consistent with Shariah as applied in that jurisdiction for the banking sector, for the capital market (debt and equity alike) and for the non- banking financial sector such as asset management, takaful and private equity.
Considering all these stakeholders’ expectations, when we intermediate in the banking sector, we would need to establish an operating platform that would best suit the provision of Islamic finance in this sector. This is where the debate between standalone Islamic bank versus Islamic window operations happens.
The debate is healthy and worthwhile having, if it is done merely for the purpose of determining how best to meet the various stakeholders’ expectations in a particular jurisdiction. For example, if there is no separate enabling Islamic banking act, then the debate will conclude that the best way to meet the stakeholders’ expectations is to establish an Islamic window operation under the existing banking laws.
However, the debate becomes totally unhealthy and time wasting if it is done on the basis of determining which one is more credible or “more Shariah-compliant”. The reason why this is the case is because whether you operate as an Islamic window or a standalone Islamic bank, the requirement to comply with Shariah and having your activities to be operated and based wholly on Shariah on an enterprise wide basis is still the same. Such requirement exists irrespective of whether or not you are subjected to a regulated Shariah governance framework.
Malaysia is pretty much the only country in the world that has comprehensively legislated and regulated how financial institution may provide Islamic banking products and services. We have the Islamic Financial Services Act (IFSA) 2013 that enables the licensing of a standalone Islamic bank and the Financial Services Act (FSA) 2014 that enables the licensing of an Islamic window operations under a conventional bank.
Those interested in participating in the industry to provide Islamic banking offerings, have a choice of doing it under the IFSA or under the FSA and this depends on how best they can meet their own peculiar stakeholders’ expectations.
Both are equally credible in terms of Shariah compliancy as both are fully governed by Bank Negara Malaysia on Shariah governance. Both are also equally credible in terms of compliance to relevant prudential requirement, capital adequacy, etc for the same reasons. Any debate to determine which one is better in Malaysia is just superflous. Both fulfill all stakeholders’ expectations for Islamic finance in Malaysia in their own ways.
If we go to a jurisdiction that does not have what Malaysia has in terms of a structured and established enabling framework, then we must operate within the existing banking framework. There is no point debating until the cows come home, to demand a standalone bank operation when legislation does not facilitate the establishment of one.
Focus on doing what can be done, which is normally the Islamic window operations under conventional bank so that we can immediately meet the stakeholders’ expectations especially the expectation by customers of having the choice to do Islamic finance. When the enabling legislation exists, then we can consider other forms of operations.
All in all, the debate between standalone Islamic banks and Islamic window to determine which one is better may never end because there will always be new people who do not understand Islamic finance wanting to debate it.
I can only hope that such a debate does not prevent Islamic finance from being effectively done in any particular jurisdiction or worse, dismantle what is already good in meeting all stakeholders’s expectations in a particular jurisdiction. We should focus on the substance instead of the mere form.
Substance wise, standalone Islamic bank or Islamic window, both are equally good and credible.
Badlisyah Abdul Ghani is ED and CEO of CIMB Islamic Bank Bhd.