Islamic banking is a growing sector and majority of multinational banks have opened a subsidiary or a dedicated centre to cater to the growing need of Islamic banking. It is estimated that currently about $400 Billion of asset is being looked by the Islamic banks and institution worldwide and it has the capacity to increase 10 times form the current level going forward. Thus the growth prospect of such a sector is high but there are few pointers that could decrease the pace of growth of this sector. Some critical factors are as follows:
• Reach of operations
Most of the Islamic banks and institutions that are presently working across globe does not have a global reach. Most of the bank operations are concentrated in the middle east, northern Africa, south Asia, and parts of ]Europe and America where there is presence of Muslim community in a sizeable number. Thus, this restricts the operations of the bank. Consider the following example a country like America trades with Russia, both these countries are huge and it is natural of them to trade, but we find that since the presence of the Islamic bank and institution is limited in Russia, most of the Islamic bank looses such opportunity because of not being present there. And even if they try to scale up it would be difficult as majority if their customer are only form the Muslim community and thus their reach is confined to countries which have sizeable Muslim population.
• Size of bank
It has already been discussed that the reach of the Islamic banks and the financial institutions is very limited and their clientele list is also majority Muslims only, so the size of the bank always remain small compare to its global peers. As their size is small, it is very difficult for them to even compete against the bigger normal banks like HSBC, Citibank, Standard chartered. Even if these banks try to grow they remain just a fraction of what the global banks are in size, quantity of money handled and no of customers worldwide. The size of the operations of the global bank is also huge when compared to these banks.
• Non-uniformity of operations
The Islamic banks and institutions worldwide function in a different way. Basically the Islamic banks and institutions work on the Sharia law, which is an adaption of understanding of what is written in the Quran. Now each one has its own understanding of the laws and thus there are different versions of what is acceptable and what is unacceptable by Sharia. As a result there is incoherence in the operations of the Islamic banks and institution in different countries. An Islamic bank working in Iran works on rules and regulation which are quite different from the rules and regulation accepted by an Islamic bank working in Malaysia. This non uniformity in the operation creates confusion and limits the operations of a particular bank to a particular geographical area.
• Human resources and Technology cost
The Islamic banks and financial institution work differently in each country of operations. It is observed that an Islamic bank which is operating in Pakistan has different set of rules that it adheres to and thus have designed its products accordingly to its customers there when compared to an institution working in Malaysia, which has its own understanding of the Sharia laws and thus has quite different sets of trade laws when compared to the bank operation in Pakistan. Now if the bank has to install software and wants to get technologically advanced, it become very costly for the bank because in needs to customize its entire range of offering on the website and have to develop the software accordingly which is a difficult task. Islamic banks and institutions when compared to the banks which are truly global do not have such robust system in place and thus cannot leverage on the technological benefits. On the contrary the global banks have wonderful software which are universally accepted and have a common software and data base which is less expensive in day to day operations and thus brings down the operating cost of the bank.
Similarly the cost of human resources is also very high for such banks because apart from the banking professionals these banks also need Islamic jurists, legal advisers and economists. These increase the cost of providing banking and financial services to the common public at large. Since the law are very unique and could be understood and interpreted by different person in different ways it is utmost necessary that there are scholars of high pedigree who could provide guidance in designing the products and understanding the legal nature of all the services offered to the customers. And finding and hiring such scholars cost the bank and institutions. So we can gauge that Islamic bank and institutions need to spend higher when compared to their global peers to provide the same service to their customers.
• Regulatory environment
Islamic bank and financial institution since are not regulated as strictly as the other global banks and thus due to laxity in the regulatory environment each bank has its own financial statements and other accounting information. The entire financial information is not standardized and due to which when the financial statement on the bank are to be interpreted by someone form the other country, he has to get it converted into a statement which could be understood. Sometime the documents also need to be translated from one language to another. It all happens because there is no proper regulation on the banks and financial institutions.
Due to lack of regulations the cross border transaction are not proper documented and many a time confusion happens because of this.
• Excess liquidity and less return
As per Sharia, the sacred laws, Islam prohibits manufacturing, distributing and consuming many things. Thus there are various businesses which could not be pursued by these banks irrespective of the fact that they could be profitable and generate more revenues for the investor. Thus this severely restricts the n scope of the operations of the Islamic banks and institutions when compared to the global peers which do not have such restrictions
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Also, charging interest, or investing money in speculative venture is also not allowed and thus the monetary flow could not be properly controlled by such banks when compare to the global peers which trades in derivatives, swaps, and futures.
This effectively creates a situation where the cash is lying idle in the bank which generated no or low return when compared to money generated by the global bank.
• Taxation and legal issues
Many of the financial products of the Islamic banks and financial institution are taxed more than one time by the government because in such product in one transaction the asset/product which is brought once could be sold more than one time. This issue has been solved in UK and Bahrain but the problem still persists in many other western countries. Since these product are complex and there in not enough regulation on all these products coupled with double taxation these products lose sheen when compared to the product offered by the global banks.
Also as per Sharia, it is mandatory for the Islamic banks and institution to part away a part of their profit after a certain level of income (zakt), which in a way decrease the profitability of the banks when compare to the global peers, these products become less exotic when compared to global products.
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