Islamic banks must boost market share before any “radical” changes: analysts

But an abolition of the fractional reserve banking system may be a good idea.

Islamic banks are called to boost their market share first and ensure stability through organic growth before contemplating making any “radical” changes, experts said during a session at the Global Islamic Finance Forum 2022.

On a session seeking to answer whether Islamic banks needs radical changes to live up to expectations, experts told attendees of the Global Islamic Finance Forum 2022 said that there isn’t any need to change existing Islamic banking structures. Instead, players should first need to consider how to operate in a commercially driven world.

“When we talk about Islamic finance, not in the aspirational context, we need to consider the operational context of how the industry grows within the confines of the global industry,” said Mukhtar Hussain, a member of the Asia School of Business Board of Governors, told attendees.

“Yes, Islamic banking should be more Islamic, and idealism has a place, but the reality is that banks have to take practical steps to be commercially sustainable,” he added.

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He noted that during times of crisis, Islamic banks may witness innovative Islamic financial products emerge and disrupt the market. It is reportedly through this organic growth and innovation that Islamic banks could then compete healthily with its rivals.

As for any radical changes, an abolition of the fractional reserve banking system may be one that Islamic banks may need, said Alaa Alaabed, chartered member of the Chartered Institute of Islamic Finance Professionals. 

“There are numerous calls for a full reserve banking system, which is in line with the spirit of Islamic finance and in line with the tenets and contracts of Islamic law,” she said.

Alaabed added that such a reform will help to address misalignments of risk and reward in existing systems.

Rafe Haneef, CEO, group transaction banking and CIMB Foundation, agreed. “But we have to take cognizant of the fact that Islamic banks must gain bigger market shares first for a stronger voice before overhauling the system,” he said.

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Dr. Mohamed Ashraf Iqbal, Chairman, Waafi Bank and chartered professional in Islamic Finance also argued for a new model for Islamic banks to better make use of capital.

“We need a new model to mobilise capital to serve humanity and, most importantly, (have) trust and faith in it,” Iqbal said.