Islamic Banking Can Grow Beyond Current Success: Report

Nairobi, Kenya - The growth of Islamic banking has been phenomenal over the past few years and is quickly catching up as a buzzword in financial service circles globally.

As Islamic banking joins the mainstream financial sector, focus is shifting towards the various models that it takes. Broadly, speaking, Islamic financial industry consists of a number of entities that includes Islamic banks, the capital markets, Islamic takaful (insurance), Islamic windows and other non-bank financial institutions. The Islamic banking windows are specialized operational entities available through conventional banks meeting the demands of customers for Islamic banking products. There are a good number of Muslim customers banking with the conventional banks but whose needs have not been fully met according to the Shariah principles, the Star reported citing KCB Head of Islamic Banking Jaafar Sheikh Abdelkader.

The growth and popularity of Islamic finance was facilitated by the conventional banks that employed their resources, brand, scale, technology and expertise to capture, retain and grow their market shares in the Middle East and Asian markets. Most of these conventional banks established Islamic banking windows to offer Shariah-compliant products and solutions in response to the rising demand for such solutions.

The Islamic banking windows have impacted positively on the growth of the Islamic banking industry by way of competition between various players and deployment of technology and other resources in research and development.

These Islamic windows have enhanced financial inclusion by bringing the underserved and underbanked clients on board. These banks have managed to grow their market share, access liquidity and growth capital from the Islamic retail, commercial and corporate market segments and diversified their revenue base.

The Islamic banking sector requires a great deal of investment in technology, training, compliance and risk management for the purpose of accountability and transparency. While there is little doubt about the immense contributions made by the Islamic banking windows to the growth of the Islamic finance, there is need for these windows to strengthen their governance structures and framework so as to enhance their compliance with the Shariah principles.

All the Islamic financial service providers, the Islamic windows inclusive, have to operate on the basis of the standards and best practices set by the bodies like the Accounting and Auditing Organization of Islamic Financial Institutions, the Islamic Financial Services Board and the International Islamic Financial Market.

For the Islamic banking window to get robust in its compliance with the Shariah principles, it must fulfil a set of requirements that includes the total segregation of the funds management and the separation of the balance sheet and financial statements from that of the parent conventional bank.