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Tuesday, 13 May 2014

Islamic banking: Challenges and solutions

What is the expected role to be played by Islamic banks and the many Islamic windows that have been opened by the commercial traditional banks operating in the Sultanate? What are the values expected to be added to the national economy in general and the private companies in particular from the introduction of Islamic banks?

We should bear in mind that Islamic banking is not just a new addition to the traditional banking or a competitor that offers the same products and services.

They are rather financial to provide ideal solution for those who have been waiting for long for banking products and services that are compatible with the tenets of Sharia.

In principle, Islamic banks act as financial brokers between the investors (depositors) and companies or individuals seeking finance solutions that are sharia compliant; sharing the profit/loss.

We should be aware that one of the most important principle of Islamic banking to ensure that while investing the available financial assets and resources they play an active role in achieving the social development; one of the basic aims behind the establishment of these banks.

They should also play their prospective role in developing the different communities and improving their standard of living.

While the basic aim is to make profits, Islamic banks , as it is the case with other banking and financial institution seek profits as this will help it to attract individual and institutional investors to deposit their funds with them.

The profits made by the Islamic banks are the outcomes of business and banking transactions. The profits will be later distributed onto depositors and shareholders at these Islamic banks and institutions.

The Islamic banks are thus institutions that seek profits as well as other social and human aims. Helping the Islamic banks to achieve their goals and missions is thus very important to ensure viability and competitiveness at the market.

In order to compete with traditional banks, Islamic banks should do their best to provide their customers with non-traditional and creative solutions.

They are not expected to replicate the products and services provided by traditional banking institutions. They should conduct through studies to identify the real needs of the people and seek the best way to meet such needs. They should be able to provide financing solutions for the different investment and commercial projects in a way different from the traditional commercial banks.

I can’t agree more with those who believe that the Islamic banks’ main aim is to develop economies and societies through providing feasible financial solutions that serve the interests of all stakeholders. Islamic banks promote the culture of saving among individuals and institutions.

The projects that are financed by Islamic banks should operate as per Islamic principle, reasonable returns that are fairly distributed (after deducting the costs) among depositors and shareholders.

The Islamic banks, beside the Sharia compliant finance and Takaful companies, are based on equal sharing of profits among investors (depositors) and shareholders (the owner of the bank), because the relation is based on sharing profits after deducts the administrative and other costs incurred to make this profit.

Islamic banking institutions in the world in general and GCC in particular face many challenges on the foremost of which is the inability to attract leaders and manpower specialised in Islamic banking. The market suffers from a sharp shortage in such specialities especially those specialised in developing financial products.

Islamic banks are therefore required to provide high quality and intensive training for their staff to make them more familiar with the principles and ethics of Islamic banking.

I believe that many services provided by Islamic banks are very similar to those provided by traditional commercial banks such as opening accounts, custody funds, letters of credit, transfer services, money exchange, investment, clearance and collection.

The role of Islamic banks will be felt by the society when they become capable of provide non-traditional and innovative banking and investment solutions.

They should promote a number of new and untraditional financial and investment tools that were not offered before by traditional banks. They are also required to devise a number of new plans and programs to keep pace with the changing needs of the market.

To address the challenges faced by Islamic banks in the Sultanate, Islamic banks and windows should

1. Enhance their ability to finance a large number of real estate, SMEs. They should finance the purchase of construction and technical equipment as well as plants but in a smoother and quicker way compared to traditional banks.

They should realise that the aims, guarantees and the way of sharing profits/loss are completely different form traditional banks; which seeks the best guarantees and the lowest risks.

2. Ensure that the commissions and fees collected for their services, such as financing the purchase of equipment or providing letters of credits, are fair and not exaggerated.

(Oman Daily Observer / 12 May 2014)
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