Growth: Striking a balance between profit and social welfare and providing a sustainable basis for balanced socio-economic development.
The transformation strategy of the Islamic banking system requires a holistic approach by focusing on profit and socio-economic development. The development of the Islamic banking business model should be expanded towards providing efficient services and providing financing to society at a lower cost.
Islamic banks can play a more active role in channeling financial resources through microfinance and venture capital that promote social welfare and economic development. While Islamic banking needs to increase profits in the business, it is important to strike a balance between social benefits and objectives to achieve the sustainability of Islamic banking.
Maqasid Shari’a: Fulfilling the Maqasid Shari’a in business operations.
It is important for Islamic banks to restructure their business model towards genuine Shari’a-based products distinct from conventional banks to remain viable and sustainable. The crisis has called for a return to the basis of Islamic financial intermediation that serves the real economy and socio-economic goals rather than heavy reliance on debt-like financing. Therefore, the Islamic banking industry has to demonstrate a real and effective alternative to the conventional banking system.
The dimension of the business model based on Maqasid Shari’a needs to be emphasized in reducing poverty, creating job opportunities and improving the economic development of society.
Financial Inclusion: Promoting an inclusive financial sector for people to have access to financial services with affordable costs.
It is crucial that all members of society have access to quality and affordable essential financial services. Thus, the need for Islamic banking to extend its agenda towards the development of the business model that contributes to greater financial inclusion.
This requires Islamic banks to embrace social dimensions in their business model to fulfil the spirit of Islamic finance. Their business model should promote effective and efficient mobilisation of deposits and provide financing to different market segments at a lower cost.
Shari’a Governance: Enhancing Shari’a governance practices and ensuring effective Shari’a compliance of Islamic financial products.
Compliance with Shari’a alone is not sufficient as Islamic banks should move towards Shari’a-based products and take steps to focus on how to provide intermediation services at lower costs to all segments in the society. Islamic banks need to strengthen the effectiveness of Shari’a governance including supervision, monitoring and management. Therefore, ensuring Islamic bank activities comply with the corporate governance framework and disclosure standard is crucial to support business operations.
Stability: Fostering greater resilience and stability in the Islamic banking sector
It is crucial that all members of society have access to quality and affordable essential financial services. Thus, the need for Islamic banking to extend its agenda towards the development of the business model that contributes to greater financial inclusion.
This requires Islamic banks to embrace social dimensions in their business model to fulfil the spirit of Islamic finance. Their business model should promote effective and efficient mobilisation of deposits and provide financing to different market segments at a lower cost.
Product Innovation: Contributing towards products that capitalise on the value proposition of Islamic finance
Islamic banks need to lead the market in product innovation to differentiate themselves from conventional banks. Innovation should contribute towards products that capitalise on the value proposition of Islamic finance and not simply imitate their conventional counterparts. This means becoming market leaders and benchmark setters in the development and delivery of products and services. In this regard, the Islamic banking industry should offer a comprehensive range of products that are simple, innovative, authentic and competitive. Instead of using a debt-like financing structure such as Murabaha, Islamic banks should place greater emphasis on equity-based financing.
Efficiency: Improving cost efficiency and taking into consideration the well-being of society, economic prosperity and the environment.
Efforts to improve operational efficiency and management need to be emphasized in reducing the costs of Islamic banking, especially in governance, Shari’a documentation and financial technology. As the documentation for Shari’a-compliant products incurs costs to Islamic banks, simple documentation is critical to increase their competitiveness. The size of the bank plays a key role in gaining economic benefits. In spite of tremendous growth, the Islamic banking sector remains small by international comparison, which indicates the importance of consolidation among Islamic banks for efficiency gains due to economies of scale. Consolidation will help the Islamic banking industry to compete with conventional banks with the creation of bigger banks with a larger assets base to serve customers’ diverse funding needs. Furthermore, consolidation provides a platform for well-diversified banking that creates differentiation in the market through specialisation and cost efficiency that can result in lower margins. Sound risk management practices are important for improving banking efficiency. There is a need for thorough and appropriate credit evaluation techniques focusing on the regular assessment of the creditworthiness and repayment abilities of the customers which lower the credit risk exposure.
Conclusion
The building of a sustainable Islamic banking model is pertinent for the progress and sustainability of the Islamic banking industry. Thus, it is crucial to evaluate the capacity of the Islamic banking system to sustain its financial intermediation role in contributing to economic growth. Furthermore, it is important for Islamic banking to provide more credible and affordable products to convince the customers that Islamic finance is really meaningful. The government can also play a vital role to provide an enabling environment that addresses the unique characteristics of Islamic banking to operate efficiently.
