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Islamic banking conversion: Where to start?

As Islamic banking continues to grow globally on a double digit basis (approximately 17% in year 2013) and is growing much faster than conventional banking in several markets, many countries, regulators, investors and existing conventional financial institutions are introducing or converting to Islamic banking.

Whilst the increasing conversion rate is great news for the industry by adding few more jurisdictions, institutions and trillions of dollars in assets, practitioners must ensure that Islamic banking is properly done as per the Islamic rules and principles and Shariah. This is more challenging in the case of the conversion of conventional retail banks with huge market shares, where customers and employees are multi-national with different religious backgrounds and legal systems. It is even more challenging if the conventional retail bank is operating in multiple countries and/or is being acquired by an Islamic bank. In such a scenario, where should this conventional retail bank start?

This really depends on whether the decision to convert is made from the top down or bottom up. A top-down approach would typically include a decision by royal decree, government or board of directors of the institution while a bottom-up approach would be management assessing and recommending to board of directors and then to shareholders for approval.

Irrespective of the approach, the most important question is what is the rationale for the conversion and is it a sound one? Assuming this is backed up by robust study instead of following a herd mentality, the bank’s decision will be sound and acceptable to most stakeholders. However this is no guarantee that the conversion process will be smooth.
In a top-down approach, implications on business can be assessed mostly post-facto, whereas in a bottom-up approach it can be done prior to embarking on the conversion. It is very important that implications are assessed from several perspectives — corporate governance, employees, customers, corporate communication, technology, funding, risk management, regulations, market etc. (the list is not comprehensive). Of course, these implications will have an impact on cost and profitability in the short to long-run which will be the shareholders’ concern.

Let us examine some of the key implications due to a conversion, which require thorough review.

Corporate governance 

Does the existing board/management have sufficient expertise in Islamic banking? If not, could this be developed with training and/or changing composition? It is to be noted that practicing Islam and doing Islamic banking are different.

What should be the composition of the Shariah Board and could we appoint experienced Shariah scholars who would also create positive reputation for the institution?

The organization structure must also be expanded by including a Shariah audit and review to enhance risk management and compliance.


Does the organization have a pool of talent with knowledge and experience in Islamic banking to help in conversion? Hiring may be considered as an easier route to bridge the gap.  However, this may not be the case; as new hires also require orientation to understand what the organization is currently doing and what it proposes to do in future.

Should the organization alter its employee composition structure based on religion? What impact would altering composition have on employees? Organizations may deal with this depending on the market in which it is operating, customer relationships either on selective basis (example front end staff) or throughout the company.

What kind of organizational culture will the bank have in the future i.e. post conversion?

Let us remember that one of the major issues affecting growth of Islamic finance is the shortage of quality human resources.


What profile of customers does the bank currently have and are these customers likely to continue their relationship on assets and liabilities products (for ease of reference – loans and deposits) irrespective of conversion?

What profile of customers does the bank propose to target in the future for growth?

It would be excellent for the institution and the industry to retain its existing customer base and grow it further as Islamic banking is inclusive for Muslims and non-Muslims alike. However this is easier said than done.

Corporate Communication

How and what to communicate to stakeholders? Should this be on a consistent and sustained basis?  Improper and ineffective communication could result in the organization not achieving its objectives.


Utmost care should be taken to identify the right core banking systems and other IT systems to suit business needs, and provide a proper implementation plan. Otherwise, this significant item of investment will drain the organization forever.


The impact on funding, liquidity and cost of funding through customer deposits, inter-bank lines, Islamic bonds etc. must be reviewed in detail.

Despite the numbers of investors who are chasing Shariah compliant assets, it is not always easy to attract them unless the business proposition is sound.

In conclusion, all of the above may be challenging. However, there are quite a number of external consultants and outsourcing options available to assist in the conversion process, which of course, must be chosen carefully.