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WHITHER ISLAMIC BANKING?MOHAMED ARIFF INCEIF 2012.Brand ManualOutlineThe Paradigm of Islamic FinanceAnatomy of Islamic BankingShariah Compliance and ImplicationsContemporary IssuesThe Way ForwardConclusions

2 INCEIF 2012.Brand ManualWhy talk about Islamic Finance?Growing global interest in Islamic Finance is partly due to the growing awareness and increasing visibility of Islamic banking nearly everywhere in recent timesThis may be attributed to the Islamic resurgence, with Muslims looking for financial products that comply with their faithThe growing interest in Islamic Finance is also due, in no small measure, to the disenchantment with conventional finance: unethical practices e.g. interest rate manipulations, money laundering and too many financial scandals (from Lehman to Libor), debacles and crises, which have eroded public trust and confidence in the financial system3 INCEIF 2012.4THE PARADIGM OF ISLAMIC FINANCEBrand Manual INCEIF 2012.Brand ManualRibaQuranic injunctions: prohibition of riba (usury) and approval of tijara (commerce) / al-bay (trade)The term tijara relates to the entire supply chain, not just wholesale/retail transactionsFinancing of real sector activities versus financial transaction for its own sakeRiba is about money making money, be it usury or interestRiba is disallowed regardless of the rate (real or nominal), whether money is meant for consumption or production, short-term or long-termDifferences in perspectives in Christianity (distinction between usury and interest) and Islam (usury = interest) Judaism: usury disallowed within Jewish fraternity

5 INCEIF 2012.Brand ManualThe RationaleConventional wisdom on the role of interest: reward for saving, abstinenceIn Islam, saving deserves no monetary reward, as it is gratifying in itself; reward only if saving is translated into investment (risk taking); zero-risk merits zero return.Risks recognized in Islam relates primarily to real sector activities, not risk of borrower delinquencyAbstinence need not be painful so long as moderation in consumption is accepted as a virtueRobinson Crusoe Economy: more fish caught with net is reward for abstinence or investment?6 INCEIF 2012.Brand ManualCentrality of the Real EconomyThe real sector of the economy needs financing, and Islamic finance is all about investing into the real sector activitiesIts meant to generate economic growth through increased output and employment: real economy multiplier effectNo financial transaction for its own sake: real economy connection ensures too much money chasing too few goods would not ariseIt ensures real value added: no such thing as paper losses/gains nor jobless growthIslamic finance is an integral part of the Islamic economy, and value system calls for moderation in consumption Little space for consumption-driven growth based on expansive consumer creditIt thus promotes stable (albeit moderate) growth with low inflation

7 INCEIF 2012.Brand ManualFundamentals of Islamic FinanceInterest-free financing does not mean capital is costlessThe cost of capital (= return to capital) is not pre-determined in the Islamic orderCost of capital tends to vary positively with the degree of riskRisk sharing is the basis, not risk shifting nor risk transfersShared risks and rewards: check and balance; inclusivenessEssentially, equity capital commands higher return (risk premium, given systematic risks)Islamic financing tends to be more reliable, as it is not highly leveraged and not debt-basedIslamic finance is free from riba, maysir, gharar, rishwah and jahl.

8 INCEIF 2012.Brand ManualThe Real-Financial Sector AxisThe need for Wall Street and Main Street to walk hand in handThe real sector focus renders Islamic finance more stable and less vulnerable than conventional finance to financial crises Real economy connectivity helps prevent dubious financial transactions (e.g. subprime credit debacle)Debt trade and speculative transactions (not based on real production or real exchange) are disallowed Debt discounting and rescheduling for increment are not permissible as they are non-value-adding Guiding principle when in doubt: weighing benefit against harm 9 INCEIF 2012.Brand ManualIslamic EthicsAll transactions must be in sync with Shariah Objectives (Maqasid al-Shariah)Two overarching criteria: (1) outcome to benefit the community at large (maslaha) and (2) ensuring balance in the terms of contractMaslaha warrants transactions are genuine and not imaginary, general and not special (e.g. hoarding versus ownership rights)Balance demands justice and fairness, mutual consent based on informed decisions with total transparencyPrice set on the spot, based on mutual consent: offer and acceptance (ijab & qabul) must be free from duress (ikroh)

10 INCEIF 2012.11ANATOMY OF ISLAMIC BANKINGBrand Manual INCEIF 2012.Brand ManualMain FeaturesIB financing is interest-freeCustomer deposits are treated as investmentsFinancial products of IBs are Shariah compliantLoans are replaced by asset-based financing Riba is replaced by profits from trade (tijara / al-bay)IBs earn profits and share them with depositors as dividends (based on the principle of mudarabah)Profits are legitimate and justified: risk-taking (ghorm), work and effort (kasb), responsibility (daman)Profiteering is abhorred, as it is considered exploitative

12 INCEIF 2012.Brand ManualIB Products ProfileIB products in the market tend to be mirror images of conventional products with add-on Shariah complianceMurabaha Home Financing substitutes conventional fixed-rate home loansMusharakah mutanakisah and Floating BBA (bai bithaman ajil) Home Facility (deferred-payment sale) replace conventional floating-rate home loansTawarruq Personal Financing instead of conventional personal loansThus, Islamic banking is still in the initial stage of product differentiation13 INCEIF 2012.Brand ManualIB FinancingThe centrality of the real economy is sacrosanct in IB financingAll IB products are linked to real sector activities: no financing for the sake of it.Murabaha (mark up): for purchase and resaleMudrabaha (profit sharing): for investments managedMusharakah (profit and loss sharing): for partnershipIjara (leasing): for the acquisition of physical assetsBai ajil (deferred payment): for home financingTawarruq (commodity trade): for personal loans

14 INCEIF 2012.Brand ManualFund MobilisationQard: Bank acting as Borrower; principal is guaranteed but no returnWadiah: Bank acting as Trustee guarantees repayment of capital but return is at its discretionWakalah: Bank acting as Investment Agent; neither the capital nor profit is guaranteed (return of capital only if Bank is negligent or in default of its obligations); all profits to be distributed to investors after deducting Banks fixed and variable feesMudarabah: Bank acting as Fund Manager sharing profits with depositors (losses borne by the latter)

15 INCEIF 2012.16SHARIAH COMPLIANCE &IMPLICATIONS

INCEIF 2012.Shariah GuidelinesIslamic jurisprudence (Shariah) is based on the Divine Revelations (Quran) and Prophetic Traditions (Sunnah)Subject to human interpretations: 4 Schools of ThoughtLiberal interpretation on grey areas often forms the basisConsensus: business risk taking not financial risk taking forms the basis of profitsAl-bay (contract of trade): exchange of money with an underlying asset, no exchange of money for more money (interest-bearing loans or qard)Money is not a commodity: cant be loaned or sold for profitMoney cannot grow on its own as it has no intrinsic value; it will have to be converted into capital to command profitsFor money to grow, it be invested in real sector activities

17 INCEIF 2012.Brand ManualRisk & RewardMaxims (qawaid fiqiah) for risk taking: profits are linked to the undertaking of risks and responsibilityBusiness risk: as outcome is unknown, capital appreciation is not guaranteedLegality and legitimacy of IB products must be in congruence with the intent of the of the overarching law (maqasid al-Shariah) which gives primacy to positive impacts on all stake-holders, including society at largeIBs need to ensure that all financial products are Shariah compliant, in addition to observing all secular industry regulations imposed by central banks 18 INCEIF 2012.Brand ManualIB Risk ProfileRisks faced by IBs exceed CBs: al-bay related business risk in addition to financial riskIBs face Shariah compliance risk (in addition to credit risk and liquidity risk): claw-back of profit when court rules in favour of clients in the event of non-complianceHigher risk taking exposure warrants more economic capitalShariah regulations (in addition to national and international governance) do have cost implications which would render IB products somewhat less competitive vis--vis conventional ones

19 INCEIF 2012.20CONTEMPORARY ISSUESBrand Manual INCEIF 2012.Theory versus PracticeIslamic finance in theory is about sharing of risks, but in practice IBs tend to be risk-averse: preference for low-risk products (e.g. murabaha, mudarabah, ijara)IBs avoid musharakah financing as it is deemed to be high-risk (due to poor risk appetite, inability to handle high-risk projects or no demand)Islamic finance in theory is inclusive, reaching out to the masses, in the spirit of maqasid al-shariah, but in practice IBs focus is on profits: micro-financing has very little spaceIn theory, mudarabah and wakalah accounts are off-balance-sheet (asset under management), but treated as on-balance-sheet with capital reserve provisions in practice21 INCEIF 2012.Brand ManualDisconnect Between Theory and Practice?Prices provide an acid test of real quality differences: do similar prices mean IB products strikingly similar to CB products? Yes (Law of One Price: 2 products bearing the same risk profile will inevitably assume the same pricing) and No (Intense competition between IB and CB products)Why do the rates of return from IBs correspond closely to that of CBs? Benchmarking of murabaha profit rate against interest rateBenchmarking of BBA profit rate against interest rateIs interest rate being admitted through the back door, if LIBOR is a premium for AA rates credit risk?

22 INCEIF 2012.Brand ManualSome Troubling QuestionsIs short selling unlawful? Clear injunctions against short selling (modern exceptions: currency forwards, currency options, etc. for hedging but not speculative gains)Is speculation a form of maysir (gambling)? The latter is an unproductive zero-sum game, where unnecessary risk is created, while in risk-taking real-sector speculation production decisions are based on expectations taking on existing riskAre derivatives untouchables? Those unrelated to real sector (off-balance-sheet) are deemed unlawful23 INCEIF 2012.Brand ManualDerivatives: Fascination and FearsDerivatives enhance financial sophistication Derivatives contribute to the high leverage in the financial systemDerivatives treated as off-balance sheet items often escape scrutinyDerivatives are blamed for financial debacles and crisesDerivatives tend to erode real sector connectivityHard to shun: every financial contract, in a sense, is a derivativeNot all derivatives are malignant: some are benign24 INCEIF 2012.Brand ManualIslamic DerivativesHighly contentious: (a) derivatives are incompatible with Shariah principles ( two parties deferment of obligations to a future date is similar to debt exchange without an underlying asset transfer gharar) versus (b) permissible if used solely for hedging purposes in managing risks (risk-sharing)Islamic derivatives based on murabaha (cost-plus financing with known cost of underlying asset), musawama (cost-plus financing with unknown cost of underlying asset, and waad (unilateral pledge)Derivative offerings include: profit-rate swaps, forward-rate agreementsUnlike conventional swaps, IDs cannot be traded as they are meant for hedging purposes only and they are not speculative instruments

25 INCEIF 2012.Brand ManualLegal IssuesIBs governed by both Shariah as well as conventional banking regulationsBasel II equates Islamic deposits with conventional depositsRegulatory regime designed for interest-bearing creditor-debtor system: 8% minimum CAR implies high leverage, while IBs al-bay mode implies greater risk, more stress on capitalTaxes on banking transactions: enah sale to avoid stamp duty on property purchased by bank for resale to customer a financing contract like conventional oneInterest is treated as cost and hence tax deductible while shared profit is notLegal documentation of IB products under civil law, which demands substance over form, and dispute resolution26 INCEIF 2012.Brand ManualEnterprise FinancingMusharakah takes an extremely low profile in IB financing Cost of equity (ROE of >15%) is much higher than that of debt (CDs yield of mr, customer is given rebate)Musharakah mutanakisah (ijara) contract: partnership with customer agreeing to pay rent which represents income from the partnership business, where rent can be adjusted every 2 years (income to the customer is used to acquire the banks share)28 INCEIF 2012.Brand ManualIn Consonance with Letter or Spirit?Classical VersionMurabaha: mark-up was justified on the basis of the agents efforts, expertise, responsibility and accountabilityMudarabah: mudarib takes no wages unless there is profit (his share of profit is his wage to ensure profitable outcome)Tawarruq: bona fide commodity trade aimed at profit

Modern VersionIB plays just the financing role, none of the other functions of a murabaha agent

Mudarib (IB) takes wages, as profit is calculated net of wage; he has nothing to lose should there be a loss which will fall on the owner of capital (depositor)Not genuine commodity trade as it is aimed not at profit but at securing a loan from IB in a round-about way29 INCEIF 2012.Brand ManualTypology of IB ClienteleThe Loyalist: those who accept IB products at face value with no questions or qualmsThe Skeptic: those who have serious doubts about the purity of some IB products and fear that riba is admitted through the back doorThe pragmatist: those who are unsure about the purity of IB products but willing to give the benefit of the doubt (reasoning: sin if any would fall on the financier not the customer) The Opportunist: those who deal with both IBs and CBs, depending on costs or returns (comprises both Muslims and non-Muslims)

30 INCEIF 2012.31THE WAY FORWARDBrand Manual INCEIF 2012.Evolution of Islamic BankingStage 1. Offering differentiated products: - conforming to conventional risk and return profile with Shariah compliance: IB substitute for existing CB products Stage 2. Introducing distinctly different products: - Changing directions with new products that have little or no resemblance to conventional ones

Stage 3. Developing innovative products based on R & D: - Shifting gear toward a new growth trajectory aimed at exemplary risk and reward sharing musharakah modes in sync with lofty Islamic ideals

32 INCEIF 2012.Brand ManualStatus QuoIBs are still in the initial stage of product differentiation with mirror imagesIBs are competing with CBs, not among themselvesCBs play a dominant role in Islamic banking as parents of IB subsidiariesNo thinking out of the box yet, with fixation on Shariah compliance per seShariah compliance adds to cost but adverse effect on competitiveness is reduced by enah transactions and fiscal concessions

33 INCEIF 2012.Brand ManualMilestonesPhase 1. IB in single existence: monopoly situation with no competitive pressuresPhase 2. Islamic windows in CBs open up: worries over the mixing of Islamic and conventional funds in common kitchens Phase 3. More full-fledged IBs on the scene, both domestic and foreign, providing competitionPhase 4. Islamic windows in CBs are replaced by full-blown IB subsidiaries, both domestic and foreign, making common kitchen concern a non-issue, but the sharing of facilities by CB parent and IB subsidiary is tantamount to using common utensils

34 INCEIF 2012.Brand ManualChallengesSlowing growth in KSA, UAE and Bahrain (exceptions: Kuwait and Malaysia)Rising cost-income ratio (declining profitability) in KSA,UAE, Kuwait and Bahrain (exception: Malaysia)Dwarfed by CBs: IBs are considerably smaller in domestic markets; biggest IBs are small compared to multinational CBsBeing Shariah compliant is not a major differentiator Lack of standardization due to different interpretations: an instrument approved by one Shariah board can be rejected by another

35 INCEIF 2012.Brand ManualMarket PenetrationEstablished IB markets: e.g. Kuwait (40%), KSA (38%), UAE (22%), Bahrain, Malaysia (17%)

Emerging IB markets: e.g. Pakistan (7%), Turkey (5%), Indonesia (3%)

Untapped IB markets: e.g. India and China

* (Figures in parentheses: Islamic assets as % of total A.T. Kearney)36 INCEIF 2012.Brand ManualMarket Share: IB Assets BreakdownIran: 55%Saudi Arabia 13%UAE 09%Malaysia 08%Kuwait 06%Qatar 03%Turkey 03%Others 04%Total 100% ($1,100 billion) Source: A.T. Kearney37 INCEIF 2012.Brand ManualScale FactorMost IBs are smallIB heavyweights pale in comparison with CB counterpartsAverage asset size of CBs far exceed that of IBs: Saudi Arabia: 2.5 X ($45b/$18b) UAE: 1.9 X (19b/10b) Kuwait 1.9 X (29b/15b) Bahrain 4.0 X (16b/4b) Malaysia 12.7 X (51b/4b) Source: A.T. Kearney38 INCEIF 2012.Brand ManualThe Niche Market OptionExploiting IB niche by meeting specific Islamic needsTargeting customers who care most about Shariah compliance (IB loyalists)Focus on IF products for basic banking (e.g. housing, trade finance, corporate finance)Venturing into more sophisticated areas (e.g. asset management and wealth management)Price differentials reflecting true differentiation and Islamic values and heritageMarket underserved outside GCC and Malaysia: Large Muslim countries like Indonesia; Muslim minority developed markets like Germany and France39 INCEIF 2012.Brand ManualThe Head-on OptionCompeting head-on with CBsGoing beyond IB loyalists to reach out to customers who attach more importance to competitive products than Shariah complianceWider audiences of both Muslims and non-Muslims who are open to ethical banking practicesStaying on par with CBs: in terms of ease of use, product variety and competitive pricingIBs at scale disadvantage vis--vis CB peers: esp. in terms of branch network40 INCEIF 2012.Brand ManualThe Mega IB Proposal.In Malaysia, a proposal to set up a mega IB dates back to 2006In 2010, BNM announced that it would issue 2 licenses to create 2 mega banks with paid-up capital of at least US$ 1 billionExpectations then: foreign entities to be involvedNow, in 2012, talk of a mega IB with local capital (including Petronas and KWAP) has drawn flaks: use of public funds, free shares (9%) to the promoters, and the role of BNMProposal centers around the purchase of Asian Finance Bank (AFB), one of 3 foreign IBs (2 branches in Malaysia + 1 representative office in Jakarta) Talk of mega IB in Bahrain with IDB and Al Baraka capital 41 INCEIF 2012.Brand ManualSoul SearchingThe mega IB idea is arguably a product of the perceived (ill-conceived) rivalry between Conventional Banking and Islamic BankingIt will be healthy if IBs compete among themselves first rather than with CBs which belong to a different league It makes no sense to emulate CBs with its own version of too big to fail IBs.Experience shows that small banks are more caring and more resilient than the so-called too big to fail banksDavid Fishwick: If a bank is too big to fail, then it is just too big to exist and it shouldnt be there in the first place When people rob banks they go to prison, when banks rob people they get bonuses. (Al-Jazeera, 6 Aug 2012) 42 INCEIF 2012.Brand ManualThe Middle PathSize would matter much, to tap economies of scale and scope, especially if the head-on option were to be adoptedNot easy to grow fast organically: M & As are an optionNeed to do soul searching on the IB rationale: serving the cause of Islam or making profit in the name of Islam? Shariah compliancy must relate not only to the IB products on the supply side but also to the usage of Islamic funds on the demand side (esp. sukuk, tawarruq financing)Providing pure Islamic products primarily for Muslims but inclusive enough to extend IB services to non-Muslims who see merit in them (subject to Shariah compliance)Competition among IBs can ensure efficiency and fair pricing of Islamic productsFull-fledged wholesome IBs are arguably more committed to Islamic fundamentals and values than CB-owned IBs

43 INCEIF 2012.Brand ManualIdentity CrisisAre IBs lenders or financiers? The difference between the two is more than subtle: all lenders are financiers but not vice versaIf IBs are not lenders why identify themselves as banks in the first place?The term Islamic bank is a misnomer, if not an oxymoron: Banking revolves essentially around lending and borrowing, which is blatantly antithetical to Islamic financeBy associating with banking (lending) business, IBs have allowed themselves unwittingly to be boxed into the CB mindset.44 INCEIF 2012.Brand ManualFalse Identity and Baby StepsMasquerading as banks has led to unintended consequences:Perception that IBs are not really different from CBsReinventing CB products with Shariah complianceDisquiet caused by CB benchmarksAdopting CB norms: risk averting, risk shifting, risk transferringVery little risk sharing / profit sharingAkin to playing soccer in the rugby fieldStuck in Stage 1 of the evolution roadmap45 INCEIF 2012.Brand ManualWhy Risk Sharing doesnt FlyIF is all about sharing of risks and profits, but musharakah plays insignificant role in IB portfolioCost of equity capital (Ke) > cost of debt (Kd). Well managed firms with good risk management credentials would prefer to borrow from CBs rather than seek risk-sharing arrangements with IBs (its cheaper to do so)Only firms with high risk profiles would go for musharakah arrangements with IBsIBs cant afford to be saddled with high-risk customers only

46 INCEIF 2012.Brand ManualDual Banking SystemProsCBs have marketed IB through special windowsCBs extensive branch network gave IB idea a huge exposureGood governance and best practices of CBs have had positive influence on IBsCBs have shown keen interest in IB businessIncreased diversity of financial products with greater choice for customers

Cons

CBs tend to cast IBs in their own mouldCBs lack the missionary zeal, somewhat indifferent toward Islamic valuesUneven competition between CBs and IBs works in favor of CBsCBs have best of both worldsIBs dwarfed by CBs which set the pace, standards 47 INCEIF 2012.Brand ManualDominance of Conventional BankingCBs are huge with very extensive network, accounting for the lions share of the banking industryCBs are more mature and far more sophisticated than IBsNothing grows under the giant banyan tree: IBs are in unenviable positionChances are that CBs will innovate, while IBs would just follow with Shariah complianceCBs can do what IBs do through their subsidiaries, but IBs wont do many things that CBs do (due to Shariah commitments)CBs are allowed to establish IB subsidiaries, but it is unthinkable for IB parents to establish CB subsidiaries

48 INCEIF 2012.Brand ManualHead-on Competition with CBsAs noted, IBs are not competing with themselves but with CBs but this raises several uneasy questionsTendency to emulate CBs in terms of products and risks how can IBs break away and chart their own course?In the case of CB-owned IBs, would the subsidiary compete with the parent? Is this collusion or competition?In the absence of competition among IBs, can there be any innovation that would really give Islamic Finance a distinct identity of its own?No wonder IB products closely resemble CB products: producing differentiated products for ever?IBs are no match for CBs: how can they possibly outperform?

49 INCEIF 2012.Brand ManualCompetition & Market ShareArgument: Competition with CBs will help increase IB market share while competition among IBs will result in the slicing of a small market Above argument is seriously flawed: (a) increased market share is likely to be truncated, as the low-base effect wears off; (b) competition among IBs will engender greater innovation and create a new market which can grow on its ownIndirect competition with CB, driven by unique IF products, will spawn new product diversity and attract more CB customers into the IB territory than direct competition which will result only in differentiated Shariah compliant products which are not competitive50 INCEIF 2012.Brand ManualFutility of IBs Competition with CBsWhy IBs just cant compete with CBsIBs are too small and far outnumbered (establishing a few mega IBs wont be enough) IBs shoulder greater risks (al-bay related and Shariah compliance) and warrant higher RWCIB substitutes for CB products entail additional compliance cost and hence uncompetitiveCBs have an upper hand through parent-subsidiary relationshipCompetition with CBs will force IBs into producing similar products with Shariah compliance and perpetuate the perception that IBs are no more than lenders in disguiseTo assert IB uniqueness, IBs need to unshackle themselves from CB business: competition with CBs, if any, should be indirect based on unique (different, not differentiated) IF products

51 INCEIF 2012.Brand ManualNon-Muslim Drivers in IB IndustryNothing wrong with large non-Muslim presence in the industry: supply response to market demandMany Non-Muslim producers of halal foods who strictly observe Islamic requirementsLikewise, IB financial products by CB subsidiaries diligently adhere to stringent Islamic standardsHowever, there is the minimalist tendency to just that which is no more than Islamising conventional productsMissionary zeal is needed to break out of the conventional box to come up with revolutionary products that would transform the entire landscape which is lacking in hybrid IBsNeed for wholesome IBs to take charge and provide leadership but care should be taken to remain inclusive52 INCEIF 2012.53CONCLUSIONSBrand Manual INCEIF 2012.Hallmarks of Islamic FinanceBased on divine laws (Torah, Bible and Quran)Its interest-free, but there is much more to it than meets the eyeIts directly linked to the real economy with all financial transactions having underlying real-sector assetsIts about not arms-length lending but active participation in the real sector through investmentIf at all any lending is involved it must be interest-free (qard hassan)IF is all about sharing of real-sector risks and rewards

54 INCEIF 2012.Brand ManualRealities on the GroundIBs are currently in the same league with CBs dubbed as lenders, notwithstanding Shariah complianceIBs are hugely influenced by CBs through competition and peer pressureIBs cannot ignore interest rate changes, which affect their profitabilityIBs are at a disadvantage vis--vis CBsIBs tend to behave like CBs insofar as risk management is concerned (risk averting, risk shifting, risk transferring)Very little real risk-sharing, with hardly any appetite for musharakah mode of financing

55 INCEIF 2012.Brand ManualPrognosis: Likely ScenarioIBs are likely to stay put at the first stage of producing and marketing differentiated products with Sharah compliance (Islamisation of conventional products)Dual banking cannot provide a conducive environment for IBs to flourishRisk-sharing is unlikely so long as IB portfolios consist of high-risk ventures only (no scope for diversification), as low-risk customers would prefer low-cost borrowed capital from CBs to high-cost equity capital from IBsIBs market share would rise rapidly in the initial stage due to small-base effect but stagnate thereafterIBs cannot outperform CBs, let alone replace them

56 INCEIF 2012.Brand ManualPolicy ImplicationsCBs are here to stayIBs have to learn to coexist with CBsIBs seem to have lost the turf war with CB intrusion or invasionPolicy mistake to allow CB-owned IB subsidiaries?Even though CB-owned IBs would diligently pursue Shariah compliance, the end result will still be more of the same, i.e. differentiation (Islamisation) rather than innovationTo dilute the dominance of CBs (which does not augur well for the advancement of IBs from Stage 1 towards Stage 3), only wholesome IBs should take leadershipPolicy makers to rethink the decision to allow CB-ownership of IBs?Will hybrid IBs retreat on their own?Wise for IBs to focus on the niche market rather compete head-on with CBs57 INCEIF 2012.Thank You INCEIF 2012.MOHAMED ARIFFariff@inceif.orgPROFESSORTel:Email:Website:+603 2781 4000

www.inceif.org INCEIF 2012.