Times of Oman is offering an opportunity for our readers to ask questions on Islamic banking to Khalid Yousaf, an expert in Islamic banking and Director (Islamic Finance Advisory Services) of KPMG in Oman. The readers have to mention their full name and location while sending the questions.
Q: What exactly is the difference between Islamic banks and other conventional banks? Whereas a conventional bank is allowed to provide Islamic banking through a Window operation, can an Islamic bank also provide conventional banking services through a window operation?
Raj Krishnan, Sohar
A: The basic difference between Islamic and non-Islamic banks is that all Islamic Banks are required to follow Sharia principles in structuring their products and services for their customers. Whereas Current, Savings & Time Deposits, Loans & Advances may appear to be similarly priced by both types of banks, all products and services offered by Islamic Banks will be based upon and structured in line with Islamic Modes of Financing like Mudaraba, Murabaha, Musharaka, Wakala and others.
These Islamic Modes of Financing ensure the elimination of Riba from any product and services and their structures are based either upon an asset or a commodity, rather than straight-forward interest-based borrowing or lending offered by conventional banks. A simile could be whereby a super-market may offer meat for both non-Muslims and Muslims. The essential difference being that meat sold to Muslims has been processed following Sharia' principles and therefore, is Halal for consumption by Muslims.
In order to ensure that Islamic Banks comply with Sharia' principles, they appoint Sharia' Supervisory Board consisting of Sharia' Scholars who are experts in Fiqh-ul-Muamlat as well as knowledgeable in banking products and services.
All products and services offered by Islamic Banks are reviewed and approved through Fatwas issued by the Sharia' Supervisory Board of the respective bank. Further, Internal Sharia' Auditor and Compliance Functions ensure that processing and workings of an Islamic Bank are in total compliance with Fatwas issued by their Sharia' Supervisory Board. Conventional Banks are permitted to open Islamic Windows with the conditions that funds and operations of Islamic banking will be kept totally separate from those of the parent bank.
Further, the Window is expected to operate exactly like a full-fledged Islamic Bank in terms of Sharia'-compliance through the appointment of Sharia' Board, Sharia' Internal Audit and Compliance functions. The funds from Islamic Depositors cannot be used by the parent bank and similarly, the funds of parent bank's depositors cannot be used to fund Islamic Window assets. Some Sharia' Scholars express doubts about water-tight control over the commingling of funds and have therefore, lobbied either for the closure of Islamic Windows or disallowing the practice. Islamic banks on the other hand, are not allowed to offer conventional banking windows at all for concerns that control over the commingling of Halal and Haram funds may be compromised.