Conversion from Conventional Bank to Islamic Bank: Issues on Banking Operational Process

Abstract

Conversion of conventional banks to Islamic banks started in the financial industry of a few countries in the 1990s. Each conversion went through their own method suiting their environment, ecosystem and having their own success story. References are limited, and some achievements are not openly shared with the industry for guidance. The guidelines from regulators and standard-setting bodies such as Basel and AAOIFI are also limited and insufficient. Furthermore, Shari’ah scholars are not equipped with the exposure, training and Shari’ah references to assist the industry. The expectation from stakeholders is for the converted institution to comply with all the elements at all stages of conversion until completion. Operational issues are not limited to products, corporate governance, legal, accounting and Shari’ah only. Conversion from conventional to Islamic operation is not as easy as changing terminology, basic documentation, and governance. The converted institution will have to comply end to end, either by stages or a total, sudden transformation. This research will highlight issues related to the banking operational process from the abovementioned perspectives. The findings will assist interested stakeholders to be aware of the operational issues and approach their conversion initiative with more realistic expectations. This research will also serve as the raw checklist for references in conversion initiatives. The sequence to be discussed should not be considered as the absolute checklist but, rather, the minimum components for addressing individual basic needs, circumstances, jurisdictions and stakeholders’ wishes. The proposed steps are also important elements that one must consider tabling as process components where detailed guidelines are not available.