The arbitrariness of the directive and the way it was introduced without market consultation has surprised some of the local banks including Qatar National Bank (QNB), the largest bank in the emirate; Commercial Bank of Qatar; Doha Bank; HSBC Amanah; Ahli Bank; Al-Khaliji Bank and International Bank of Qatar (IBQ), which between them have 16 Islamic banking branches in Qatar.
Already the pressure is mounting on QCB Gov. Sheikh Abdullah bin Saud Al-Thani to review his decision, which ironically comes at a time when Islamic banking has been flourishing in the emirate as in neighboring ones in the Gulf Cooperation Council (GCC) region. The Islamic banking sector has a 20 percent market share of the total banking industry in Qatar, which also has four dedicated standalone Islamic banks of which the largest and oldest one is Qatar Islamic Bank (QIB).
It was way back in 2005 that the QCB allowed conventional banks to launch Islamic Banking Units (IBUs), which have contributed to the growth of the sector and to the profitability of the banks, and which have attracted an estimated customer base of just under 100,000. In fact, embarrassingly for the QCB, Gov. Al-Thani recently opened a branch of HSBC Amanah, which according to his new directive will have to cease the activities of the branch by the end of the year.
Co-mingling of funds is a real and contentious issue especially in situations where conventional institutions get involved in Islamic finance. It has, in a contemporary historical sense, assumed different manifestations. For instance, in the early days in the 1970s and 1980s, Islamic financial institutions had serious problems parking their short-term funds in Shariah-compliant vehicles and institutions. This was because of the lack of such institutions and Islamic liquidity management instruments to absorb this liquidity, usually on an over-night or short-term basis.
Many institutions, including the Islamic Development Bank, used to park short-term funds with the major conventional banks such as Merrill Lynch, Goldman Sachs, Citibank, UBS and so on, some refusing to take interest on the funds while others took the interest and diverted it for charitable purposes only, because the interest could not be brought back on to the balance sheet because of Shariah proscriptions.
These were exceptional situations because of the non-existent of an Islamic liquidity management scheme. Only Malaysia developed its domestic Islamic Inter-bank Money Market in tandem with the growth of the industry because Kuala Lumpur has a systemic approach to developing its financial services sector — both conventional and Islamic, which has been bereft in the GCC and other countries even till today.
Co-mingling of funds also has other manifestations including the potential for this in Islamic Banking Units (IBUs). Some critics also point to the source of funds and the end-use of funds where co-mingling also can and very often takes place.
For instance, can funds derived from conventional riba-based (interest-based) vehicles be used in Islamic finance? Some Shariah advisories stress that Islamic financial institutions do not and cannot have control over the source of funds and as long as the funds are invested or utilized in a Shariah-compliant manner, that is what matters. But critics argue that this notion is open to abuse and is inconsistent with a post 9/11 compliance world where the emphasis is more on Know Your Customer (KYC) and the sources of his/her funds.
At the same time, there has been a debate on the end use of Islamic funds. For instance, conventional banks have raised cheaper funds from the Islamic sector to support their own balance sheet or refinance conventional debt. Once again some Shariah advisories have stressed that it is not their brief to police the end use of funds as long as the primary transaction was Shariah-compliant. This can be open to the same potential for abuse as in the case of sources of funds.
Unfortunately, the Islamic finance industry has failed to tackle these issues head-on, both intellectually, and from a regulatory and supervisory point of view. Malaysia once again is the outstanding exception, where by law Islamic funds cannot co-mingle with conventional funds and the entire transaction cycle has to be Shariah-compliant. Failure to do so would constitute a serious breach of the law and is liable of punishment either through a jail sentence or fine or both.
Perhaps it is high time the Islamic Financial Services Board (IFSB) or the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) should seriously consider developing and adopting a dedicated standard covering co-mingling; sources and end-use of funds because they go to the core of what constitutes Islamic faith-based ethical finance.
Perhaps the QCB should also learn from the Malaysian experience in regulating Islamic financial institutions. Under its Islamic Banking Act 1983, Malaysia introduced its Interest-free banking scheme (Skim Perbankan Tanpa Faedah), effectively Islamic banking windows. This in addition to its flagship Bank Islam Malaysia, then the sole Islamic bank in the country.
This scheme was then developed into Islamic Banking Units and more recently to full-fledged standalone Islamic banking subsidiaries. As such, there are no Islamic banking units or windows in Malaysia. HSBC, Citibank, Standard Chartered Bank and Deutsche Bank all have dedicated Islamic banks incorporated in Malaysia, totally separate and independent from their conventional banking activities. This was the natural evolution of authorizing and developing the Islamic banking sector in Malaysia. At a stroke, this pre-empts any conflicts over co-mingling of funds.
Indeed, at the core of the Malaysian policy is the stated goal of the duality of the Malaysian banking model, pioneered in 1983 by the then governor of Bank Negara Malaysia, the central bank, late Tan Sri Jaafar Hussein, who stressed that he had a dream that “in my lifetime we will have in Malaysia a dual banking system — a conventional one operating side-by-side an Islamic one — cooperating but not inter-acting”. Malaysia has ever since had such a system since he uttered those words.
Indeed, thanks to Article 27 of the Central Bank Act 2009, this dual banking model is now enshrined in Malaysian law: “The financial system in Malaysia shall consist of the conventional financial system and the Islamic financial system.” Malaysia as such is the only country in the world that has enshrined this dual model approach in banking in the law of the land.
“The development of the legal and regulatory framework for Islamic financial services industry is therefore grounded on the principle of neutrality in ensuring no worse off treatment when compared to conventional finance in terms of the taxation, laws and regulations,” according to BNM.
The above act was amended in 2010, a development that further entrenched the Islamic banking system in law in perhaps the most comprehensive enabling legislation and regulatory framework in the world.
In this respect, in Qatar it could be preferable for the QCB instead of closing down the Islamic banking windows of conventional banks, to give them the option of converting them into dedicated standalone Islamic banks. This would immediately solve the problem of co-mingling of funds and at the same time contribute to the further development of the sector in Qatar and in the region and beyond.
