Incentives for conventional banks for the conversion into Islamic banks: evidence from Bangladesh

Abstract

Purpose The skyrocketing rise of Islamic banking is noticeable in not only Islamic countries but also non-Islamic countries during the past few decades. Many conventional banks have started Islamic banking generally by maintaining separate branches/windows and occasionally by pursuing a complete conversion strategy. Following the global trend, two of the full-fledged Islamic banks adopted a conversion strategy consecutively in 2004 and 2008 in Bangladesh. The number of the conversion case is still limited. At this backdrop, this study aims to identify the incentives in the conversion strategy into Islamic banks. Design/methodology/approach Using the secondary data from the annual reports of the sample banks for both pre- and post-conversion periods, this study adopts the “case study” approach upon the comparison with the performance of conventional banks and other types of Islamic banks. Findings It is apparent that higher reserve requirement for conventional banks provides the incentive for the conversion into Islamic banks given with less reserve requirement. Under the protective regulatory framework, these converted Islamic banks may have enjoyed the rent for learning during the initial phase after the conversion, even though majority of the funds of these banks are collected from high-cost mudaraba time deposits. Basically, the credit strategy of the converted banks has been quite conservative, resulting in the concentrated portfolio selection on the asset-backed financing. However, the recent engagement of these banks in the Shari'ah-based participatory financing makes their performance a bit vulnerable. Research limitations/implications It is becoming difficult to justify a protective regulatory framework for incubating infant Islamic banks if the rent for learning given under the framework would not encourage them to challenge and absorb the risk and uncertainty associated with Shari’ah-based participatory financing. The current mode of profit–loss sharing (PLS) makes it difficult for the regulators to create an appropriate incentive for Islamic banks to challenge the equity-based financing. Originality/value The number of the conversion case is limited. Less has been done to investigate the reasons why the conventional banks opt for the conversion into Islamic banks, particularly in Bangladesh.

The Business Cycle as a Moderator of Financing for Financing Risk of Islamic Commercial Banks in Indonesia

“…Islamic Commercial Bank chooses customers or mudharib with high eligibility to be funded so that channel financing can reduce financing risk (NPF). This finding is also linear with the findings of Mutamimah & Saputri (2022) and contradicts previous findings (Adzimatinur & Manalu, 2020;Omer Mustafa, 2020;Suzuki et al, 2020), which reveals a significant positive relationship between Mudharaba financing and financing risk.…”

“…Profits from the Mudharaba contract will be shared in a fixed ratio, while losses will be borne by the Islamic Bank (Fianto et al, 2019). Mudharaba financing is considered to be riskier than Musharaka financing, and the two contracts have a significant impact on non-performing financing (Adzimatinur & Manalu, 2020;Omer Mustafa, 2020;Suzuki et al, 2020). This is contrary to research findings from Warninda et al (2019) and (Mutamimah & Saputri, 2022), which found no relationship between the two and even a negative effect.…”

“…Furthermore, Figure 1 demonstrates that Murabaha finance is superior than Mudharaba and Musharaka financing. Murabaha finance tends to predominate due to its lower risks and easier administrative procedures compared to the more complex Mudharaba and Musharaka financing, its low demand, and the lack of contract understanding (Sabrina & Majid, 2020;Suzuki et al, 2020). With the three most extensive financing arrangements, Sharia banking confronts various possible dangers, including default and moral hazard (Omer Mustafa, 2020).…”

A strategy for strengthening public perception toward sharia banking

“…The asset value of Subsidiary Unit or Usaha Unit Syariah (UUS) has reached 50% of Conventional Commercial Banks' total asset value (Yuspin et al, 2020). Something similar happened in Bangladesh, where many conventional banks have also started Islamic banking by maintaining separate branches/windows and sometimes carrying out a complete conversion strategy (Suzuki et al, 2020). Islamic banking's prospect depends on the consumer's knowledge of Islamic banking (Ezeh & Nkamnebe, 2019b;Abbas & Shirazi, 2015).…”

Corporate social responsibility (CSR) practices in Islamic banks of Bangladesh

“…Sen et al (2020) identified that high-profit ratio, ATM facility, available services, lower operating cost and lower deposit fee are the important factors influencing the customers toward Islamic banks in Bangladesh. Suzuki et al (2020) revealed that Islamic banks are becoming popular to the people of Bangladesh because of some advantages, for instance, fewer reserve requirements, protective regulation, suitable credit strategy and participatory financing. Ullah and Khanam (2018) exposed that Shariah compliance influenced the internal and external strengths of Islamic banks for maintaining better financial performance in Bangladesh.…”