Conversions to Islamic Banks: Jurisprudence; Economic and AAOIFI Requirements

Abstract

       The major objective of this study is to investigate the conventional banks conversion to Islamic banks. Islamic banking industry has grown tremendously. Nearly, 1.6 billion Muslims believe that Islam is not only a religion, but also a guideline for the complete way of life. Thereby, the demand on Islamic product is increased day by day. Islamic banking assets with commercial banks globally are set to exceed US$1.7t in 2013, suggesting an annual growth of 17.6% (Arnest &Young 2013/2014). This huge growth of Islamic banks is attracting big financial institutions such as HSBC, Citibank, Deutshebank to keep up with this growth by providing Islamic financial services, opening an Islamic branch of the bank (or window within the banks), or even fully converting to Islamic banking (Saaid & Shafii, 2013). Islamic banks in the financial crisis (2008) were less adversely affected and have been much more resilient than conventional banks. These conversions present a challenge to Islamic banking sector and many are skeptical of these branches and consider just curious just to attract depositors' money savers. As well as that, these branches are not overseen by a Sharia supervisory board like Islamic banking and may employ external legitimate counsel, and this in truth is not enough (Al-Atyat,2007). Hence such branches become a serious challenge to the Islamic banking. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) issued standard number (6) which represents the conversion issue and identifies its requirements and how the banks deal and treat with it.

This study, therefore, provides an important opportunity to advance the understanding of the Sharia requirement to conversion process and what the conventional bank have to do to be right converted to Islamic bank. In addition, it discusses the jurisprudential and financial reasons for why traditional banks turned towards Islamic banking. Moreover, it discusses the AAOIFI conversion standard. This paper, hence, provides a step further in understanding  the conventional banks conversion issue by highlighting four main areas (1) the main Jurisprudence reasons of conversion (2) the economic motives of conversion (3) explore the main conversion forms from jurisprudential point of view (4) AAOIFI conventional banks conversion to Islamic bank standard overview.

Overall, the conversion process is turned from corrupted situation toward right way. There is religious and financial motivation to conventional banks conversion. The religious motivation must be supported by stable and good plan to grantee a successful conversion. The conventional banks conversion to Islamic banking is obligatory in Islam, and the gradually method is one of the most successful methods used in the implementation of the transformation. Independent Sharia supervisory board is a very important element in conversion to Islamic bank. Moreover, AAOIFI Sharia standard put explanatory procedures and illustrate how to treat the conversion process. The study suggested that the conventional banks must commitment with all conditions to finish the conversion successfully and to be full commitment to sharia law.