This is widely seen as a move towards clearer governance and the ring-fencing of businesses that have fundamentally different risk propositions. There is no reason why such a move should not be contemplated for Islamic banks.
There are a couple of interesting things to note however.
Firstly, the residential mortgage business would be included in the retail section of the bank. However it was this business that was one of the key triggers for the global collapse we saw.
The lesson to learn (one of many in fact) is that even if the ‘safer’ retail business is segregated, banks still need to have stronger governance and controls in place to prevent that line of business crossing the line in terms of risk management and risk acquisition.
Secondly, I believe in due course it will be seen as a source for discomfort for our industry. Whilst purporting to embrace strong values (no debt, no speculation, real economy etc) Islamic banks have some protection from critical analysis by the amalgamation of its business practices into a single entity.
The proposed ring-fencing will make it much clearer as to what the Islamic banks are actually doing.
The retail side (which is of course at its very essence accepting deposits at interest and providing financing at a spread) operates wholly within interest and debt-based parameters.
Similarly the risk acquisition element of investment banking (proprietary trading, structured finance, derivatives, speculation and other risk transfer activities without effective reference to the real economy) will also be segregated.
And again, many objective readers will question if these activities are really what we should be doing anyway.
One may argue the strict segregation of such activities will highlight exactly what Islamic banks are doing to make money and how they utilize capital and how they generate and manage risk. I think that is not a bad thing.
In summary — yes this move should be encouraged.
SAFDAR ALAM
CEO, Siyam Capital
Conventional corporate banking often involves banks trading in complex derivative products which can result in substantial losses if markets move in a direction which is unanticipated or if counter parties cannot meet their commitments.
If the banks involved in such operations are also providing consumer services this poses regulatory challenges as bail-outs may be needed to protect depositors from the consequences of poor trading decisions, imposing burdens on taxpayers. For this reason corporate and consumer banking should be segregated.
These challenges do not arise with Islamic banks however as most are involved in classic retail banking, funding their financing from customer deposits.
They are not involved in derivatives trading which most are considered to be contrary to Shariah. Their riskiest corporate banking activities involve Istisnah and Musharakah, but the risks associated with the former are mitigated by parallel contracts and for the latter diminishing Musharakah structures provide a safe exit.
Given these considerations there is no need for consumer and corporate activities to be segregated for Islamic banks.
RODNEY WILSON
Emeritus Professor, Durham University