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Three-Tier Banking Needed To Strengthen Islamic Banking

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Points of Essence:

  • Islamic banking is urged to operate on a three tier system. First tier is to mirror the operation of conventional bank as a deposit taking institution. The second tier is to leverage on the Mudharabah mode company where banks will act as  fund providers. The third tier will be to act as a partner in Musyarakah type of transactions. The appropriate regulations will be modeled to accommodate the three tiers rather than one regulation fits all as of the conventional system. Bernama has the report.

KUALA LUMPUR, April 6 (Bernama) — A three-tier banking system is needed in Islamic banking to further strengthen the industry, an economist suggested.
“The first tier is to be like the conventional bank, where people put their money in the bank, and where the bank gives money to meet their type of transactions.

“The second tier is like a Mudarabah type of institution or Mudarabah company, where people put their money and combine it and try and develop different things. This model is very much applicable for SME financing, where a person has the idea but does not have the money, (while) and another person has the capital. They can combine using the Islamic principle.

“The third tier is like the venture capital or Musyarakah, where big infrastructure projects financing (is involved),” Professor Dr. M. Kabir Hassan of New Orleans University said.

For this, a regulation for Islamic Finance can be created with the support of the government and finance institutions, as the existing conventional banking regulations do not suit the needs of Islamic banking, he said.

“We simply cannot copy the regulations of conventional banking to help this industry. We need to have our own regulation, which is more consistent with Islamic finance,” he told reporters after delivering a talk entitled “Can Islamic Financial System Be A Cure To The Global Financial Crisis”, here today.

He also said that it was time to correct any problems within the system.

In the past 30 years, about 80 percent of Islamic finance dealt with short term Murabahah while the remaining 20 percent was long-term partnerships or Mudarabah Musyarakah, he said.

However in Islamic finance, Mudarabah Musyarakah type transactions should reach 80 percent instead, he said.

To achieve this, there needs to be government support, there have to be institutions, law and regulations to help grow the industry, he said.

According to Hassan, there were some big Islamic players who were already practising three-tier banking.


Written by Suapi Shaffaii

April 7, 2009 at 9:17 pm

Posted in Articles

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2 Responses

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  1. Thanx i enjoyed yr article and as a student i would love get news on


    April 21, 2009 at 10:25 pm

  2. Islamic banking is growing strongly again, as it leads the rest of the banking sector in the recovery of the global financial crisis that affected the banking sector in Malaysia, much less as a result of actions taken during the Asian financial crisis in 1998.

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