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Mohammed Khnifer
Mohammed Khnifer is regarded as part of a second generation of
Islamic banking practitioners who have a solid academic background in Islamic
finance. He is a holder of an MSc. in Investment Banking & Islamic Finance from
Reading University and is a Chartered Islamic Finance Professional (CIFP) from
INCEIF. He is one of the most prolific and well-known journalist specializing in
Islamic Finance today. For the past six years he has been in charge of the
editorial content for the Islamic Banking section of Al Eqtisadiah (Kingdom of
Saudi Arabia). By 2011, he is expected to earn his MBA in Islamic Banking &
Finance after he won the Silver Scholarship Award from Bangor University. He has
authored various papers and articles on Islamic finance (see
reference link).
The concept of deposit insurance in the Islamic finance industry is still
relatively new as practitioners are struggling to comprehend whether it conforms
to Sharia. Very few countries with Islamic economies have an Islamic deposit
insurance system in place as it is a complicated balance between maintaining
profit-loss sharing Sharia principles and protecting bank customers (Baeshen,
2010). Islamic deposit insurance is a Sharia-compliant system that provides
protection to depositors against the potential loss of an Islamic bank's failure
(Arshad, 2009).
In this research I try to highlight how the concept of Islamic Deposit Insurance
(IDI) developed in the Muslim world. Over the past 10 years, the concept of
insuring Islamic deposits started in the Gulf Cooperation Countries (GCC) until
the concept reached its maturity after it was institutionalized and adopted in
Malaysia.
Due to the absence of guidelines and papers on this topic, it is imperative to
point out the controversial areas in designing Islamic deposit insurance system
and how they were resolved. The Malaysian model is being heavily reviewed and
the researchers at the International Association of Deposit Insurers (IADI) are
trying to understand whether such a system can enhance the stability of the
Islamic financial system. Therefore, it makes sense for this research to examine
the Malaysian IDI system and to look into the possibility of its adoption in the
GCC.
First stage: a concept in the making
Segregation of funds - Between 2000 and 2004 researchers started to
debate whether there is a need to insure some types of Islamic banking accounts.
Banks with Islamic windows used to commingle the Sharia deposits with
conventional funds (and used for conventional purposes) or provided Islamic
returns that may have been derived from such commingled sources. Some Sharia
scholars observed this and asked commercial banks to establish appropriate
controls to avoid commingling of Islamic and conventional funds.
In operational terms, this required banks to establish different capital funds
and separate accounts, books and reporting systems evidencing the complete
segregation of funds (Yaquby, 2000). Indeed, before designing any Islamic
deposit insurance scheme, it is a requirement to separate streams of cash flows
and block any leakages. This separation of funds caused the first thoughts about
deposit insurance for sharia-compliant accounts.
Determine the Guaranteed Deposits - Sources of funds in Islamic banks can
be grouped into four general categories, 1) Islamic banking funds, 2) customers'
deposits, 3) corporate banking activities, and 4) treasury activities or
placements (IADI, 2006). It is estimated that the financial institutions
offering Islamic products now collectively hold US$750 billion of assets. Of
this, US$350 billion is held by fully Islamic financial institutions and the
remaining US$400 billion by conventional banks that offer Islamic banking
services (Sabourin, 2009).
In early 2000, there was a healthy debate over which of the customer's deposits
should be guaranteed. Before we examine these deposits, we need to point out
that Islamic banks do have demand deposits, savings deposits, and general and
special investment deposits. Savings and demand accounts are normally based on
Wadiah (safe custody or safe keeping with guarantee) or Qardul Hassan
(benevolent loan) contracts, while general and specific investment accounts are
based on Mudarabah (IADI, 2006).
Wadiah Deposit and Qardul Hassan - Under Wadiah Yad Dhamanah, where the
nominal value is guaranteed, Islamic banks act as custodian or guarantor of the
funds deposited by customers, e.g., demand deposits. Customers may withdraw
their balances at any time (IADI, 2006). By using this product, depositors no
longer supply funds to earn a fixed income. Instead, they place deposits for
protection (Rosly & Zaini, 2008). Banks are not supposed to use these funds as a
source of investment and financing or risk-bearing projects. However, in reality
they do.
It is hard to quantify those banks that use Wadiah accounts, but we do know that
some banks provide a token of appreciation known as hibah to depositors for
banking with them. It should be noted that since the custodian service is given
without a price, the Islamic bank holds no legal obligation to pay depositors a
fixed return and may do so only on voluntary basis (Rosly & Zaini, 2008) .
However, the banks are obliged to reimburse the funds at par value to their
depositors in the event that a loss does occur (IADI, 2006).
The second type of widely used contract for Islamic deposit is Qardul Hassan.
Under the Islamic Fiqh Academy ruling, shareholders are obliged to guarantee
those deposits because they received returns from utilizing the deposits in
investment projects (Othman, 2006).
PLS Deposits and the Risk of Eroding Sharia Principles - The profit and
loss sharing (PLS) or Mudarabah forms the bulk of Islamic deposits. PLS was and
still is a centre of debate on multiple levels. To begin with, The prohibition
of interest in Islamic banking is replaced by PLS arrangement whereby the rate
of return on financial assets held with banks is not known and not fixed prior
to the undertaking of each deposit transaction, also known as ex-post rate (IADI,
2006). In this partnership structure, no guarantee is given for capital
protection or a fixed income. This product structure is run under the principle
of sharing equity. Unfortunately this makes it a risky product for depositors as
the underlying contract is based on profit–loss sharing system (Rosly & Zaini,
2008).
Under a Mudarabah contract, the depositors act as providers of funds who place a
specified sum of money to the bank, while Islamic banks act as entrepreneur
through investing the funds and sharing the investment profit according to the
predetermined profit sharing ratio (IADI, 2006). Profits are acquired only when
the investments are gaining ground, while capital may depreciate or even
diminish if the investment does not turn a profit (Rosly & Zaini, 2008). Banks
bear the entirety of the loss if there is negligence and mismanagement on the
part of the bank.
While conventional banks guarantee the capital and rate of return, the Islamic
banking system can not provide such to PLS depositors. Some practitioners in the
industry would argue that insuring a deposit goes against the PLS principle (Baeshen,
2010). Hence, depositor will not incur any risk, which contradicts the basic
concept of Mudarabah. Other researchers are beginning to debate if protecting
Muslim depositor funds, by providing guarantee, can erode Sharia principles.
First Attempt to Guarantee PLS - Before Malaysia took the helm, the
concept of designing a complete Islamic deposit insurance system started in the
GCC as a relatively innocuous idea that was based on understanding the economic
and Sharia justification of the necessity of protecting depositors by
guaranteeing PLS. For example, depositors are the ones who provide funds for
specific investment activities by the bank. Thus, shareholders should consider
sharing their distributed profits fairly to the small depositors who are bearing
the risk.
The second justification on why Islamic Banking scholars favoured a guarantee of
investment deposits (PLS) was based on the fact that conditions of Mudarabah
contracts were not applicable to investment deposits and therefore the bank
should guarantee nominal value on the deposits. This opinion was based on the
fact that Islamic banks were so diversified that if a loss did occurred in one
investment, there would still be enough profits to cancel out any defaults to
depositors. (Othman, 2006).
After establishing the logical argument, the concept of tabarru (donation) was
introduced in 2003 for guaranteeing the principal amount of PLS deposits. It has
been suggested that the mudarib can voluntarily agree to compensate for any loss
of principal amount of capital in a mudarabah contract (Al-Tegani, 2003). Then,
Dr. Mohamed A. Elgari, one of the most influential Sharia scholars today, issued
a fatwa of its permissibility. In order to ensure the validity of such offer of
guarantee as a pure gift, it should not be stated in the Mudarabah contract,
neither explicitly or implicitly, nor should it be given except after the
Mudarabah contract has already been concluded (Elgari, 2003).
It is unclear as to how many GCC banks established, at that time, in-house
Islamic deposit insurance based on the concept of tabarru. As far as how the
concept works, we know that banks retain a fraction of the yearly shareholders
income in a special account of shareholders which would be used to compensate
the depositors for any loss of their principal amount that may occur when taking
risks with their money (Khan, 2003). For instance, a Saudi bank sustained large
losses around the same time and its Board of Directors decided to have the
bank's owners bear this loss on behalf of the owners of the investment accounts
(Elgari, 2003). Maintaining such an account from contributions from shareholders
income will be similar to paying an insurance premium to a third party to
guarantee the depositors principal amount (Khan, 2003).
Prior to its establishment in 2005, Malaysia Deposit Insurance Corporation (MDIC),
Malaysian banking officials were monitoring these non-institutionalized efforts
in the GCC to design in-house deposit insurance schemes. Indeed, it was reported
that MDIC studied several other frameworks including donation (Tabarru'), agency
(Wakalah), and an approach based on government regulations (siasah syar'iyyah) (Baeshen,
2010). The Sharia Advisory Council (SAC) of Bank Negara Malaysia decided to
adopt the Kafalah bil Ujr structure (explained below) as the most viable option.
Keep in mind that the tabarru' concept was internally implemented by some GCC
banks even though there were no third-party guarantee in place.
For a country striving to lead the way in developing standard international best
practices relating to Islamic deposit insurance, the concept of tabarru' was not
the answer. In its argument, MDIC stressed that tabarru' might not be a
sufficient alternative to convince central banks that Islamic institutions could
provide a guarantee as voluntary rather than a obligatory act (Baeshen, 2010).
It added if Islamic banks were allowed to provide guarantee as a tabarru' act,
they might abuse it and provide guarantee for Mudarabah investment deposits, and
then allege that it was not an explicit guarantee, but only tabarru'.
Second Stage: Laying the Foundation of an Islamic Deposit System
In this section I will attempt to highlight some of the hurdles that may stand
in the way of developing a sound Islamic deposit insurance (IDI) system. In
order to understand how to overcome such obstacles, the Malaysia Deposit
Insurance Corporation (MDIC) will be at the centre of this case study.
Dual Banking System - The vast majority of Islamic and Western countries
have a dual banking system, which makes it difficult to design a deposit
insurance model that is compatible with the principles of Islamic finance. The
Malaysian deposit insurance system was introduced in September 2005 and was the
first deposit insurance system to provide separate protection for conventional
and Islamic deposits under one organization. Without such an entity, there would
be a complete lack of consumer protection in the Islamic banking system. This
would undoubtedly create an unfair disadvantage in the evolution and stability
of the Islamic banking system (Sabourin, 2009).
Eliminating Commingling of Funds - The Sharia Advisory Council of Bank
Negara Malaysia, which has one of the most respected group of scholars in the
Islamic banking industry, issued a fatwa prior to the establishment of the IDI
system that emphasized the need to separate funds in the operation of deposit
insurance schemes for Islamic banking to ensure that the funds of such a scheme
are invested in Sharia-compliant instruments. For Malaysia, it was already in
compliance with that, but for the other few countries that have incomplete IDI
system, they were not.
While other regulators lacked the willingness to make an effort to eliminate
commingling of Sharia and conventional deposits, others failed to separate
Islamic deposit insurance funds with conventional funds after receiving the
scheme's insurance premiums. According to Moha-Pisal Zainal, INCEIF Joint
Director of Research, (personal communication, 6 February 2010), Indonesia has
one pool where all the premiums and returns out of purchasing securities are
mixed. Hence, the paid capital of the IDI fund has been contaminated with
conventional funds.
Third Party Guarantee for PLS - As in the GCC, the PLS or Mudarabah
investment accounts were the centre of debate in Malaysia as observers argued as
to whether PLS depositors should be protected. MDIC laid down two rationale why
these accounts should be protected. First, deposit insurance is a prudential
measure to promote the stability of the financial system due to significant
proportion of PLS vis- -vis other types of deposit products in the Islamic
banking industry. The public's interest should be taken into consideration as
PLS accounts for more than 45% of total Islamic deposits and therefore accounts
for the bulk of deposits mobilised in the Islamic banking system (Sabourin,
2009). Second, the protection will only take effect in the event of a bank's
failure. In the normal course of banking operations the loss arising from
investing PLS accounts will continue to be borne by the PLS holders. As such,
the nature of the Mudharabah contract remains enforceable and the conditions are
not voidable.
Under the Mudharabah contract, the entrepreneur is not allowed to guarantee the
principal amount of PLS accounts. However, in 2003, Elgari issued a fatwa for
the permissibility of such guarantees as long as it came from an unrelated third
party. After that, the Shariah Advisory Council resolved that a third party
guarantee is allowed to protect Mudharabah investment accounts (Sabourin, 2009).
If an Islamic bank fails, MDIC would reimburse the PLS account holder up to the
limit of deposit insurance coverage based on the value of their deposit at the
date of payment and subject to priority of claims.
Public Interest Justifies Setting up Islamic Insurer
One of the justifications for setting up an IDI is for the public's interest (Maslahah)
and the banking industry as a whole. According to MDIC, their Islamic deposit
insurance system contains the element of maslahah in the several areas:
- First, the main objective of establishing a deposit insurance system is to
protect the public's money and prevent the public from facing financial
difficulty in the event of a bank failure. Such hardship would affect people's
lives and cause even greater hardship to those who have limited financial
resources.
- Second, IDI instils public confidence in the safety of depositors' funds in
banks. The act of instilling confidence amongst members of the public in the
safety of their deposits contributes and promotes to financial stability.
- It also promotes the competitiveness of the Islamic deposits and the banking
system. Without the protection, Islamic deposits may lose their competitiveness
against the conventional deposits which enjoy such protection. As a result,
there is a possibility depositors would withdraw their funds in Islamic banks
and place them in conventional banks. This would create liquidity issues to
Islamic banks and dampen the development of the Islamic banking industry. (Sabourin,
2009).
Examining the Malaysian IDI System
After reviewing many concepts, the Sharia Council of Bank Negara endorsed its
IDI system as long as its implementation is based on the arrangement of kafalah
bil ujr, or guarantee with fee. This is a contractual guarantee given by a
guarantor (MDIC) to take on the responsibilities and obligations of the
depositors in the case that claims arise (Baeshen, 2010). The guaranteed party
pays the guarantor a fee (Ujr) as consideration for the guarantee. In the event
of a member's failure, MDIC will reimburse the insured depositors and banks be
automatically subrogated to the rights and interests of the depositor's claim to
the extent of the payment mode (Sabourin, 2009).
Funding and Premium Assessment - The Malaysian IDI system adopted an
ex-ante funding where the premiums are paid annually. The operations of the IDI
are funded by premiums received from members. This is compatible for both
Islamic banks and those offering Islamic windows. Premiums are calculated by the
MDIC through two different models: 1) a flat rate (2005-2007), and 2) a
differential premium system (DPS).
A flat rate premium system is relatively simple to design, implement and
administer (Baeshen, 2010). However, it is open to criticism as it does not take
into account the level of risk that Islamic member institutions pose to the
deposit insurance system. A flat rate premium system is also viewed as being
less equitable since member institutions with lower risk profiles would
effectively be subsidizing those with higher risk profiles (Baeshen, 2010). In
2008, MDIC switched to the DPS system, which is not intended to be an
actuarially based measure of the risks posed to the deposit insurer by
individual member institutions. Rather it is intended to send an early warning
signal - with financial consequences - to the management and directors of member
banks (Baeshen, 2010). The DPS aims to provide incentives for members to adopt
sound risk management practices, differentiates members according to their risk
profiles, introduce fairness into the premium assessment process and promotes
the stability of the financial system (Sabourin, 2009). The DPS in a sense
becomes a tool for MDIC to exercise financial discipline on behalf of depositors
by charging higher premiums from banks that are more risky and prescribing early
corrective actions for troubled banks. These annual premiums are assessed on the
amount of total insured Islamic deposits held by each bank as of 31 December of
the preceding year (Sabourin, 2009).
Coverage - In term of coverage, MDIC provides separate protection for
Islamic deposits and these include savings, demand and investment deposits
accepted under various contracts such as Wadiah, Qardul Hassan and Mudarabah (PLS).
However, this system excludes accounts such as deposits payable outside
Malaysia, negotiable instruments of deposit, other bearer deposits and
repurchase agreements (as is the case for conventional deposits). MDIC has the
legal authority to also assess and determine the insurability of new Islamic
deposits as and when the deposits are offered by members (Sabourin, 2009).
Each country can set its own deposit insurance limit under such IDI systems,
although there are still some questions on how such limits will be applied.
Furthermore, if a country has already an established conventional deposit
insurance system, is the insurance coverage limit per depositors under Islamic
deposit insurance comparable or equal to the limit of the conventional deposit
insurance system? (IADI, 2006)?
Management of Islamic Deposit Insurance fund - MDIC then established a
separate fund, the Islamic Deposit Insurance Fund (IDIF). For this purpose, MDIC
maintains distinct and separate accounting records and financial statements for
both conventional and Islamic deposits. In managing both funds, MDIC ensures
that there is no commingling or cross-subsidisation between the conventional and
Islamic IDIs. All premiums received from the Islamic banks and Islamic windows
are channelled into the Islamic fund, which is then invested in Sharia compliant
instruments (Sabourin, 2009).
Payments in the event of the failure of member institutions are similarly
separated and no transfer of funds between the IDI and conventional IDI are
permitted. Instead, MDIC is statutorily permitted to increase funding from the
government should there be a need (Othman, 2006). Moreover, MDIC ensures all
expenditures charged to the Islamic IDI fund are incurred through permissible
activities. If an expense cannot be specifically attributed to either the
Islamic or conventional funds, the expense is apportioned to the respective fund
based on the amount of premiums collected in the preceding year (Sabourin,
2009). Any non-permissible expenses will also be borne by the conventional fund.
Payment and Priority of Payment - To maintain confidence in the financial
system when a member institution fails, MDIC is required to reimburse depositors
quickly, and by law no more than three months from the date of the issuance of a
winding-up order. All reimbursements for Islamic deposits must be made from the
IDI fund. In the event of a shortfall in the Islamic fund, MDIC would use the
credit line from the government or funding from the market, which would be
structured in a sharia-complaint fashion (Sabourin, 2009).
The priority of claims accorded to depositors would affect the amount that may
be recovered by the deposit insurer or resolution costs incurred. Depositor's
would automatically subrogate to MDIC their rights and interests to their funds,
but only to the extent of the payment made by MDIC (Sabourin, 2009). In respect
to the priority of Islamic deposits, the legislation sets out the priority of
payments based on the underlying contracts of the deposits where, given the
nature of Wadiah deposits, they are given the highest priority over all other
Islamic deposits.
Components of a Financial Safety Net
After elaborating on the micro-factors that support the initial infrastructure
of a sound IDI system, it is time to add a macro-economic perspective. Deposit
insurance has become an increasingly used tool by governments in an effort to
ensure the stability of banking systems and protect depositors from incurring
large losses due to bank failures. Almost all countries have financial safety
nets in place which include explicit and implicit deposit insurance, bank
regulation and supervision, a central bank lender-of-last-resort facilities, and
bank insolvency resolution procedures (Othman, 2006).
The Islamic financial industry recognizes the important role of ethical banking
in contributing to economic growth. This includes the intermediation function
between providers and users of capital, but also a country's payment and
settlement system are particularly important (Sabourin, 2009). The preservation
of the stability of the financial system is essential to a country's economic
growth. For observers of financial safety net systems, the recent crisis has
showed even sophisticated economies are susceptible to financial upheavals.
According to the IMF the cost of cleaning up the financial crisis is estimated
at US$12 trillion, which is equivalent to one fifth of the world's annual
economic output.
Safety net arrangements are intended to maintain the stability of the financial
system. If there is a lack of confidence in the stability of the financial
system, any news of problems faced by one or more financial institutions may
lead to bank runs. Bank runs can be one of the primary causes of a liquidity
crisis; as there simply is not enough cash on had to meet every depositor's
needs at once. More importantly this type of event has the ability to pollute
the entire banking system and cause a systemic crisis (Sabourin, 2009).
To ensure a strong and robust banking system, policy makers have at their
disposal a toolkit of safety net components. These encompass ways to manage the
full spectrum of activities throughout the life cycle of a financial
institution, from birth to death of the institution (Sabourin, 2009). In a
speech by Jean Pierre Sabourin, CEO of MDIC, he highlights the components of a
robust financial safety net. This covers the chartering or licensing function,
prudential regulation and continuous supervision, lender-of-last-resort
facilities, intervention and resolution mechanisms including liquidation and
depositor reimbursements (Sabourin, 2009).
Chartering Function - Character and capital requirements are at the front
end of any financial safety structure. Typically, this gate-keeping function is
performed either by the ministry of finance, central bank, or supervisory
authority but certain deposit insurers also play a role, such as the Federal
Deposit Insurance Corporation in the United States. The first safety net
component is the chartering or licensing function. The chartering function
imposes minimum set-up capital and character requirements on the underlying
financial sector (Sabourin, 2009). Minimum set-up capital requirements typically
ensure that the new entries to the financial system have sufficient capital to
conduct a sound business and financial operations.
Prudential Regulation and Supervision - The second component of the
financial safety net is the prudential regulation and supervision function
which, amongst others, include disclosure and capital adequacy requirements as
well as restrictions on selected business activities. The aim of prudential
regulation is to reduce unwarranted or unmitigated risk taking while supervision
is to monitor banks to ensure that they are complying with regulations in order
to maintain the safety and soundness of the banking system (Sabourin, 2009).
Lender of Last Resort - The lender of last resort is another safety net
component. Typically performed by the central bank, the lender-of-last-resort
function is available to provide liquidity to a solvent but illiquid bank,
should a run against an institution occur (Sabourin, 2009). Should contagion
occur, the lender of last resort can also provide liquidity to the entire
banking system, as we famously saw in 2008 and 2009.
Intervention and Resolution Mechanisms - The fourth component of any
safety net is the framework of intervention and resolution mechanisms. A timely
and effective strategy for handling problem or failed banks help to
substantially mitigate costs and avoid adverse effects on the public, the
banking industry, and the economy. One author (Sabourin 2009) points out that it
is important to have a public policy in place to remove troubled banks from the
system quickly. This should be done in an orderly manner to mitigate contagion,
promote discipline, mitigate moral hazard and ensure that depositors are
promptly reimbursed their insured deposits. The monetary authority (central
bank) also has to play a vital role in the safety net and this fact should be
known by all those involved.
Deposit Insurance - The role of Islamic deposit insurance is to provide
explicit protection in the form of a promise to pay depositors of member banks
in the event of a bank failure. This promotes and contributes to confidence in
the financial system, thereby reducing potential contamination of healthy banks
(Sabourin, 2009). Globally, deposit protection has become an integral part of
the financial safety net. Over the past two years 47 countries raised deposit
insurance coverage or adopted depositor guarantees (Parker, 2009). These
included temporary measures in 26 countries that will be scaled back in the
foreseeable future.
Dual deposit insurance is not intended to be structured to singlehandedly deal
with an entire meltdown of the financial system. In such situations, it is the
role of all safety net providers to play their respective part under proper
coordination (Sabourin, 2009). There is also a wide spectrum of deposit insurers
with varied mandates, powers, roles and responsibilities. These range from
supervised funds with limited mandates that only reimburse depositors after a
bank fails, but also risk minimisers that have a mandate to take pre-emptive
action necessary to minimize the loss of bank failures on the financial system (Sabourin,
2009).
Before any Islamic deposit insurance scheme is set in place, stakeholders should
strive to educate small depositors and allow them to be fully informed about the
benefits and limitations in order to help mitigate bank runs during bad times as
they are unlikely to trust an agency that they have never heard of.
Unfortunately it has been noted that having depositors with no knowledge of
deposit insurance, is as good as having no deposit insurance (Sabourin, 2009).
What depositors do not know does not benefit them.
A country's national deposit insurer should require banks to disclose to
depositors which products are insured and those that are not protected prior to
making financial decisions (Sabourin, 2009). On the other hand, Islamic banks
are also exposed to bank-run risks when the financial system loses public
confidence. Islamic deposit insurance systems, whether they are explicit or
implicit, can play an important role in easing bank-runs and thereby promotes
financial stability (IADI, 2006).
Regional status of Islamic Deposit Insurance
The concept of Islamic deposit insurance has come a long way over the last ten
years. It grew from a simple idea of guaranteeing PLS deposits to the creation
of actual comprehensive Islamic deposit insurance systems in Malaysia and to
less extent in Turkey, Sudan and Indonesia. Jordan and Bahrain are the closest
countries in the Middle East to adopting an Islamic deposit insurance scheme for
their banks. The rest of the GCC has implicitly adopted the deposit insurance
scheme, and thus there is no formal regulation that explains the scheme. Instead
the individual country is relied upon to observe the situation informally
(Othman, 2006).
During the recent credit crisis, many GCC countries used public statements for
deposit guarantees rather than introducing legal protection. These were
primarily countries that made political rather than legal commitments to protect
depositors. Current plans for easing temporary or special protection (for
depositors) should be deconstructed within the next few years, with the majority
split between 2010 and 2011 (Parker, 2009). One can only wonder what will happen
to Islamic deposits when these temporary deposit insurance measures expire. The
Islamic finance industry in the GCC needs a sustainable and comprehensive
Islamic deposit insurance system in order to have a level playing field with
conventional banking.
The Way Forward
Over the past decade differing views on Sharia interpretations between Malaysia
and the GCC have contributed to some extent in the creation of a secular deposit
insurance systems in the relative jurisdictions. However, this research
concludes that when it comes to deposit insurance, there is a common Sharia
ground between Malaysia and the GCC. Hence, there is a need for the political
will if such system is to ever be implemented in the GCC.
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