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.

Citation

Suzuki, Y., Uddin, S.M.S. and Islam, A.K.M.R. (2020), "Incentives for conventional banks for the conversion into Islamic banks: evidence from Bangladesh", Journal of Islamic Accounting and Business Research, Vol. 11 No. 2, pp. 273-287. https://doi.org/10.1108/JIABR-03-2017-0031