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April 06, 2009 17:23 PM

Three-Tier Banking Needed To Strengthen Islamic Banking

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.

-- BERNAMA

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