PROBLEMS AND ISSUES IN TRANSFORMATION FROM CONVENTIONAL BANKING TO ISLAMIC BANKING: LITERATURE REVIEW FOR THE NEED OF A COMPREHENSIVE FRAMEWORK FOR A SMOOTH CHANGE

Abstract

During last few decades, conventional financial systems are being transformed to
Islamic financial systems in many countries around the globe. One of the major
components of Islamic financial system is Islamic Banking. As most of the economies
were not ready for this change, Islamic banks and financial institutions were and are
confronted by many difficulties primarily due to non-existence of a comprehensive
framework. We studied these transformation problems and issues in Far Eastern
countries being the first entrants in this transformation phase. Among a large number of
problems some are lack of general awareness among various stakeholders, existence of
different schools of thought within Islam and insufficient/ineffective legal rules and
regulations. Concerted efforts are not made to develop a new framework in line with the
sensibilities towards the role of religion in commercial and financial activities of society
and to introduce laws compliant with core Shariah principles, prudential standard
requirements for supervision, disclosure requirements for financial statements,
corporate governance and transparency requirements, new product development
requirement, consumer code of conduct to name a few. New entrants in Islamic Banking
may take benefit of this learning curve.