Islamic banks more likely to adopt controversial practices introduced to the sector by conventional banks

Traditional Islamic banks adopt controversial practices of outsiders, reject bad behaviour of insiders

Traditional Islamic banks are more likely to adopt controversial practices introduced to the sector by conventional banks, than those that are introduced by a similar Islamic bank, according to new research co-authored by a Cass Business School academic.

The research investigates a data set consisting of 143 Islamic banks in 23 countries; 101 of these banks are considered ‘insiders’ as they are full-fledged or traditional Islamic banks, while 42 are Islamic bank operations owned by a conventional bank, often internationally known, and are considered ‘outsiders’.

The asset worth of the Islamic banking sector tripled between 1996 and 2017, growing from $509 billion US dollars to more than $1.5 trillion US dollars.

This rapid growth has seen conventional banks venture into the sector to establish their own Islamic bank operations, bringing with them practices that are often in opposition to Islamic banking principles that are embedded in religion.

Among the most controversial of these practices is the adoption of financial derivatives – a practice considered incompatible with Sharia Law and in violation of the principles of Islamic banking.

The research found that despite the controversy surrounding financial derivatives, traditional Islamic banks are willing to adopt the practice when it is introduced by conventional banks who are seen as outsiders to the industry.

Most often these practices are adopted by traditional Islamic banks as a means of competing with the outsider and under the rationale that the outsider bank is so different to the traditional insider bank that adopting their practices is akin to leveling the playing field.

Co-author of the paper, Cass Business School’s Dr Maima Aulia Syakhroza said as competition from conventional banks increases in the Islamic banking sector opposition to violations of its traditional principles is diluted.

“The more intense the competition, usually what happens is that the theological undertones become more subtle,” Dr Syakhroza said.

“What the traditional Islamic banks do is to follow in the footsteps of the outsiders, they will say ‘This is what we need to do to survive against these evil capitalistic banks’.”

In contrast, derivatives introduced to the sector by full-fledged Islamic banks, are rejected by their peer banks as there is a perception it could damage the purity of the Islamic banking sector as a whole.

“When a fellow Islamic bank violated the principles, other banks were afraid that their whole image would be tainted; they were afraid that they would be seen as no different to the conventional banks,” Dr Syakhroza said.

The paper Holier than Thou? Identity Buffers and Adoption of Controversial Practices in the Islamic Banking Category’ is published online and will be printed in the Academy of Management Journal later in 2019.

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