Three-Tier System Needed In Islamic Banking

Professor Dr. M. Kabir Hassan of the New Orleans University has in regard that a three-tier system is needed in Islamic banking to further strengthen the industry.

He said the first tier is to be like the conventional bank where people put their money in and where banks give money to meet their type of transactions.

“The second tier was like the mudarabah type of institution or Mudarabah Company, where people put their money, combine it, try and develop different things,” he said.

He mentioned this model is very much applicable for SME financing, where a person has the idea but does not have the money and another person has the capital. They can combine using the Islamic principle.

He added that the third tier was like venture capital or musyarakah, where big infrastructure project financing was involved.

For this, a regulation for Islamic finance could 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.

“We simply cannot copycat the regulations of conventional banking to help this industry. We need to have our own regulation that is more consistent with Islamic finance,” he stated.

Kabir also said that it was time to correct any problems within the system.