Principles of Islamic banking and finance/PIBF202/Structure and operations/Overview

The structure and operations of Islamic banks is not entirely different from those of conventional banks. A typical commercial bank is headed by the CEO appointed by Board of Directors whose members are selected by the share holders. Indeed the large share holders have influence on the composition of the boards. Below CEO are the COOs, the chief operating Officers who look after different departments of the banks. There is an internal auditing department that keeps an eye on different banking operations and financial reporting. Commercial banks have to follow the rules and regulations set by the central banks apart from those formulated by securities and exchange commissions. All these are also applicable for Islamic banks. But each Islamic bank also has its own Shari'ah board that validates their products, services and operations. Until now, no country has a central Shari'ah establishment that standardize Islamic financial products and services. There are two important institutions that provide guidelines on products, services and operations but these are not mandatory. They are: Islamic Financial Services Board (IFSB)and Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).

Almost all major banks in the western capitalist economies are owned by small or large number of share holders or institutional investors. Government ownership of banks is seen as a source of inefficiency. The situation in many developing countries has been somewhat different. In the beginning almost all Islamic banks were established in developing countries with support from the government such as Dubai Islamic Bank and Bank Islam Malaysia. However, Islamic banks are now increasingly established in the private sector. As the principles of Islamic banking are different, special laws were made to facilitate their operations.

In this section you will learn the differences in the structure and operation of Islamic banks and the conventional commercial banks. They are related to ownership pattern and the mechanisms of control and compliance.