Suggestions for Banking Business Models of Islamic Banking: Current Issues and Practical Solutions for Future

Abstract

A business model can be briefly defined as how a business organizes itself to generate value. It has become an important and hot topic attracting the attention of academics for the last few decades. Banks also have a particular business model. It is commonly believed that the Islamic banking business model depends on interest-free income-generating processes. Initially, the Islamic banking business model was designed based on partnerships on both the asset and liability sides. Then, due to the necessities of the following periods, it has shifted toward a more debt-based structure by heavily employing products such as murabahah (mark-up sale). However, the current structure of the Islamic banking business model has been criticized by both academics and practitioners. First, this chapter discusses the criticisms – such as using off-balance-sheet items – directed toward the banking business model in general and the current Islamic banking business model in particular. Second, it provides some recommendations regarding the Islamic banking business model by taking into account the relevant literature. The suggested business model developments for Islamic banks are as follows: introduction of a wide range of crowdfunding platforms, establishment of peer-to-peer (p2p) financing platforms, drawing up smart profit-loss sharing contracts, and distinct and unique bank structures in line with the nature of Islamic banking, such as Islamic investment bank. Thus, fintech seems to play a major role in reshaping the Islamic banking business model.