The Mega Islamic Bank: A ‘Silver Bullet’ Solution

By  Mughees Shaukat & Mohd. Zamree Mohd Ishak

Abstract

Islamic finance is fast becoming a major global force and its impact is only just beginning. However it still lacks well-capitalized institutions. About a quarter of the roughly 300 Islamic financial institutions worldwide are reported to have less than US$25 million in paid-up capital. No wonder the idea of ‘Mega Islamic Bank’ has picked up pace, and so have these burning questions. For instance, is it viable to have such a bank or do we really need one? If so, then how? Who will take the lead? What could be the consequences? Are there more pros than cons to it? These are among the many pivotal IFs & BUTs. This study will attempt to address most of these issues, and finally would prove the viability of this idea and even come up with some policy implications to support its transformation from reasons to reality. Our findings and arguments are based on comparing the profitability and performance of a sample of 18 Islamic viz-a-viz 18 conventional banks globally. The techniques involved would be the Fixed and Random Panel Techniques and more advanced Dynamic Heterogeneous Panel, to make the comparison more rigorous. The findings provide a justification for further mergers and consolidation in the industry. Better capitalized, more profitable and robust banks are found to operate at higher efficiency levels in a politically stable environment that fosters financial openness and this is exactly at the core of why we should have an Islamic Mega Bank.