Capitalization requirement and efficiency - Essay Example

This issue is highlighted in the study of Ahmed et al. (2001) where it is noted that ‘Islamic banks perform both commercial and investment banking services but do not establish firewalls to separate these two services legally, financially, and managerially’ (Ahmed et al., 2001, p.169); in accordance with the above researchers the effectiveness of Islamic banks could be increased if their activities were appropriately categorized and distributed among different organizational departments. On the other hand, Chong et al.

(2009, 125) state that the most important characteristic of traditional Islamic banking is the Profit and Loss Share scheme – in Islamic banks there is no interest on transactions, a fact that differentiates these banks from Conventional ones; the daily functions of Islamic banks have to be aligned accordingly. Through the study of Chong et al. (2009) it has been also proved that the use of PLS scheme in Islamic banks worldwide has been limited under the influence of the Conventional-banks practice of offering interest on investments and transactions; through this way, it is proposed by Chong et al. (2009) that the rules regulating the activities of Islamic banks worldwide would be changed and introduce similar principles with those applied on Conventional banks.

The need for update of the existing operational principles of Islamic banks has been highlighted by the Accounting and Auditing Organization for Islamic Financial Institutions; the above organization has proposed the development of ‘accounting standards for Islamic investment vehicles and the conduction of related training and publicity’ (Pomeranz, 1997, p.123); in other words, the weaknesses of the current Islamic banking system are recognized; however, it is noted that the improvement of Islamic banking system should be developed independently from the Conventional banking, i.e. through the establishment of principles and practices that they will