REGULATING THE CONVERSION OF CONVENTIONAL BANKS TO ISLAMIC: THE 4 QUADRANTS CONVERSION (4-QC) FRAMEWORK

Abstract

This research paper proposes the conversion of conventional banks to full-fledged Islamic banks as a catalytic approach to propelling the Islamic finance industry to Islamic Finance 2.0. The paper identifies a gap in literature regarding a regulatory framework for Central Banks to regulate the conversion of conventional banks into Islamic banks. The objective of this paper is to propose a model regulatory framework, the "4-Quadrants Conversion Framework (4-FQF)," to aid Central Banks in regulating this conversion process. The 4-FQF consists of twenty-four components classified into four quadrants, and regulators can systematically and comprehensively regulate the conversion by focusing on these twenty-four components. The proposed conversion involves leaving all Shari’ah non-compliant activities and embracing Shari’ah permissible alternatives. Prior studies have discussed different aspects of conversion, and this paper contributes to the literature by proposing a regulatory framework for Central Banks to regulate the conversion process. The successful conversion of conventional banks to Islamic banks will result in a new Shari’ah compliant entity and eliminate a non-compliant one. The proposed regulatory framework can also serve as a guide for banks to self-assess and ensure a timely and less cumbersome conversion.