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KembaraXtra – Islamic Banking – Mixing Conventional and Shari’ah-Compliant Payment and Settlement Systems
In countries that operate a dual-banking system (where Islamic and conventional banking coexist), a common question arises:
Do Islamic Financial Institutions (IFIs) need a separate payment and settlement system from conventional banks?
General Shari’ah position
From a Shari’ah perspective, there is no requirement to separate Islamic and conventional payment or settlement systems. This is because the main function of a payment system is purely operational:
- to transfer money from the payer, and
- to credit the rightful recipient.
The source of the funds—whether they originate from Islamic or conventional banking activities—does not affect the validity of the payment system itself. What matters is that the transfer is accurate, timely, and final.
What must be segregated
Although the payment infrastructure can be shared, Islamic banks operating:
- in a dual-banking environment, or
- through Islamic “windows” within conventional banks
must maintain internal segregation. This means:
- Islamic transactions must be recorded separately,
- Islamic funds must not be mixed with conventional funds internally, and
- reporting systems must clearly distinguish Islamic and non-Islamic activities.
Example: Malaysia’s dual-banking system
Malaysia provides a practical example of how conventional and Islamic payment systems can operate together.
Islamic banks and conventional banks offering Islamic windows are required to maintain a Wadiah (safe-keeping) current account with Bank Negara Malaysia (BNM). This account is used to facilitate cheque-clearing and settlement activities.
Under the principle of Al-Wakalah (agency), banks authorise BNM to manage their settlement positions during the automated cheque-clearing process.
How deficits are handled (step by step)
- During cheque clearing, a bank may end the day with a settlement deficit.
- BNM provides temporary funding using a Shari’ah-compliant, repo-like arrangement.
- The bank sells Islamic securities or papers (previously deposited with BNM) to BNM.
- BNM provides cash proceeds to cover the settlement shortfall.
- The bank later repurchases the same securities from BNM at an agreed price.
- The securities are redeposited with BNM.
- This process is repeated whenever a deficit arises.
This mechanism achieves the same liquidity management objective as a conventional repo, but without interest, ensuring Shari’ah compliance.
Why this approach works
- ✔ One national payment system is maintained (efficient and cost-effective)
- ✔ Islamic and conventional banks can coexist smoothly
- ✔ Internal Shari’ah compliance is preserved
- ✔ Interest (Riba) is avoided
- ✔ Central bank liquidity support remains effective
Islamic banks do not need a separate payment system. They can use the same national payment and settlement infrastructure as conventional banks, provided Islamic transactions are internally segregated and liquidity support is structured using Shari’ah-compliant mechanisms.
In a dual-banking system, Shari’ah does not require separate payment and settlement systems for Islamic and conventional banking. What is required is internal segregation of Islamic transactions and the use of Shari’ah-compliant liquidity arrangements, such as agency-based and Islamic repo-like facilities, as practiced in Malaysia.
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