Compare the Structures of Commercial and Islamic Banks - dummies

Compare the Structures of Commercial and Islamic Banks

By Faleel Jamaldeen

Comparing the structures of Islamic banks to the structure of conventional commercial banks is somewhat difficult because the structures differ according to each bank’s specific requirements. To give you a starting point for comparison, this figure illustrates a generic organizational structure of a conventional commercial bank.


The next figure offers a generic organizational structure of an Islamic bank. Note that a bank’s sharia supervisory board may report directly to shareholders, and in some cases the sharia board may have subunits such as regional sharia committees.


As you can see, they have a lot in common.


You can see that stockholders are the people at the top. If you’re a stockholder in a commercial bank, you’re a powerful person indeed. Stockholders are the investors and the primary resource supporting the bank’s existence.

Board of directors

The board of directors oversees the operations of the bank and is responsible for supervising the bank’s affairs by exercising effective corporate governance. The board of directors governs the bank by setting policies and procedures; it’s selected by the stockholders and should represent the stockholders’ interests.

It’s also responsible for many high-level decisions and appoints the bank’s chief executive officer (CEO). This list of duties applies to the boards of both conventional and Islamic commercial banks.

Audit committee

Each commercial bank creates an audit committee that reports directly to the board of directors regarding the bank’s financial reporting, disclosures, and risks. Generally, audit committees in commercial banks handle the following tasks:

  • Ensure that bank operations comply with industry regulations.

  • Make sure that the day-to-day operations of the business function according to the company’s internal control policies.

  • Conduct internal audits of the bank to make sure that banking operations are performed according to specific internal control procedures and comply with the rules and regulations set by the governing organization.

Chief executive officer (CEO)

The CEO of a commercial bank plays a vital leadership role and reports directly to the board of directors. The CEO is expected to mobilize the bank’s funds and utilize them in order to make money. The CEO also has to make sure that the bank meets standards of customer service so it can compete effectively in the industry.

In an Islamic bank, the CEO must also have in-depth experience with the sharia-compliant financial industry. Many Islamic banks prefer to hire CEOs with experience in both conventional and Islamic banks; the CEO needs to interact with stakeholders of both types of banks.

Operational-level management

The operational-level management occupies a lower tier in the organization chart of a bank. Operational-level management reports directly to the CEO. The people who make up the operational-level management team include the operational managers for banking activities (the chief operating officers) and the departments of finance, marketing, human resources, legal affairs and compliance, information technology, and risk management.

Each bank has a compliance department to make sure that the bank upholds proper market conduct, that customers are suitably advised, and that the bank serves customers fairly.

Islamic commercial banks have compliance departments just as conventional banks do, but they also need an entity to oversee sharia compliance, which is the sharia supervisory board.

Banks have inherent risks in their day-to-day transactions. To manage those risks, each bank has a core department called (appropriately enough) the risk management department.

Business segments

The retail (consumer) banking business segment, also referred to as personal banking, exists in banks that are directly involved with the general public. Most primary and secondary services offered by commercial banks are offered by retail banks. Conventional retail banks provide checking accounts, time deposits, demand deposits, housing mortgages, auto loans, credit cards, and safe-deposit boxes. They provide services to their customers through branch banking, ATMs, and/or online banking.

Islamic retail banks offer their customers current (checking) accounts, savings accounts, demand deposits, Islamic credit cards, sharia-based mortgage and auto loan products, and more.

Corporate banking is another large segment of commercial banks. The corporate banking units provide services to corporations, large portfolio customers, governments, and other large-scale institutions. Corporate banking services range from simple loans to complex foreign exchange derivatives. The corporate banking segment provides customers with the most suitable customized financial solutions.

Many Islamic banks have already engaged with corporate banking to serve their major corporate customers, and many Islamic corporate financial products exist.

Islamic banks also provide leasing options through ijara contracts. Sukuk are used to issue corporate bonds, and takaful (insurance) contracts are used to finance risk management of a corporation. So every product in Islamic corporate banking is based on existing types of Islamic contracts.

The investment banking segments of commercial banks don’t take deposits from customers; instead, they provide services to clients. They offer advice and help to individuals, corporations, and government organization on a range of activities. For example, this banking segment provides financial advocatory services (such as advice on corporate mergers and acquisitions), underwriting, and sales and trading of securities (stocks and bonds).

Investment banking segments also become involved in the trading of financial instruments such as derivatives, fixed income instruments, commodities, and foreign exchanges.

Islamic commercial banks also have investment banking segments that provide the same basic services as conventional investment banks, but with this difference: Islamic investment services must comply with sharia and are, therefore, subject to oversight from the bank’s sharia supervisory board.