The rapid growth experienced by Islamic finance is likely to last for at least a few more years, driven by the opportunities presented by a huge Islamic market that is only partially tapped. But the picture is not all rosy. The Islamic financial market is increasingly competitive, and growing pains accompany rapid growth. This chapter focuses on the strategic, managerial, and cultural challenges facing Islamic banks. Some of the issues discussed here are common to emerging markets in general and are not exclusive to Islamic banks or even Islamic countries. Indeed, even the most “advanced” markets are not, as the recent financial meltdown has shown, immune to strategic, managerial, and cultural challenges. The world of finance is inherently prone to “manias, panics, crises, and crashes.” The religious dimension nonetheless adds an extra layer of problems.

Competitive Challenges

When modern Islamic finance came into existence, the oil bonanza as well as the novelty of the concept allowed wide latitude for experimentation and error. Funds were plentiful for the handful of Islamic institutions that were in a position to share a monopoly on the small but growing niche of clients looking for Shariah-compliant investments. Many depositors did not even seek any remuneration, placing their money in al-wadiah accounts, thus providing banks with the cheapest possible funding.