Competition from Conventional Banks

1) Islamic banks have to pay more taxes and registration costs

- Because it is asset based banking and the banks has to own the goods it further sells which
eventually are paid by the client, but it increases the cost.

2) Lack of knowledge about Islamic Banking

- Most customers still had low level of knowledge about Islamic banking with their main
sources of knowledge being newspapers and television. A large category of customers was
not confident that Islamic Banking could compete with conventional banking and most of
customers who had yet to use Islamic Banking were equally disinterested in using Islamic
Banking.
- Mostly customers prefer conventional bank because they provide business loans and basic
investment products. they generally pay higher rates on investment and deposits, and
charge lower fees.

3) Conventional Banks have good structural financing

- For conventional loans, if the borrower changes the terms of the loan (Example: Increasing
the loan amount), the Loan Facility Agreement will only need stamp duty. For Islamic
financing, a new Sale and Purchas Agreement (BBA) must be provided, making it more
expensive.
- Islamic financing has difficulty in restructuring in the event of failure.

Unfamiliarity with the Islamic Banking System

1) Extra Management Burden of the Islamic Banks

- This problem is serious in developing countries where the business enterprise, generally, do
not maintain proper accounts or keep different sets of accounts for different purposes. The
presence of such malpractices will raise the cost of Islamic Banking.

- The Islamic banks have devised certain strict rules and regulations so that they select only
sound parties but these procedures not only discriminate them unfavourably against the
other banks but also do not guarantee that customers will be obliged to declare actual
profits of their enterprise.

2) Problems of Investment in Long Gestation Projects

- The Islamic banks have been found to be investing generally in the projects with quick
returns. This is perhaps because the banks have to pay a sizeable profit every year on the
deposit and they cannot afford to have no profit for some time if they are competing with
the interest based banks.

- This means that the long projects are not likely to be picked by these banks. This not only
reducing the long run efficiency of the Islamic banks compare than other banks but will also
affect the growth in developing countries if there are no banks to finance such project.