Problems that arise from the use of profit-sharing investment accounts (PSIAs) by Islamic banks


There are two central issue:

which are the regulatory problems in jurisdictions and problem in supervision. 
  1. The problem in jurisdiction arises as bank deposits are required by legal definition to be ‘capital certain’ but the presence of such ‘puttable instruments’ in the capital structure of Islamic banks leads to complications in assessing their capital adequacy. 
The main regulatory problem arising from the use of PSIAs is that they do not meet the legal definition of deposits. Neither the customers’capital nor any return on it is guaranteed by the bank. Hence, PSIAs are not ‘capital certain’and are, essentially, investment products. Islamic banks, therefore, do not meet the criteria to be classified as depository institutions as required by banking regulations in the majority of countries

    2.  The problem of supervision occurs due to the fact that profit-sharing investment account            holder are a type of equity investor without the governance rights of either creditors or               shareholders. 

PSIA holders have no such right or any other ‘voice’ in governance. This is a particular problem for unrestricted PSIA holders who have no choice in deciding the types and risk-return characteristics of the assets in which their funds are invested

reference: 
Profit-sharing investment accounts in Islamic banks: Regulatory problems and possible solutions written by Simon Archer and Rifaat Ahmed Abdel Karim
for pdf version

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