The Hybrid Model of Islamic Finance: Evaluating the Effectiveness of Conventional Banks in Advancing Shariah-Compliant Products in Developing Muslim Economies

Abstract

This study examines the viability of hybrid banking models—conventional banks offering Islamic financial products—as a strategy to scale Shariah-compliant finance in Muslim-majority developing nations. While Islamic finance has grown exponentially (global assets: $3.5 trillion in 2023, IFSB), its penetration remains limited due to infrastructural constraints and low consumer awareness. This research addresses the critical tension between leveraging conventional banks’ existing infrastructure and maintaining ethical integrity in Islamic finance. A mixed-methods approach was employed, combining quantitative analysis of financial data from 150 conventional banks in Malaysia, UAE, and Nigeria, and qualitative interviews with regulators, Shariah scholars, and consumers. Secondary datasets from the World Bank, IFSB, and central banks were analyzed to compare cost structures, compliance risks, and adoption rates between standalone Islamic banks and hybrid models. The study reveals that hybrid models reduce operational costs by 30–40% and accelerate market reach but risk diluting Shariah compliance without stringent governance. For instance, 22% of Islamic “windows” in Nigeria exhibited non-compliance due to inadequate auditing. Conversely, Malaysia’s harmonized regulatory framework (e.g., Shariah Advisory Council oversight) boosted consumer trust, with 65% of hybrid bank users reporting satisfaction. Consumer awareness programs increased adoption rates by 25% in pilot regions. The focus on three countries may limit generalizability. Future studies should expand to non-Muslim-majority economies. Policymakers must prioritize standardized Shariah governance (e.g., AAOIFI-IFSB harmonization) and invest in consumer education to mitigate “greenwashing” risks. Hybrid models should serve as transitional pathways toward full-fledged Islamic systems. This research pioneers a systemic evaluation of hybrid banking’s dual role in scaling Islamic finance while preserving ethical foundations. It offers a novel regulatory roadmap to resolve the niche-mainstream dichotomy, contributing to SDG 8 (decent work and economic growth) and SDG 10 (reduced inequalities).