Islamic Banking and Financial Crisis

Islamic Banking and Financial Crisis: Reputation, Stability and Risks

Habib Ahmed
Mehmet Asutay
Rodney Wilson
Copyright Date: 2014
Pages: 256
https://www.jstor.org/stable/10.3366/j.ctt9qdrpg
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  • Book Info
    Islamic Banking and Financial Crisis
    Book Description:

    Do Islamic financial institutions perform better than their conventional counterparts during periods of financial stress? To what extent do systems for managing risk have to be adapted for Islamic financial institutions, given the unique characteristics of their assets and liabilities and the need for shari’ah compliance? These issues have come to prominence since the global financial crisis of 2007-8 and the subsequent recession, and are addressed in this book. The challenges for Islamic financial institutions are explored in an international post Basel II system where banks are required to have more capital and liquidity. Governance issues are also examined, given their influence on client and investor perceptions and their ultimate implications for institutional stability and sustainability. Offers an in-depth assessment of how Islamic banks weathered the financial crisis and what lessons can be learnt. Asks whether Islamic banks are inherently more stable than conventional banks during periods of economic stress. Examines how Islamic banks manage risk, focusing on liquidity risk and the use of forward contracts to mitigate currency risk. Appraises the work of internal shari’ah audit units and the use of shari’ah reports to reduce non-compliance risks. Features case studies from the Gulf, Malaysia, the UK, Pakistan, Turkey and GCC countries.

    eISBN: 978-0-7486-7237-0
    Subjects: Finance, Business, Religion

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. List of Figures
    (pp. vii-viii)
  4. List of Tables
    (pp. ix-ix)
  5. List of Contributors
    (pp. x-xii)
  6. 1 REFLECTING ON ISLAMIC BANKING AND FINANCIAL CRISIS: RISKS, REPUTATION AND STABILITY
    (pp. 1-20)
    Habib Ahmed, Mehmet Asutay and Rodney Wilson

    Do Islamic financial institutions perform better than their conventional counterparts during periods of financial stress? To what extent do systems for managing risk have to be adapted for Islamic financial institutions given the unique characteristics of their assets and liabilities and given the need forShariahcompliance? The eleven contributors to this book address these issues, which have come to prominence since the global financial crisis of 2008 and the subsequent recession. The study explores the challenges for Islamic financial institutions in an international system where banks under Basel III are required to have more capital and liquidity to deal...

  7. 2 RESHAPING THE ISLAMIC FINANCE INDUSTRY: APPLYING THE LESSONS LEARNED FROM THE GLOBAL FINANCIAL CRISIS
    (pp. 21-39)
    Rafe Haneef and Edib Smolo

    In the last twenty-seven years, the world has witnessed more than 124 distinct financial crises. The financial meltdown caused by the current global financial crisis brought the fi nancial world to its knees. Due to its severity, it has been labelled the worst crisis since the Great Depression (for example, see Jones, 2009; Nonomiya and Lanman, 2008;The New York Times,2010; Volcker, 2010). It is now, more than ever before, clear that the current financial system is not flawless. The severity of the recent asset bubble burst has raised questions about the merits oflaissez-fairecapitalism and the theory...

  8. 3 ASSESSING THE RESILIENCE OF ISLAMIC BANKS: AN EMPIRICAL ANALYSIS
    (pp. 40-57)
    Rania Abdelfattah Salem and Ahmed Mohamed Badreldin

    Due to the sub-prime financial crisis, and with banks being one of its major players, many countries have begun to look for more prudent, more transparent banking models in order to overcome the critical flaws of the conventional and current banking system, especially after some of its major defects have become apparent (Newman, 2009). One of the banking models currently being examined by a number of countries, such as the United Kingdom (FSA, 2009) and France (Kamel, 2009), is the Islamic banking model, which emphasises transparency and value creation in its dealings, and shuns greed and profit-only oriented transactions. While...

  9. 4 STABILITY OF ISLAMIC BANKS: A COMPARISON OF CONVENTIONAL AND ISLAMIC BANKS
    (pp. 58-86)
    Matthias Verbeet

    The recent credit crisis did not only raise questions about the instruments and institutions involved but about the financial system as a whole. When debating alternative ways of banking and finance, any media-led discussion will sooner or later reach the topic of Islamic banking. Key phrases like ‘interest-free’, ‘ethical investments’ and ‘profit and loss sharing’ make the concept of Islamic banking appear even more attractive to the half-informed audience of these discussions. Yet there is an ongoing debate about Islamic banking from many perspectives. But, with regard to the current crisis, the question to be asked would be, ‘Is it...

  10. 5 ISLAMIC BANKS’ FINANCING BEHAVIOUR: A PILOT STUDY
    (pp. 87-105)
    Mohd Afandi Abu Bakar, Radiah Abdul Kader and Roza Hazli Zakaria

    It is irrefutably true that bank-lending volume is stronger in periods of strong economic growth and weaker in periods of weak economic growth. During strong economic growth, due to high consumption spending by households, investment demand will increase; the opposite is true during weak economic growth. The nerve-racking issue is that empirical studies exhibit a pro-cyclical behaviour of the conventional banks’ lending to the business cycle (Gruss and Sgherri, 2009; Albertazzi and Gambacorta, 2009; Rochet, 2008; Bouvatier and Lepetit, 2008; Quagliariello, 2007; Bikker and Metzemakers, 2005 are among the latest empirical studies that provide evidence on the matter). The conventional...

  11. 6 RISK MANAGEMENT PRACTICES OF ISLAMIC BANKS: INTERNATIONAL EVIDENCE
    (pp. 106-123)
    Romzie Rosman and Abdul Rahim Abdul Rahman

    The esteemed status that Islamic banking has achieved, as well as the evident proof of its practical and viable system is noteworthy. The increasing development of Islamic fi nancial institutions worldwide demonstrates the desire for Muslims to use Islamic fi nancial institutions that are interest-free and that adhere to the Islamic principles ofShariʾhlegislated in theQur’ān(Sundararajan and Errico, 2002). The Islamic financial industry is currently comprised of Islamic commercial and investment banks,tākaful(mutual insurance) companies, leasing andmudārabahcompanies, and other non-bank fi nancial institutions (Sundararajan and Errico, 2002). Iqbal and Llewellyn (2002) emphasised that, by...

  12. 7 LIQUIDITY RISK MANAGEMENT AND FINANCIAL PERFORMANCE OF ISLAMIC BANKS: EMPIRICAL EVIDENCE
    (pp. 124-135)
    Noraini Mohd Ariffin and Salina Hj. Kassim

    Managing liquidity is one of the top priorities of a financial institution’s assets and liabilities management. In the context of banking, liquidity, or the ability to fund increases in assets and meet obligations as they come due, is critical for the ongoing viability of the banking institution. Since there is a close association between liquidity and the solvency of banks, sound liquidity management reduces the probability of banks becoming insolvent, thus reducing the possibilities of bankruptcies and bank runs. Ultimately, prudent liquidity management as part of the overall risk management of the banking institutions ensures a healthy and stable banking...

  13. 8 RISK MANAGEMENT AND ISLAMIC FORWARD CONTRACTS
    (pp. 136-148)
    Sherin Binti Kunhibava

    This chapter explores risk management and the current use of Islamic forward contracts in Islamic banks around the world. While Islamic banking facilities and Islamic capital market instruments such assukuk ijārah, sukuk mushārakahandsukuk mudarabahare well documented, widely understood and known, Islamic derivatives, on the other hand, are not. The possible reason for this is that there are a number of objections towards derivatives inShariahthatmake conventional derivatives,¹ such as forwards, futures and options impermissible (Obaidullah, 1998; Kamali, 2002). However, due to the need for risk management tools (Bacha, 1999), ‘Islamic’ derivatives have been created and...

  14. 9 ENHANCING GOVERNANCE, ACCOUNTABILITY AND TRANSPARENCY IN ISLAMIC FINANCIAL INSTITUTIONS: AN EXAMINATION INTO SHARĪ‘AH INTERNAL CONTROL AUDIT
    (pp. 149-169)
    Zurina Shafii and Supiah Salleh

    Malaysia has been embracing the practice of Islamic banking and finance for twenty-five years since its first establishment of Bank Islam Malaysia Berhad (BIMB) and Takaful Malaysia in 1984 and 1985 respectively. Since then, the investors have been relying on self-reporting regardingSharīʿah- compliance by theSharīʿahCommittee (SC) of the relevant institutions. This is the requirement of Bank Negara Malaysia’s (BNM) guidelines of GPS-1 on the role and responsibilities ofSharīʿahSupervisory Boards of Islamic financial institutions. The practice is similar to other Islamic Financial Institutions (IFIs) in the world, that is, reporting in IFIs is done at the...

  15. 10 SHARĪ‘AH REPORT: A POTENTIAL TOOL FOR SHARĪ‘AH NON-COMPLIANT RISK MANAGEMENT
    (pp. 170-199)
    Abdou Karim Diaw and Irawan Febianto

    It is agreed thatSharī‘ah-compliance is the main justification of the existence of Islamic banking and finance. To fulfi l this very important requirement, the Islamic Financial Institutions (IFIs) have made various arrangements consisting of the appointment ofSharīʿahscholars with the specific task of supervising their operations. At the national level, some countries have taken the initiative of setting up a national body to cater for theSharīʿahsupervision and the approval of the financial instruments used by the IFIs. That is the case in Malaysia (SharīʿahAdvisory Council) and Sudan (HigherSharīʿahSupervisory Board). Globally, there are also...

  16. 11 A SURVEY ON SHARĪʿAH GOVERNANCE PRACTICES IN ISLAMIC FINANCIAL INSTITUTIONS IN MALAYSIA, GCC COUNTRIES AND THE UK
    (pp. 200-221)
    Zulkifli Hasan

    Sharīʿahgovernance as defined by the IFSB Guiding Principles onSharīʿahGovernance System (IFSB-10) is ‘a set of institutional and organizational arrangements through which IFIs ensure that there is eff ective independent oversight ofSharīahcompliance over the issuance of relevantSharīʿahpronouncements, dissemination of information and an internalSharīʿahcompliance review’ (IFSB, 2009: 2). As an additional layer of governance within the internal structure of corporate governance in IFIs,Sharīʿahgovernance is very important as a mechanism to address a specific type of risk exclusive to IFIs known asSharīʿahnon-compliance risk.¹ The singnificance ofSharīʿahnon-compliance risk to...

  17. 12 TOWARDS GENUINE SHARĪʿAH PRODUCTS WITH LESSONS OF THE FINANCIAL CRISIS
    (pp. 222-233)
    Abdulazeem Abozaid

    According to financial analyses, the current financial crisis has basically been caused by excessive dealing in interest and by trade of debt securities.

    In fact, these two practices are unanimously prohibited in Islam and are related toribā,one of the gravest sins a Muslim may ever commit. However, some Islamic banks have developed and marketed asSharīʿah-compliant some products that are to observers and financial experts similar in substance and economic implications to the conventional interest-bearing loans. Developers and proponents claim the legitimacy of these products on the basis of locating some juristic statements that indicate their acceptability. However,...

  18. INDEX
    (pp. 234-244)