Islamic Finance gif
Europe and the United States as well. They provide Islamic products for an estimated 1.82 billion Muslims in 2009 (26.72% of the world’s population). Even if the sizes of Islamic financial institutions are relatively small compared to international stand- ards, it has to be noted that the prospects for growth and expansion in non-Muslim countries are strong. IFI have experienced a steady growth during the last decade thanks to strong economic development in their host countries.
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The top 500 Islamic banks enjoyed an in- crease in their assets by 28.6% in 2009 ($822 billion) from US$639 billion in 2008 and the value of Shariah-compliant bonds was $100 billion in 2009. The share of issu- ance of Sukuk notes represents about 10% of the global Islamic finance industry. In ad- dition, it is broadly known that Islamic Banks (IBs), the main part of the Islamic Financial System (IFS), performs better, during the crisis, than Conventional Banks (CBs). One key difference is that the formers don’t al- low investing in and financing the kind of in- struments that have adversely affected their conventional competitors and triggered the global financial crisis. These instruments in- clude mainly derivatives and toxic assets.
In this article, we will explore the logic of Is- lamic finance from the pillars of Shariah. We will investigate the ethical dimension that dominates the relationship among bankers, depositors and investors. We will compare the nature of that relationship to that of the nature of the dominant players in western banks. In fact, when we compare Islamic banks to non Islamic, we are not comparing one financial institution to another as many analysts like to put it. We are rather compar- ing two different natures. It is the nature of the west alongside the nature of the east. Ethical vs. unethical are key differences. Greed, exploitation and abuses are the
slamic banking and finance is one of the fastest growing segments of glo- bal financial industry. Currently, there are over 300 Islamic financial institu- tions (IFI) which are mainly concen- trated in the Middle East and South- east Asia, and gaining popularity in
ture of the depositors, the bankers, and the investors, and because of the direct involve- ment of all the parties in the transaction. No one has any direct or indirect interest in ex- ploiting one another, and if they do, they all fail. In addition, Islamic banks do not finance risky investments, or intangible assets, and they equate the interest of the society to that of the investor.
Dr Kassim Dakhlallah, Assistant
Professor of Finance, University of Dubai
Dr. Kassim Dakhlallah earned PhD in Economics from Claremont Graduate University in California. Currently, he works as an Assist- ant Professor of Economics and Finance at the American University of Dubai. His research interests are in the field of International Finance and Islamic Banking.
Furthermore, the formation and the differ- ent structure of an IFI and the challenge to corporate governance are of great impor- tance to the conduct of Islamic banking. The need for regulation in the context of Islamic banking and the main risks associ- ated with the different financial products will be discussed. Concepts related to corporate governance (Asymmetric information, Moral hazard, and Adverse selection) will be ana- lysed as well.
The article’s challenge will be to recognise the strengths that helped IBs performance as well as their weaknesses in order to iden- tify the main Islamic financial products that protect IFS from the crisis. This article will provide operational recommendations for fi- nancial policy makers since it will determine how the IFS could be structured to withstand future global economic and financial crisis. The article is organised as follows.
dominant factors in most financial transac- tions that take place under the conventional banking system. So long commissions are received and interests are paid and the col- laterals are in place, banks will lend. Reck- less investors, on the other hand, knowing the borrowed money is not theirs will borrow to the max. Depositors who care most about the high interest they receive, will keep on depositing regardless of the behaviour of the bankers. Thus, a good recipe for a crisis. They all contribute to it and they all suffer from it.
While under Islamic finance, we notice that greed, exploitation, abuses are at minimum. Reasons are attributed to the religious na-
Section 1 presents the background of Is- lamic banking. Section 2 discusses the re- lationship between depositors, intermediar- ies and investors. Section 3 describes and analyses performance of IBs and CBs and the last section concludes the article.
Background on Islamic Banking Islamic banking has the same purpose as conventional banking except that it oper- ates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamic banking is the sharing of profit and loss (PLS) and the prohibition of Riba (usury). Many studies have discussed in depth about the rationale behind the prohibition of interest and the importance of PLS in Islamic bank- ing. Indeed, all commercial transactions and contracts must be free from elements of
2012 May Global Islamic Finance 63
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