A Critical Review Of Islamic Banks Finance Essay

Islamic banking is now one of the universe ‘s fastest-growing economic sectors, consisting over 300 establishments in over 75 states. They are concentrated in the Middle East and Southeast Asia ( with Bahrain and Malaysia being the largest hubs ) , but are besides looking in Europe and the United States. Entire assets worldwide are estimated to transcend $ 250 billion, and are turning at an estimated 15 per centum a twelvemonth. The grounds behind the recent growing in Islamic finance are:

The strong demand from a big figure of immigrant and non-immigrant Muslims forA Sharia-compliant fiscal services and minutess ;

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Oil wealth, with demand for suited investings surging in the Gulf part ; and

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The fight of many of the merchandises, pulling both Muslim and non-Muslim investors.

Islamic banking refers to a system of banking or banking activity which is consistent with Islamic jurisprudence ( Sharia ) rules and guided by Islamic economic sciences. In peculiar, Islamic jurisprudence prohibits vigorish, the aggregation and payment of involvement, besides normally called “ riba ” . Generally, Islamic jurisprudence besides prohibits trading in fiscal hazard ( which is seen as a signifier of chancing ) . In add-on, Islamic jurisprudence prohibits puting in concerns that are considered “ haram ” ( such as concerns that sell intoxicant or porc, or concerns that produce un-Islamic media ) . In the late twentieth century a figure of Muslim Bankss were created, to provide to this peculiar banking market.

1. An Overview on the Review of Problems

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The Islamic Bankss face a figure of challenges. First, they have non yet been successful in inventing an interest-free mechanism to put their financess on a short-run footing. They face the same job in funding consumer loans and authorities shortages. Second, the hazard involved in profit-sharing seems to be so high that most of the Bankss have resorted to those techniques of funding which bring them a fixed assured return. As a consequence, there is a batch of echt unfavorable judgment that these Bankss have non abolished involvement but have in fact merely changed the terminology of their transactions.1 Third, the Islamic Bankss do non hold the legal support of cardinal Bankss of their several states ( except in Pakistan and Iran ) , which exposes them to great hazards. Fourth, the Islamic Bankss do non hold the necessary expertness and trained work force to measure, proctor, evaluate and audit the undertakings they are required to finance. As a consequence, they can non spread out despite holding extra liquidness.

The hereafter of Islamic Bankss flexible joints, by and big, on their ability to happen a feasible option to involvement for financing all types of loans. They should acknowledge that their success in get rid ofing involvement has been at least partial and they have yet to travel a long manner in their hunt for a satisfactory option to involvement. Simultaneously, Islamic Bankss need to better their managerial capablenesss by developing their forces in undertaking assessment, monitoring, rating and public presentation auditing. Furthermore, the hereafter of Islamic Bankss besides depends on developing and seting into pattern such accounting criterions which provide seasonably and dependable information of the type that the Islamic Bankss would necessitate for profit-sharing, rent-sharing or for cost-plus funding. These criterions are yet to be developed. The Muslim Bankss would hold to work hard to prosecute their clients to accept these criterions so that a dependable information base is established.2

2. Issues and Problems in the Implementation of an Interest-Free Banking

The execution of an interest-free banking raises a figure of inquiries and possible

Problems if seen from the macro and micro operational point of position.

2.1 Issues Related to Macro Operation of Islamic Banking System

2.1.1 Liquid

Islamic banking bases for the usage of money as a medium of exchange. Conventional banking, on the other manus, emphasizes the demand for keeping liquidness and hence requires an equal sum of militias. The basic rule of Islamic banking being PLS-based funding and thereby holding been exposed to increased hazard ; it would conceivably necessitate higher liquidness and militias. The ground is that its investing in assets has by nature lesser divisibility and reversibility. This means that modesty ratios for interest-free banking are to be calculated on the footing of hazard computation in assorted signifiers of investing.

2.1.2 Valuation of Bank ‘s Assetss

It is argued that Islamic Bankss may endure a loss of value of its assets in the absence of a fixed positive rate of return. Further, without the proviso of insurance Islamic Bankss may confront problem in doing their system stable and avoiding liquidness crises. So far, under Islamic banking, no such insurance system exists.

Theoretically, Muslim Bankss are likely to confront a double hazard: ( a ) the ‘moral ‘ hazard due to miss ofhonesty and unity on the portion of the borrower of financess in declaring a loss, ( B ) the ‘business ‘ hazard originating from unexpected market behavior.

2.1.3 Lack of Capital Market and Financial Instruments

Muslim Bankss working under conventional banking model in different states lacks capital market and instruments for investing of their excess liquidness. Availability of Islamic capital market and instruments help growing of these Bankss. Growth of Islamic capital market and fiscal instruments besides helps making the environment for authorities funding.

2.1.4 Insufficient Legal Protection

A comprehensive system of Islamic banking requires legal protection. This means a thorough reappraisal of all relevant Torahs holding a bearing on banking concern is needed. Laws associating to companies, commercialism, investing and the tribunals and legal processs need to be reviewed and reformulated to accommodate the demand of the efficient operation of Islamic Bankss. It is non acceptable that company jurisprudence continues to speak about bonds and involvement while disregarding engagement workss and net incomes. Investing publicity Torahs should suit regulations and ordinances, which permit Muslim Bankss to use their profit/loss sharing manners so that they can take part in partnership concerns either in the signifier of Musharakah or direct investing.

2.2.1 Lack of Positive Response to the Requirement of Government Financing

It is a well-known fact that the modern province is ever in demand of financess and resources to

implement utile undertakings, such as the proviso of schools, roads, electricity, and H2O and telecommunication services. By and large, authoritiess resort to issue of exchequer measures with involvement in conformity with the signifier used by conventional Bankss. Muslim Bankss are required to come in into this field so as to turn out their ability to play their function in the funding of undertakings in a mode that conforms to the Islamic system through the issue of workss of Musharakah, advance-sale, salam and such other signifiers that satisfy the demands of the province for funding and, at the same clip, benefit from investing of their idle liquid excesss.

2.2.2 Failure of Islamic Banks to Establish Co-operation among Themselves

In malice of good purposes, Islamic Bankss are blamed for their deficiency of open-mindedness to one another, a province of personal businesss that obstructs the accomplishment of common co-operation among them. This is in malice of the relentless enterprises of the Islamic Development Bank to convey them closer to one another and unite their bases. Following illustrations are adequate to turn out the point:

aˆ? Not all-Islamic Bankss are members of the International Association of Islamic Banks. The Association has neither been able to unite their ordinances, nor build Bridgess of assurance and advance apprehension among them.

aˆ? The thought of set uping a “ Bank of Islamic Banks ” is still a mere thought, although there is an pressing demand for its constitution. As a consequence of its absence, Islamic Bankss have lost 100s of 1000000s with the prostration of the BCCI.

aˆ? Islamic financess continue to mouse out by 100s of 1000000s into investing houses making concern in the West while the Muslim universe remains thirsty for investing resources.

aˆ? Fundss of exiles from Islamic states do non happen their manner back to their ain states to lend to the development of their original fatherlands.

aˆ? Trade among states of the Muslim universe is wholly paralyzed as the Islamic funding system goes along with the traditional tendency in funding imports from foreign states without giving any penchant to merchandises of the Muslim universe. Merely the Islamic Development Bank has been paying due attending and attention to the demand for discriminatory intervention for the merchandises of Muslim states.

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