Kashif

Investment Management and Financial Innovations, 2017

Islamic finance has faced a two-fold criticism from scholars; viz. constructive criticism and destructive criticism. Majority of the scholars criticize it with the intention to improve its overall development, but some scholars are more negative in their criticism. This paper proposes that Islamic banks (a component of Islamic finance) are not charitable institutions, but are the intermediary institutions that take care of investors’ expectations to keep the time value and return to their investments intact with the market fluctuations. The purpose of this paper is to provide better insight about Islamic finance so as to further improve this industry to achieve its long term goals and serve the society better. The paper also attempts to answer some of the common allegations imposed by scholars towards Islamic finance.

Some recent writings on Islamic finance have resuscitated the old 'no risk, no gain' precept from the earlier literature in the wake of current financial crisis. They argue that the basic reason for the recurrence of such crises is the conventional interest-based financial system that subsists purely on transferring of risks. In contrast, Islam shuns interest and promotes sharing of risks, not their transfer. The distinction is used to make a case for replacing the conventional system with the Islamic; for that alone is thought as the way to ensuring the establishment of a just and stable crisis free economic system. Islamic banks have faced the current crisis better than the conventional is cited as evidence. The present paper is a critique of this line of thought. It argues that risk-sharing is not basic to Islam. It encourages profit sharing of which sharing of risk is a consequence not the cause. The paper concludes that the case is for reform, not for replacement, of th...

European Research on Management and Business Economics, 2016

The aim of this paper is to examine whether Islamic finance could be an alternative to the traditional financial system and could guarantee stability in times of crisis. To this end, 78 Islamic banks in 12 countries have been studied over the 2004 to 2013 period. A series of bank-specific and other country-specific indicators are combined to explain the soundness of Islamic banking in terms of profitability as measured by ROA and ROE, and risk divided into credit risk measured by IMLGL and EQL, and insolvency risk measured by Z-SCORE. The aim is to estimate five regressions using dynamic panel data econometrics (GMM system). The results indicate that bank size and capital are the main factors responsible for increasing profitability and stability of Islamic banks and reducing their credit risk. However, the ratios forming the variable liquidity and asset quality often lead to inconclusive results. It is also found that macroeconomic variables, except inflation, are able to improve Islamic banks' stability. This is not the case for credit risk where the ratio is still unfavorable. The conclusion is that there are no major differences between IBs and CBs in terms of their profitability and risk features.

Islamic Financial Industry is experiencing a good high pace and many Islamic financial products have been introduced in a very short span of time as compared to conventional financial products but in fact the present prevalent Islamic financial system, around the world, has been developed keeping in view the products of conventional banking in order to attain same results/profit margins in a Shari'ah Compliant way. Consequently, the product becomes Shari'ah compliant but the core attributes of Islamic Economic System i.e. Justice and Social Welfare etc. are overlooked by the Industry. In other words, the conventional thinking of banking has an existence in Islamic Banking and only profit maximization concept is being considered rather than the concept of profit maximization with social welfare. This paper discusses all of such concerns and highlights the flaws and issues in the prevalent Islamic banking system and proposes suggestion/solution in this regard. The current depr...

2013

Journal of Finance Issues

After experiencing phenomenal growth over the last forty years, the Islamic banking and finance industry (IBF) faces some difficult challenges which are addressed in this paper. We argue that the industry has moved away from pursuing ideals conveyed by its brand-name products towards a convergence to the conventional banking and discuss the reasons behind this trend. We suggest that the dictates of the economic and financial theory might be at conflict with the IBF market niche strategy. Additionally, we highlight operational challenges facing the industry in deploying risk management techniques and regulatory compliance.

Over the decade, serious banking problems have been a major issue in many countries, and more and more countries have been plagued by banking disasters. There are many reasons leading to the banking crisis. Islamic banking is one of the emerging fields in the global financial market and grows at a very fast pace. This study is primarily concerned with the theoretical foundations of Islamic banking and the practice in Malaysia, examines similarities and differences between the structures and practices of Islamic banking and conventional banking, and further seeks to investigate how the Islamic banking system could avoid the banking crisis. Unlike conventional banks, the operations of Islamic banks are not interest-based, which are primarily governed by the Sharia laws that prohibit interest transactions. Islamic banks mainly turn to the creation of equity through profit-loss-sharing (PLS) financial transactions. This study looks into the capital structure of Islamic banks and also addresses issues pertaining to the supervisory authorities in the conventional banking system and the implementation of the Islamic banking system in Asian countries.

Global Islamic Finance Report, Chapter 13, Edbiz Consulting, UK. , 2015

2017

This article aims to give a quantitative synthesis of the literature related to the performance of Islamic banks. Like conventional finance, Islamic Finance deals with 100% Halal investment, trade, transactions, lending and financial products. Thus, as its name suggests, Islamic Finance respects the precepts of the Muslim religion while addressing an audience without distinction of religion and color. Concretely, the consumer who chooses to entrust his money to Islamic finance is protected from interests (Ribâ), speculation (Maysir and Qimâr), uncertainty (Gharar) and the illicit (Haram). In Islamic Finance, banks are forbidden to invest their money in Haram domains such as the tobacco industry, pornography, eroticism, the alcohol and wine industry ( And of course drugs), gambling, the hog industry and unlicensed food, armaments (except for states), the banking industry (except the Islamic banking industry), and so on. More clearly, Islamic Finance seeks to simplify access to money ...

The aim and focus of the foundations and principles of the modern Islamic finance is to revive the justice and equity in the society, and that formulates the core objective of the Islamic system. However, in the current situation, Islamic banking and finance (IBF) is apparently mixing up the concept of social welfare and the conventional ideology of wealth maximisation altogether due to the unavoidable need to compete with the conventional financial system and the force of convergence between those two. There are many Islamic finance scholars who now argue that ‘banks are not for poor’, which clearly shows that the need for the new institution is necessary. Therefore, establishment of new institutions and reformation and improvement of present ones will bring complete and solid Islamic financial system, which then will contribute to enhancement of the distributive and social justice in the society, which will be one step closer to the completion of the true Islamic economic system. This paper studies the emergence of IBF, its relationship with maqasid al-Shari’ah, meaning, proper comprehension and appropriate application of Shari’ah objectives, as well as challenges facing in realising these divine objectives. The paper analyses current practices of IBF showing examples of social failure and deviations of IBF from the concept of maqasid al-Shari’ah and provides some practical solutions, implementation of which should bring IBF back on its course to achieve maqasid al-Shari’ah.