Universiti Malaysia Terengganu
Question
Asked 16th Mar, 2016
Is Islamic finance failing to deliver on its promises?
is Islamic finance failing to deliver on its promises?
Most recent answer
we can't judge on the failure of Islamic banking easily. i would like to add to your debate that Islamic banks, in fact, are subject to huge risks if the practices of these banks are not well regulated by one institution in all over the world, based on a conceptual framework to facilitate these practices. For instance, the AAOIFI or IFSB can jointly form this institution
Hope that helps
All Answers (5)
Universiti Teknologi MARA Johor
It is not a failure, it needs to be reviewed, updated, upgraded so that it can fulfill the needs for better financing in future. Comprehensive studies should be done looking at many aspects, from many angles and perspectives.
Universiti Teknologi MARA
Islamic finance should go beyond Islamic banking. A sustainable Islamic finance industry must continuously seek for new products or to innovate old products. There are many new Islamic products such as sukuk, corporate waqaf and Islamic philanthropy that have great potential in today's dynamic economy. There are also other "older" products such as Islamic Microfinance, Zakat and Sadaqah that can be innovated so that the products are sustainable. For example, one of the greatest gap in Islamic microfinance is the need to link the entrepreneurs to both the suppliers and the market. Entrepreneurs must also be trained in term of financial management and business development. To mitigate financial leakages in the form of fraud and other unethical activities, the industry must inculcate the culture of good governance and integrity.
Christ University, Bangalore
When it is about the promises made by the Islamic Banking which is guided by the Shariah law, I would like to take the example of the country Malaysia where both Conventional Banking and Islamic Banking is present side by side. (reference :Islamic banking: Interest-free or interest-based?
Beng Soon Chong , Ming-Hua Liu)
So,
- In theory, a unique feature that differentiates Islamic banking from conventional banking is the PLS paradigm. In practice, however, Islamic banking is not very different from conventional banking from the perspective of the PLS paradigm.
- On the asset side of Islamic banking, it is found that only a negligible portion of financing is based on the PLS principle. Consistent with Islamic banking an experience elsewhere, a large majority of Islamic bank financing in Malaysia is still based on non-PLS modes that are permissible under the Shariah law.
- On the liability side, the PLS principle is more widely adopted in structuring Islamic deposits. But the study provides new evidence which shows that, in practice, Islamic deposits are not interest-free.
- There are several possible reasons for the poor adoption of the PLS paradigm in practice.
- First, unlike conventional banking, PLS financing encounters severe principal–agent problems. Moral hazard problems associated with ex-post information asymmetry, for example, are especially significant in PLS financing because the entrepreneur (borrower) has incentive to under-declare or artificially reduce reported profits.
- In the case of mudarabah (profit-sharing) contracting, the entrepreneur has an incentive to undertake high-risk projects because the entrepreneur is actually given a call option whereby he or she gains on the upside but bears no losses at all on the downside. PLS financing, thus, requires more costly monitoring.
- The adoption of PLS financing is disadvantaged by a lack of management and control rights. In mudarabah (profit-sharing) financing, for example, the bank provides all the risk capital, but the management and control of the project is mostly in the hands of the entrepreneur. The lack of management and control, in particular, accentuates the principal–agent problems associated with PLS financing.
Finally, that the adoption of the PLS paradigm is constrained by competition as well as by best practices from conventional banking. Religion notwithstanding, individuals can choose to bank with an Islamic bank and/or a conventional bank. Thus, in terms of best practices, Islamic banking practices often cannot deviate substantially from those of conventional banking because of competition. The returns on the Islamic deposit accounts are effectively pegged to the returns on conventional-banking deposits because of competitive reasons.
CMR College of Engineering & Technology
It is not a failure, just see one attached paper are proved
the paper examined twenty-eight Islamic banks of fifteen Muslim majority countries to determine whether or to what extent the promises (Islamic principles) are delivered. The overwhelming percentage of total assets is allocated for debt-type financing which the critiques of Islamic bank doubt about its Islamic validity.
For full paper see the following link
1 Recommendation
Universiti Malaysia Terengganu
we can't judge on the failure of Islamic banking easily. i would like to add to your debate that Islamic banks, in fact, are subject to huge risks if the practices of these banks are not well regulated by one institution in all over the world, based on a conceptual framework to facilitate these practices. For instance, the AAOIFI or IFSB can jointly form this institution
Hope that helps
Similar questions and discussions
To what extent can Shariah-Compliant credit cards serve as a tool to enhance the financial inclusion of Muslim population?
The Shariah-compliant credit cards are becoming increasingly common in many countries.
"According to Brian Riley, a research director at TowerGroup, a financial services research firm based in Needham, Mass., Muslims constitute almost 24 percent of the world's population, and he estimates that total assets in Shariah-compliant banks will hit $1 trillion by 2011" (Read more: http://www.creditcards.com/credit-card-news/shariah-compliant-credit-cards-1273.php#ixzz43hAlz28i)
many Islamic banks are now involved in these Islamic credit cards in GCC Region, UK, USA, and more importantly in Malaysia (see Noor, A.M. and Azli, R.M., 2009. A review of SharENah compliant instruments for Islamic credit cards as adopted by Malaysian Financial Institutions. International Journal of Monetary Economics and Finance, 2(3-4), pp.221-238). instead of charging an interest "Riba", the customer is charged a subscription fee periodically
These efforts are apparently an attempt to utilize the huge Islamic compliant-assets worldwide. however, many people are still skeptics about the substance of these credit cards and the extent of its significance.
to what extent do you think that these Islamic instruments can contribute in the inclusion of Muslims in the financial system? and is it really Shariah-compliant?
Related Publications
Islamic Banking: An Introduction to Islamic Accounting is written with the purpose of sensitizing readers to the need of accounting according to the al-Quran and Sunnah, Islamic accounting concepts, and accounting for Islamic financial transactions. The knowledge and skills gained from the course is able to add value to the students in order to pre...
•Overview papers on Islamic Finance•Papers cover Islamic Stock Indices, Islamic Banks, Islamic Mutual Funds, Islamic Bonds and Islamic Accounting•Provide direction for future research in Islamic finance
