How Islamic Banks are Spared from Financial Crisis of 2008

Running head: HOW ISLAMIC BANKING IS SPARED FROM FINANCIAL CRISIS OF
2008
Title : How Islamic banks are spared from financial crisis of 2008
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HOW ISLAMIC BANKS ARE SPARED FROM FINANCIAL CRISIS OF 20081
EXECUTIVE SUMMARY
In the study how Islamic banks are spared from the financial crisis of 2008 is shown. It
revealed that Islamic banks followed Sharia law, hence it protected them from the financial
crisis. Most of the assets of Islamic banks were asset based and was financed mostly by
equity. Islamic banks did not lend money like the conventional banks as it is against the
Sharia law. An Islamic bank does profit and loss sharing and does not charge interest. Before
the financial crisis, conventional banks were into sub prime mortgage, while Islamic banks
stayed away from it. When the financial market crashed, it shook the entire world. But
Islamic banks though were effected a lit bit, again stood up as they had strong grounds to
stand up. While many conventional banks and financial institutions collapsed not only in US,
but throughout the world. The financial crisis mainly affected the conventional banks,
underdeveloped and developing countries. It reverberation can be still felt in many parts of
the world.

HOW ISLAMIC BANKS ARE SPARED FROM FINANCIAL CRISIS OF 20082
Table of Contents
Chapter 1: Introduction..............................................................................................................4
1.1 Introduction......................................................................................................................4
1.2 Background......................................................................................................................4
1.3 Problem Statement...........................................................................................................4
1.4 Research Aim, Objectives and Questions........................................................................5
Chapter 2: Literature Review.....................................................................................................5
2.1 Introduction......................................................................................................................5
2.2 Justification for the existence of banks............................................................................5
2.3 Islamic Banking...............................................................................................................5
2.4 Why Islamic Banking are spared from the financial crisis..............................................6
2.4.1 Shariah Concept............................................................................................................6
2.4.2 Interest ( Riba)...............................................................................................................7
2.4.3 Difference between conventional banking and Islamic banking.................................9
2.4.4 Equity participation ( Musharaka)..............................................................................10
2.4.5 Mudaraba (Trustee financing )....................................................................................10
2.4.6 Murabaha (Mark –up)................................................................................................11
2.4.7 Ijara (lease)..................................................................................................................12
2.4.8 Moral Hazard..............................................................................................................12
2.4.9 Profit and Loss Sharing...............................................................................................15
2.4.10 Expansion of Derivatives..........................................................................................15
2.11 Cause of global financial crisis....................................................................................18

HOW ISLAMIC BANKS ARE SPARED FROM FINANCIAL CRISIS OF 20083
2.12 Corporate Governance.................................................................................................19
Chapter 3: Conclusions, Recommendations and suggestions..................................................20
3.1 Conclusion......................................................................................................................20
3.2 Recommendation............................................................................................................21
3.3 Limitation and suggestion for future work.....................................................................21
References................................................................................................................................22

HOW ISLAMIC BANKS ARE SPARED FROM FINANCIAL CRISIS OF 20084
Chapter 1: Introduction
1.1 Introduction
Banks are financial intermediaries, which accepts deposits from the household sector
and grants loan to the organization sector. It helps to mobilize the money flow in the market.
Finance is the science and art of managing money. Finance focuses on the institutions,
process, instruments and markets involving transfer of money among government, business
and individuals (J Gitman, 2013).
1.2 Background
The entire world faced financial crisis in 2008, the dangerous one since the Great
Depression of 1930’s. It started in 2007 when extremely high price of homes in the United
States started falling unquestionably. It started spreading in the financial sector in the U.S,
then to financial markets globally. Throughout the world share prices dived and a great
recession had captured the world. The effect was found globally(Waemustafa and Sukri
2015). The U.K government offered $88 billion to purchase banks partially or completely.
Barclays, British multinational investment bank and financial services company accepted
$11.7 billion from rich investors in U.A.E, Abu Dhabi and Qatar. Top representatives of the
Group of 20 met in Washington to pave the way for global association. There were high
unemployment rate and reduced economic output.
1.3 Problem Statement
The problem statement is the ways in which the Islamic bank were spared from the
financial crisis of 2008.

HOW ISLAMIC BANKS ARE SPARED FROM FINANCIAL CRISIS OF 20085
1.4 Research Aim, Objectives and Questions
The aim of the research is to understand that in what way Islamic banks was spared
from the financial crisis of 2008.
The objective of the research is to investigate what are the effects of the financial
crisis on the Islamic banking and how Islamic banking was spared from the financial crisis of
2008. Some important sub questions are considered to figure out the issue like the differences
between Islamic banking and conventional banking.
The question for the research is:
How Islamic banks are spared from financial crisis of 2008?
Chapter 2: Literature Review
2.1 Introduction
To understand how Islamic banks were spared from the financial crisis in 2008, it is
pivotal to understand how banks operate and how Islamic banks differ from the conventional
banks.
2.2 Justification for the existence of banks
According to Wright (2012), the global economic and technological progress is due to
financial intermediaries. The financial intermediaries contact those entrepreneurs wanting
finance and provide loans. These loans benefits the economy as money is taken to make
investment .There are different types of financial intermediaries, like banks, insurance
companies, venture capitalist (Mansour et al. 2015).
2.3 Islamic Banking
Islamic finance bestows itself as a replacement to conventional banks globally,
besides Muslim countries. The first oil crisis happened in 1973-74 this lead the Middle - East