Islamic Banking & Financial Crisis

This assignment examines the relationship between Islamic banking and financial crises. It delves into historical events, analyzes the efficiency and stability of Islamic banks compared to conventional counterparts, and explores the unique characteristics of Islamic finance that may contribute to its resilience during economic downturns. The assignment utilizes both academic literature and online resources to provide a comprehensive understanding of this complex topic.

ISLAMIC BANKING

Table of Contents
Literature Review.............................................................................................................................1
Meaning and concept of Islamic banking...............................................................................1
Comparison between the Islamic banking with conventional banks......................................2
Analysing the Principles and Scope of Islamic finance.........................................................4
REFERENCES................................................................................................................................7

Literature Review
Meaning and concept of Islamic banking
As per the view of Arshad, Yusoff and Tahir, (2016) Islamic banking is also known as
Sharia complaint finance and it is a kind of banking activity which implies with Islamic law. It
aids in practical application of the development of Islamic economics. It includes some models
about the finance like mudarabah, wadiah, musharaka, murabahah and ijar. In a simple word it
can be said that Islamic banking is a system which refereed by the Islamic law and sharih. It has
main aim is to provide an effective financial services to the people and it does not take any
interest along with banking and financial services. On the contradicting view of Hassan, (2010)
Islamic banking is a banking activities under which Gulf Cooperation council have big marketed
share. This banking is consisted with principles of Islamic law that is called as Shariah compliant
finance. Lebdaoui and Wild, (2016) stated that Islamic banking and financing assist in
preventing re-occurrence of economic downturn and depression that is known as global financial
crisis. This financing is occurred in the historical year in 2007 and 2008. The leading variation
between the conventional banking and Islamic banking is that profit sharing investment account
holders share return any pre guaranteed without risk and return in the Islamic banking. On the
other hand, in the conventional banking, there is a guarantees specified return for the depositors
and take risk. Furthermore, in the Islamic banking, Mudharabah and musharakah conduct sales
contract and share risk in order to discussing utilisation and financial resources. In the
conventional banking, it is great responsibility of the borrowers to pay the interest as monetary
reward to investors. As per the view of Hassan, (2010) Islamic banking are closely related with
productive and financial flow. Islamic baking is very important financing and banking which
provides great financing services to customers. It has great role in the baking industries as it does
not take any interest for its customer who take loan under Islamic baking services. The principle
of Islamic banking adopt shariah law through which quran and hadith involved. The major
objective of Islamic financial products is investors who wants to follow and adopt the Sharia that
is Islamic low. In the view of Khorshid, (2012) The major aim of the financial system which is to
accomplish the precept of Holy Quran which implies to collect an effective interest along with
financial assets. The basic principles in this Islamic law is that exploitative contracts based on
Riba or unfair contracts that included risk which is unenforceable. The major difference between
the conventional banking and Islamic banking is that profit sharing investment account holders
1

share return any pre guaranteed without risk and return in the Islamic banking. On the other
hand, in the conventional banking, there is a guarantees specified return for the depositors and
take risk.
As per the view of Arshad, Yusoff and Tahir, (2016) there are major two kinds of
principles under the Islamic banking. First is that Islamic law represent and reflected the totality
of Allah orders which includes all principles and aspect of the life of Muslim. One another
principle under the Islamic banking is that Islamic finance represent and involved in the social
justice and spiritual value. stated that Islamic law prohibited Muslims people about to paying or
receiving any interest rate which incurred in attractive out security interest, pickings balances on
credit card, finance any income like T-Bills, T-bounds that promises guaranteed return. Thus, in
the Islamic banking it can be said that all parties who involved in the financial transaction shares
the risk and profit or loss of a venture. In addition to this, under this no party is liable to gets
specified return under the financial contract.
As per the view of Beck, Demirgüç-Kunt and Merrouche, (2013) the principles of Islamic
banking have major objective is to welfare of the whole society. It is no ;longer confined to
concepts and idea only. It started in 1963 while Mit Ghambr saving bank began offering interest
free banking in Egypt. In the initial time in 1980, there are various Islamic banks and Islamic
financial institution have begun their operation in various Islamic countries. When in the Iran
and Pakistan Islamic banking is implemented the Islamic banking system and practices in the
entire banking sector then at that time Islamic banking operates in the other countries and
delivers an effective banking and financial services to its customers.
Comparison between the Islamic banking with conventional banks
As per the view of Islamic banking is refereed as fastest growing market and in the
present time Islamic banks are organised in the various countries and according to the reserch it
has been founded that its annual growth rate is about the 10% to 15%. As per the investigation it
has been analysed that Islamic banks are established in more than sixty countries and its
estimated value is about $166 billion. In the opinion of Morrison, (2015) in the Islamic banking,
money is not a thing or item though it can be used as a medium of exchange and store of value.
Hence, it can not sell at a price higher than its face value or rented out. On the other hand in the
conventional banking, there is used money for the exchanging among the community. There are
2

used money for the exchange among the parties. They have main objective is to generate the
profitability. Thus, it can be sold at a price higher than its face value. Furthermore, in the Islamic
banking, profit on trade of goods is the major source or ways to get the profitability. On the other
hand interest is source of profitability which is charged according to time. Arshad, Yusoff and
Tahir, (2016) stated that Islamic bank survive according to earned profit and loss sharing. If the
business man has faced losses then in this condition bank is responsible to share that losses of
that businessman according to used finance. On the other hand in the conventional banking, bank
will charge the interest from the company even it is suffered from losses. Thus, it can be said that
it is not based on the earned profit and loss by the organisation. It has major obligation to charge
the interest. As per the view of Morrison, (2015) in the Islamic banking when disbursing funds
under murabah, salam and istisna contracts, then it is very important to execution of agreement
for exchange of commodities. On the other hand in the conventional banking, there is not any
agreement for exchanging commodities when there is conduct financial services for only the
purpose of profit making. On the other hand in the islamic baking, there is not main aim to
develop the progiotability and they charge the amount for the charity event. They do not charge
any interest along with financial services. Its major objective is to maximising the profitability
but subject to shariah restrictions. On the other hand in the conventional banks its aims at
maximising profitability without any restrictions. In the Islamic bank there are not any kind of
policies and practices under which bank charges the extra money from the customer who
involved in the islamic banking. The people who involved in the islamic banking have major
benefit is that they are not supposed to pay interest along with banking and financial services.
There is only charge the compensation which goes to the charity work
As per the view of Hassan, (2010) a commercial bank is a kind of retail bank which
delivers services related to investment products, business loans, accepting deposit. In addition to
this in the Pakistan, commercial bank can be bifurcate into four class that are nationalized
commercial bank, privatized banks, private banks and foreign banks. On the other hand in the
Islamic banking system, it is based on the Islamic banking law and directed by the Islamic
economics. There are major two kinds of principles incurred that are collection and payment of
interest and profit and loss. Islamic banking assist in understanding the relationship between
financiers and borrowers via profit loss sharing contracts. Islamic banking changes that for
3

involve into the partnership contract. In this aspect both parties agree to exchange risk and return
with each other.
Stability of Islamic banking specifically the aftermath of the GFC
As per the view of Khorshid, (2012) As per the report of 2013 Islamic financial services
industry have huge scope and it has strong growth of 38.4% in the duration of 2011.Due to this
growth, other industries and people have earned greet benefit because it assist financially to the
people. In the 2008 there has financial crisis led to difficulties in many conventional bank across
the national borders. Islamic finance growth rate and its stability in the financial crisis attempts
consideration of the various advisor who provides financial advise to the people.As per the view
of Abedifar and et.al., (2015) Islamic finance industry in the beginning of 2014 will be grown
and its volume will pass through US $ 2 trillion where Islamic banking keeps 78%. As per the
view of Ferhi and Chkoundali, (2015) Islamic finance and banking have great scope through
which it increased continuously in the global level. The mentioned aspect major objective is to
provide an effective banking services to the customer without any interest rate. In the 2008,
financial crisis has been started under which liquidity and capital adequacy is full fledged in the
UK Islamic bank. Scope of Islamic Finance in UK and European countries stated that Shariah
Finance which was developed more than a decade but was involved in recent years. It was found
that they have more than $750 billion and has been found that they are developing with more
than 20% rate. They are able to expand globally. Those who are following the business will
continue their investment in the company as they will be getting more advantages. There are
large scope of Islamic finance but in the restricted areas. Islamic culture doesn't allow to support
the investment in the firms like tobacco plantation or use, beverages, fashion, gambling and
formal finances like banks and others. Their are more than a million Muslims residing in UK. As
Muslims are the fastest growing religion so it can be considered that there is large scope of
Islamic finance in UK. Furthermore, UK government is also supporting the Islamic Finance as
they are helping and supporting in the improvement of the UK. They are able to more contribute
and support the organization. This helps to develop the opportunities in providing better
economic system and jobs. In west UK is the first company to use the Islamic finance in 2004.
4

Analysing the Principles and Scope of Islamic finance
According to the view of Wild, (2009)Islamic bank is corporation which involve in the
financial services and it has main objective is to protect the people and given them interest free
services about banking and finance. On the basis of principles of Islamic Sharia, mobilisation
and investment of funds should be conducted. Following are some major principles of the
Islamic finance and baking- The prohibition of interest- As per the view of Ferhi and Chkoundali, (2015) it is one of
the most important Principle in the Islamic banking by which it is prohibited of usury or
interest. As per the principle of Islamic finance which are established in Quran stated
there is not right to charge the interest from people who involve in the Islamic banking.
This terms is known as riba and quran. According to the Islam, paying and receiving
money should not generate unjustified income. In addition to this, Beck, Demirgüç-Kunt
and Merrouche, (2013) stated that owner of the wealth gets return without making any
efforts and bears. With help of this principle about the Islamic banking, people can able
to get the benefit from the banking services as in this regulation bank will not charge any
interest along with financial services. Profit and loss sharing- As per the view of Iqbal and Molyneux, (2016) this is another
major important principle of the Islamic banking under which among the partner's profit
and loss can share and they have to disclose each and every information to each other. As
per the Islam view, Muslim will not act as a nominal creditor in any investment, but they
can act as a partner. Liability and business risk- As per the view of Ferhi and Chkoundali, (2015) the idea
that all parties concerned should involved in both risk and profit. In order to authorize
returning, a provider of money entitled to accept business risk and deliver service like
delivering assets. In order to ensure that principle of Islamic banking followed by the
each Islamic bank and institution, there is established advisory council that is known as
Sharia board. Moral and social value- As per the view of Demiralp and Demiralp, (2015) third
principle is very important which assist to financial sector and services of banking in
society. This principle is related to the concerns moral and social value. According to the
Quran it is disciple to protect, secure and care for people so as they can keep secure
5

themselves and Islamic banking provides an effective protection to that people. As per
this principle, this banking is obligated to deliver profit free loan to society. In addition to
this, Islamic banks also works on certain social projects and charitable donations. The
major work of these banks is to deliver the profit free loan to society who needed for this. Ethical standards- As per the view of Beck, Demirgüç-Kunt and Merrouche, (2013) it is
another most important principle which is concerns the ethical standards. In the fact of
financial system, there are several rules and regulation about the financial system as
Muslim people can attend the activities through which they can get benefit. This is very
essential and helpful principle of the Islamic finance and banking by which Muslim
people can able to participate in the activities. Avoiding Gambling- As per the view of Abedifar and et.al., (2015) in the Islam there are
both acquisition of wealth by chance and games of chance are strictly prohibited due to
their uncertainty. In this Islamic law, there is prohibited gambling as they prevent Muslim
from purchasing conventional insurance products because conventional insurance is a
gamble. Thus, principle assist in keep securing to the people from the illegal activities.
 Avoiding investment in prohibited industries- As per the view of Arshad, Yusoff and
Tahir, (2016) Islam strictly prohibits investment in those industries which considers
harmful to society and a threat to social responsibility. For instance, Islam does not allow
investing in the tobacco, illegal drugs, weapons of mass destruction, pornography,
prostitutions etc. As per the view of Beck, Demirgüç-Kunt and Merrouche, (2013)This
principle have major objective is to protect the society and human being from the illegal
activities like tobacco, illegal drugs, weapons of mass destruction, pornography, illegal
drugs etc. With help of Islamic banking, people have able to get full protection from the
illegal activities.
6

REFERENCES
Books and Journals
Abedifar, P. and et.al., 2015. Islamic banking and finance: recent empirical literature and
directions for future research. Journal of Economic Surveys. 29(4). pp.637-670.
Arshad, M. U., Yusoff, M. E. and Tahir, M. S., 2016. Issues in Transformation from
Conventional Banking to Islamic Banking. International Journal of Economics and
Financial Issues. 6(3S) pp.220-224.
Beck, T., Demirgüç-Kunt, A. and Merrouche, O., 2013. Islamic vs. conventional banking:
Business model, efficiency and stability. Journal of Banking & Finance. 37(2). pp. 433-
447.
Demiralp, S. and Demiralp, S., 2015. The rational Islamic actor? Evidence from Islamic banking.
New Perspectives on Turkey. 52. pp.3-27.
Demiralp, S. and Demiralp, S., 2015. The rational Islamic actor? Evidence from Islamic
banking. New Perspectives on Turkey. 52(12). pp. 3-27.
Ferhi, A. and Chkoundali, R., 2015. Credit Risk and Efficiency: Comparative Study between
Islamic and Conventional Banks during the Current Crises.Journal of Behavioural
Economics, Finance, Entrepreneurship, Accounting and Transport. 3(1). pp. 47-56.
Iqbal, M. and Molyneux, P., 2016. Thirty years of Islamic banking: History, performance and
prospects. Springer.
Lebdaoui, H. and Wild, J., 2016. Islamic Banking and Financial Development.Review of Middle
East Economics and Finance. 12(2). pp. 201-224.
Morrison, S., 2015. Islamic Banking and Financial Crisis: Reputation, Stability and Risks Edited
by Habib Ahmed, Mehmet Asutay and Rodney Wilson. Journal of Islamic Studies. 26(1).
pp. 103-107.
Samad, A., 2016. Are Islamic Banks' Non-bank Deposits Shock Resistant? A Comparison with
Conventional Banks: Evidence from Bahrain. Journal of Applied Finance and
Banking. 6(5). pp. 107-119.
7

Online
Hassan, K. M., 2010. [PDF]. Available through: http://www.sesric.org/imgs/news/image/585-
paper-1.pdf. [Accessed on 26 June 2017].
Khorshid, A., 2012. Global Financial Crises and its effect on Islamic Finance. [Online].
Available through: http://www.academyuk.org/index.php/global-financial-crises-and-its-
effect-on-islamic-finance-2. [Accessed on 26 June 2017].
Wild, J., 2009. Islamic Banking – A Solution to the Global Financial Crisis. [PDF]. Available
through: https://ded.abudhabi.ae/en/studies-indicators/Studies/Islamic%20Banking%20-
%20A%20Solution%20to%20the%20Global%20Financial%20Crisis.pdf. [Accessed on
26 June 2017].
8

9