Principles in Islamic Banking Operations | Report

Islamic Banking
Operations

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
QUESTION 1...................................................................................................................................3
a) Ways in which Islamic bonds are affected during recession...................................................3
b) Islamic bond or conventional bonds which are affected higher degree..................................4
c) Dubai a global center for Islamic Bonds.................................................................................5
d) Companies that utilizes Islamic bonds for financing...............................................................5
e) Identifying and evaluation of difference between Mudarabah, Musharakah, Ijarah and
Istisn'a sukuk................................................................................................................................6
QUESTION 2...................................................................................................................................7
a) Does Wadiah in Bank Islam Malaysia offers goods return on savings...................................7
b) Opportunity risk and manner in which it can be addressed.....................................................8
c) Comparing returns of saving accounts with that of conventional one.....................................9
d) Investment opportunities that can benefit from Islamic banking and finance industry.........10
e) Would you save and invest money in Malaysia, Saudi Arabia or UAE................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13
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INTRODUCTION
Islamic banking is regarded as the banking activity which is consistent with the principles
associated with Islamic law such as sharia. Further its involves its practical application through
the development of Islamic economies. Further the more accurate terminology for Islamic
banking is regarded as sharia complaint finance. Today Islamic banking is gaining wider
attention among non- Muslims (Kasmo and et.al., 2015). This is due to the reason that Islamic
bank that have been opened for people of all faiths have ensured survival in the global economic
crisis. Islamic bank are regarded as more conservative within their commercial activities in
comparison with other ordinary banks.
The present report entails to identify and analyze principles and trends within Islamic
banking operations. Further it critically evaluate key performance of Islamic banking in the
finance industry. The study covers critical evaluation of economic benefits of Islamic financial
instruments in Islamic banking operations. The report makes critical evaluation of current
Islamic financial instruments in Islamic banking operations in respective nation.
QUESTION 1
a) Ways in which Islamic bonds are affected during recession
In general, Sukuk bonds refers to the Islamic equivalent of bonds. However, they are
different from conventional bonds which merely confer the ownership of a debt. Further, Sukuk
bonds grants the investor a share of an asset as well as with the proportionate cash flows and
risk. The main purpose of modern sukuk is to fill the gap in the global capital market by
balancing the equity portfolios with bond like products for the Islamic investors. During the
recession where every company was facing major concerns regarding financial struck, Islamic
financing showed stable functioning (Léon and Weill, 2016). However, despite of appropriate
functioning there are varied disadvantages that has affected the course of issuer regarding sukuk
bonds. Further, there are several issues in ijarah sukuk structure that affected during the financial
crisis. During this period, not every potential issuer has access to the needed underlying asset.
Ijarah sukuk carries high transaction costs such as maintenance and insurance costs it is because
of the fact that, sharia requires the asset to be operable, otherwise it be suspend the lease until
and unless the asset is fixed. Furthermore, shariah fees and audits which are not only expensive
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in nature but also time consuming thus, during the recession it was very difficult for the bond
holders to make most out of Islamic bonds. In addition to it, there were various types of penalties
that, bond holder have to pay if payment of lease is not made on time (Demiralp and Demiralp,
2015). Along with this, there are few other ways through recession impacted the Islamic bonds
and due which bondholder faced varied disadvantages such as finding an appropriate underlying
asset, potential stamp duty and taxation costs associated with introducing the asset into the
structure etc. Furthermore, there are several regimes that disadvantage sukuk in comparison to
conventional bond during recession. However, the insurance of sukuk often requires the issuing
of entity to develop Special Purpose Vehicle (SPV) for transferring the assets underlying the
sukuk. Currently the structure of sukuk structure determines the level of investor’s protection in
different circumstances.
b) Islamic bond or conventional bonds which are affected higher degree
Islamic bond is also referred to as Sukuk. There is greater difference between Islamic
bond and conventional bond. The value of conventional bond is affected to higher degree in
comparison with the Islamic bond by the possibility of default. For instance in case of recession
there is drop in the rate of interest. In addition to this drops within interest rates tends to enhance
the value of investment. However recession tends to enhance the possibility of default within
conventional bond (Hanif, 2015). The conventional bond are regarded as the one that does not
give investor share of ownership in the asset, business and project that is being supported by
them. Along with this they are debt obligation from issuer to the holder bond. In contrast to this
Sukuk offers the investor with the partial ownership in the asset on which the sukuk is based.
In case of conventional bond the bonds are being utilized for the purpose of financing
asset, project, business or joint venture that follows the local legislation. On the other hand in
case of Sukuk the asset on which it is based need to be sharia compliant. The extent to which to
conventional bond are affected demonstrate that they are being influenced by the economic
activities to a significant level (Gheeraert and Weill, 2015). This include recession and other
fluctuation in the economy that disrupts situations that are activities of the organization. It has
been determined that for conventional bonds there is particular rate of interest. However in case
of sukuk there is no provision regarding rate of interest. This demonstrates that impact on
conventional bond would be greater in comparison with sukuk as fluctuation in the market
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