Credit Risk in Islamic Banking

By

ACKNOWLEDGEMENT

I would like to thank my supervisor for supporting me throughout my project and giving his valuable suggestions. Finally thanks to all my friends and family for their utmost support and inspiration.

DECLARATION

I, (Your name), would like to declare that all contents included in this dissertation stand for my individual work without any aid, & this dissertation has not been submitted for any examination at academic as well as professional level previously. It also represents my own views & not essentially the ones associated with university.

Signed __________________ Date _________________

ABSTRACT

The research study has highlighted the credit risk in Islamic banking and finance. the research study is based on the credit risk in Islamic banking system. in today's world, the researchers and scholars are taking great interest in the Islamic banking because there is huge difference between the Islamic and conventional banking systems. the Islamic banking system is based on the Islamic economics according to which state has an enormous role in taxation, managing public assets, policing and ensuring the circulation of wealth. moreover, in the Islamic economics, there is a redistribution of resources so that the essential requirements of the people can be fulfilled efficiently. however, to apply such system is not an easy task for any government authority. the main difference that remains between the Islamic and conventional banking is the interest-based system. the research study will underline several issues of the Islamic banking system. the credit risk in the Islamic banking and finance is considered to be an important issue that has been highlighted in various studies. it is considered that the Islamic banking system is more risky than the conventional banking system. there are some aspects that make the Islamic banking system more risky than the conventional banking system. this involves the method of cost of financing within the conventional and the Islamic banking system that greatly differs. this research is founded on the secondary data. however, primary data is also included in the research study. the research encompasses the publications, articles and similar studies accessible on the internet. it is also entail the interviews and surveys of the workers in the banking industry. the Islamic banking industry has been developed to significant extent by adopting the interest free operations. however, there are various other things that must be considered by the Islamic banking authorities to make this system less risky in every manner.

TABLE OF CONTENTS

ACKNOWLEDGEMENTII

DECLARATIONIII

ABSTRACTIV

CHAPTER 1: INTRODUCTION1

Background of the Research Study1

Problem Statement2

Aims and Objectives of the Research Study2

Significance of the Research Study3

Rationale of the Research Study4

Research Questions5

Structure of the Thesis6

CHAPTER 2: LITERATURE REVIEW9

Theoretical Framework9

Credit Risk9

Past Studies on Islamic Banking System11

Presence of Islamic Banks13

Global Economic and Financial Crisis14

Riba (Interest) and Gharar (Risk)17

Issues of Islamic Banking System17

Islamic Banking and Finance19

Interest Forbidden Approach20

Islamic Banking and Financial Markets22

Scope and Limitations24

Islamic Banking and Finance25

Classical Islamic Economic28

Banking Institutions28

Islamic Financing Techniques34

Asset Based Lending35

Murabaha36

Mudaraba37

Musharaka37

Permanent Musharaka37

Modern Musharaka Contract38

Diminishing Musharaka38

Modern Musharaka Contract39

Debt Financing Contracts39

Dealing in credit and risk40

CHAPTER 3: METHODOLOGY42

Introduction42

Research Approach42

Research design42

Rationale for a Quantitative Research43

Rationale for a Qualitative Study44

Secondary Data45

Primary Data45

Choice of ...