[Credit Risk in Islamic Banking and Finance]

By

Acknowledgement

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

DECLARATION

I, [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

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Abstract

In this study we try to explore the concept of “Credit Risk” in a holistic context. The main focus of the research is on “Credit Risk” and its relation with “Islamic Banking and Finance”. The research also analyzes many aspects of “Credit Risk” and tries to gauge its effect on “Islamic Banking and Finance”. Finally the research describes various factors which are responsible for “Credit Risk” and tries to describe the overall effect of “Credit Risk” on “Islamic Banking and Finance”.

TABLE OF CONTENT

CHAPTER 01: INTRODUCTION6

1.1 Purpose6

1.2 Design / Methodology / Approach6

1.3 Results6

1.4 Originality / value7

CHAPTER 02: LITERATURE REVIEW8

2.1 Islamic Banking11

2.2 Concepts and practices of Islamic banking14

2.3 Islamic banking concepts and paradigm14

2.5 Credit Risk14

2.6 PLS Theory17

2.7 PLS Paradigm18

2.8 Islamic and Traditional banking19

2.9 Commercial and Investment Banking21

2.10 Characteristics of Islamic banks27

2.11 Islamic Perspective28

2.12Risk management and internal control of Islamic banks30

2.13The international framework for control and Islamic financial system38

2.14 Accounting standards and oversight body of Islamic banks42

2.15 Summary49

REFERENCES52

APPENDICES69

CHAPTER 01: INTRODUCTION

1.1 Purpose

The purpose of this study is to validate the concern that banks' increasing involvement in securitization activity of Islamic banks restricting lending, and the degree of credit risk tolerance. theoretical claim that securitization reduces the credit risk, therefore, reduce the banks credit risk aversion. Subsequently, the banks would be encouraged to increase its percentage of assets subject to credit risk activities, which is providing economic sectors. However, banking statistics dictates that lending banks is declining, while banks' securitization activities are increasing.

This study is an empirical exploration of how the participation of Islamic banks in securitization activity affects their financing activity. In particular, this study is to investigate whether securitization encourages complementarily "financial activity is to reduce banks or Islamic banks willingness to extend financing. Then, an exhibition of the effects of securitization in the financial profile of Islamic banks addressed in the back of this study.

1.2 Design / Methodology / Approach

The document refers specifically to the Islamic and commercial banks use the standard panel data analysis.

1.3 Results

Supporting evidence was found that the participation of banks in securitization activity not limit their lending. Moreover, banks tend to be composed of riskier portfolios after their involvement in securitization activity. Overall, this indicates that banks' involvement in securitization activity should be regulated or restricted since excessive securitization activities can reduce and increase the credit risk of banks loan portfolio.

1.4 Originality / value

This study departs from previous literature in the sense that an alternative method is introduced to measure the activity of banks in securitization.

CHAPTER 02: LITERATURE REVIEW

The current financial crisis can be attributed ...