Islamic Banking and Financial Crisis

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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

The research study highlights the special issues in the Islamic banking and finance. There have been highlighted various issues in the Islamic banking that are mainly associated with the risk management and the cost of financing. The cost of financing is very high in the Islamic banking system due to the higher risk associated with the rates of return. The risk management is not efficient in the Islamic banking system that makes the investors less attractive towards it. There are many other problems that are related with the Islamic banking system. These include the limited inter money markets, the lack of legal framework, low liquidity ratio, lower reserve requirements, lower rates of return etc. The research study has also highlighted other aspects of the Islamic banking system that includes the positive performance of the Islamic banks during the financial and economic crises in the whole world.

Table of Contents

ACKNOWLEDGEMENTII

DECLARATIONIII

ABSTRACTIV

CHAPTER 1: INTRODUCTION1

Background of the research study1

Aims and Objectives of the research study1

Significance of the Research Study2

Rationale of the Research Study4

Research Questions5

CHAPTER 2: LITERATURE REVIEW6

Presence of Islamic Banks6

Bank stability and financial ratios8

Factors affecting financial stability of banks9

Liquidity factor9

The affect of capital management10

Risk management11

Islamic Bank products12

Murabaha13

Mudaraba13

Musharaka14

Global Economic and Financial Crisis14

Riba (Interest) and Gharar (Risk)17

Issues of Islamic Banking System17

CHAPTER 3: METHODOLOGY21

Research design22

Quantitative Research23

Qualitative Research23

Secondary Data24

Primary Data24

Search Technique25

Literature Search25

Critical Appraisal tool26

Ethical Considerations27

CHAPTER 4: FINDING AND ANALYSIS29

CHAPTER 5: CONCLUSION35

REFERENCES37

APPENDIX39



CHAPTER 1: INTRODUCTION

Background of the research study

The research study is based on the issues of 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 (Boualem, 2003, 143).

As the Islamic banking has introduced new accounting and finance systems to the banking industry, the credit risk can be raised to a significant level. In the Islamic banking, the concept of interest free banking is of prime importance that reduces the level of profits for the banking sector. However, this system of interest free banking has been introduced in order to avoid the credit risk in ...