ISLAMIC BANKING

An analysis of the various types of risks that Islamic banking products are exposed



An analysis of the various types of risks that Islamic banking products are exposed

Introduction

Islam is the complete code of conduct for the followers of Islam. However, in today's world, the researchers and scholars are taking great interest in the Islamic financial institutions because there is a huge difference between the Islamic and Conventional financial institution. The Islamic banking and other financial institutions got based on the Islamic economics according to which state has an enormous role in the taxation, managing public assets, policing and ensuring the circulation of wealth. Moreover, in the Islamic finances, there is 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 (Warde, 2000, 12-38).

Islamic banking system and Islamic finance activities got carried out on the basis of profit and loss sharing (PLS). The main objective of Islamic banking system is the prevention of riba and to avoid receipt and payment of interest. Islamic banking did improvement so promptly and developed into full-fledged Islamic institutions over the last three decades. The successful growth and expansion of Islamic banking and finance system in various countries reflects the tremendous performance of Islamic banks accomplished in a very short period. The Islamic banking system is not only confined to Muslims countries but also there is a realization of vast spread of Islamic banking in western countries (Warde, 2000, 12-38).

We shall look into the importance of the products that got offered by the Islamic banking system. However, the paper highlights the analysis of each of the product and services accessible in the Islamic banking sector. Moreover, the risks associated with the products will emphasize in the paper and focus upon notions that analyse the products.

Discussion

In the Islamic for interest free banking, encouraging efforts got taken from the period of 1990 to 2000. In 1991 federal shariah court (FSC) announced his judgment against the financial system used by banks that got based on riba and encouraged to change the interest based banking into shariah based banking system. In 2000 CTFS organized a team for the development of financial instruments for an Islamic banking system (Siddiqi, 2000, 36-43).

However, Islamic banking system has the same determination as conventional banking, but Islamic banking does not operate its activities on interest based system, it claims to work in accordance with shariah principles, known as Fiqh al-Muamalat (Islamic guidelines on transactions). Whereas, the conventional system, rely on interest system, and it is vital root on which the banking system gets laid upon. However, the leading belief of Islamic banking is the sharing of profit and loss and the prevention of riba (interest). Among the common Islamic finance theories and models used in Islamic banks are profit and loss sharing (Mudarbaha), joint ...