ISLAMIC BANKING AND FINANCIAL CRISIS

Islamic Banking and Financial Crisis

WORD COUNT: 3117

Table of Contents

Introduction3

Islamic Financial Transactions and Transaction Rules4

Background and Key Concepts of Islamic Banking5

Islamic Banking in the UK and Globally6

Challenges and Opportunities for Islamic Banking8

Islamic Finance10

Emergence Challenges10

Global Strategic Initiative11

Conclusion12

Islamic Banking and Financial Crisis

Introduction

Islamic Banking or Islamic Finance refers to a system of banking or banking activity that must respect the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics. Sharia prohibits the payment or acceptance of the interest rate on the loan and the acceptance of money, respectively, (usury, Riba), as well as investing in companies that provide goods or services considered contrary to its principles (Haraam, forbidden) and should enjoy the Halal. Although these principles were the basis for a thriving economy in the past, only certain financial institutions in Islamic countries agree to conduct transactions subject to these principles. The credit risk in the Islamic banking and finance is considered to be an important issue that has been highlighted in various studies.

The past studies on the credit risk have made it possible to review the issues and risks that are associated with the Islamic banking. It is considered that the Islamic banking system is more risky than the conventional banking system. However, it does not involve the interest based transactions. There are some aspects that make the Islamic banking system more risky than the conventional banking system. The issue of the credit risk in the Islamic banking system needs to be examined thoroughly as it affects the performance of the banks in remaining competitive within the banking industry. Moreover, the issue of the credit risk also affects the policies of the central bank in managing the Islamic banks.

Islamic Financial Transactions and Transaction Rules

The purchase of products with friendly bank loans Islamic finance bank and customer requires fixing the price of the goods plus an extra amount the customer paid in time must also be established beforehand. That property will be acquired by the bank that sold the client on agreed terms. However, the extra amount paid by the customer to the bank is not subject to changing market conditions so there is no room for speculation and not be considered Riba (usury).

The common element of these operations is that bank and client share the risk. The system with the traditional banks to ensure the return of borrowed capital is pledging the assets of the borrower, which are always above the value of the loan requested. By contrast, Islamic banking, share risks and participates in the profit and loss account. Moreover, speculation is reduced, the financial institutions work on the real economy. The debt cannot be alienated, so the risk of it has to assume from the beginning to the end the lender original, i.e. the bank that gave credit rights.

In some countries like Malaysia have established funding mechanisms more flexible, however, do not violate Islamic rules on transactions (Fiqh al-Muamalat), such as mortgages denominated Musyaraka al-Mutanaqisa that base their success ...