Islamic Banking

Islamic Banking

  • Submitted By: amiblue
  • Date Submitted: 09/16/2008 8:11 PM
  • Category: Business
  • Words: 524
  • Page: 3
  • Views: 2

The Islamic Banking is evolving to become an important part of the banking systems as the growth rate of this banking over the last few years has been very large recently. The Islamic banking activities are consistent with the Islamic law, which recognized as fiqh mualamat, the Islamic rules on transactions, which governed by the rules of Shariah (Calyon Credit Agricole CIB, 2008). For instances, Affin Islamic Bank Berhad in Malaysia, Jordan Islamic Bank in Jordan and Islamic Bank of Britain in UK and etc. are banks practicing the Islamic banking currently (IBF Net, n.d.). Thus, this banking system prohibited the payment and collection of interest (riba) and promotes profit sharing in order to advocates greater degree of equality in the banking activities.

According to the Pillar II of Basel II said that are necessitate to ensure that banks have sound internal process to accurately assess the capital adequacy through a complete evaluation of its risks. Therefore, Basel II was indirectly coercing Islamic banks to identify and unbundle the risk inherent in the financial instruments. This is a challenges faced by Islamic banks as this requirement is contradicting with the Islamic law reinforced by Shariah and the accounting standards they adhered to at this time (Chapra & Khan, 2000) .

In this case, Basel II might harm the Islamic Banks in certain areas by the currently proposed of the flexibility of risk measurement. This is because Basel II suggests that a risk weighting in general of 50% for the purposes of estimating the lowest possible amount of capital needed to soak up the losses from the bad loans. Whist, Islamic banking system which exercising the non-interest bearing loan that will results banks have to allocate proportionately more protective capital of approximately 100%, which is double from the usual rate to absorb losses (Keefe, 2004).

Although Islamic banking is fast growing, but the size of these banks are usually relatively small....

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