Risk and Regulation of Islamic Banking

Risk and Regulation of Islamic Banking

Foundations of Islamic Finance series

Edited by Mervyn K. Lewis, Mohamed Ariff and Shamsher Mohamad

From a single product offering in 1963, the Islamic financial services industry has grown to an estimated $1.6 trillion in assets. Products must comply with profit and risk-sharing criteria and regulations preventing banks from venturing into activities with high risk and excessive uncertainty. This timely volume analyses these matters and considers the range of new products, discussing both conceptual and practical dimensions. It connects Islamic finance to the mainstream theoretical literature on financial intermediation while also exploring its differences. The expert contributors also examine why an ethical foundation is important and why the system requires well-thought-out regulations to ensure outcomes that protect the community’s well-being.

Chapter 3: Objectives of Islamic banking: a theoretical discussion

Mohamad Akram Laldin

Subjects: asian studies, asian economics, economics and finance, asian economics, financial economics and regulation, islamic economics and finance, money and banking


Islamic banking attempts to rearrange modern banking practices to be in line with Islamic Shari’ah (legal) principles and requirements as currently accepted by majority opinion among Islamic scholars. The Islamic banking industry has grown considerably and has a global reach (as at 2012) compared to its very limited reach some 50 years back, when it had just been introduced. We contend such a trend is not only triggered by the fact that Islamic banking and finance is now operating with full compliance of Islamic legal requirements (Shari’ah compliance) but also because the objectives and values it upholds and promotes are consistent with human ethics and pro-society moral precepts. Islamic banking brings Islam’s vision of the economy to the financial sphere in an effort to realize that human wellbeing is achieved within a just and fair order of society. Financial practices are arranged to meet those objectives. Recently, there has been growing interest in discussion of the objective of Shari’ah (maqasid) and its realization in the Islamic financial industry whereby, it is argued, satisfaction of the minimum legal requirement is not considered sufficient. There needs to be a broader perspective of ‘Shari’ah-compliant’ meaning, which carries the expectation of a financial system and practice that are truly based on all the tenets of Shari’ah, namely the beliefs and faith (aqidah) and Islamic ethics (akhlaq), and that serve the noble goals prescribed by Islam (maqa_id al-Shari’ah) rather than merely satisfying the Islamic legal principles (ahk_m al-shar’iyyah).

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