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 4: Similarities and differences in Islamic and conventional banking

Mohamed Ariff and Mervyn K. Lewis

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


One byproduct of the global financial crisis has been an increased interest in the soundness and resilience of the Islamic financial model. Over the years 2007–10, when the conventional financial system was in crisis, the Islamic financial services industry expanded 78 per cent, from $639 billion to $1139 billion (BMB, 2011, p.35). Islamic banks generally hold more capital and better rode out the global crisis. Not a single Islamic bank anywhere needed to be bailed out by taxpayers’ money, despite some difficulties in Dubai real estate and a management restructuring at the Dubai Islamic Bank. Islamic banks were not caught up with exposure to the ‘toxic assets’ that blighted conventional banks. At least in comparison with conventional banks, the product offerings and investments of Islamic banks are relatively conservative with a very different balance sheet structure, much less reliant on what William Poole, former President of the Federal Reserve Bank of St Louis, called ‘the poison of excessive leverage’ (Poole, 2010). Consequently, Islamic financing increasingly is a market segment of interest to Western banks, and the Islamic banking transactions of conventional banks have grown strongly at both wholesale and retail levels, although there is some market resistance to their presence. At the same time, however, Islamic banking is by no means confined to Muslims. It has been estimated that in Malaysia, 50 per cent of Islamic banking customers are non-Muslim, indicating the broadening appeal of the concept (Krasicka and Nowak, 2012).

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