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 5: Towards making ‘Islamic’ banking Islamic

Munawar Iqbal

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


The Islamic Finance Industry (IFI) has made impressive progress for almost four decades, posting double-digit annual rates of growth. Such phenomenal growth for such a long period is unprecedented. The size of the industry is estimated to be over $1.3 trillion as at 2011, spread all over the globe, with around 1500 institutions in more than 40 countries. Banks incorporated as Islamic banks have out-performed conventional banks on the most commonly used performance evaluation variables, such as rates of growth of equity, deposits and assets as well as on performance ratios such as return on assets (ROA), return on equity (ROE), cost-to-income ratio and liquidity ratio (production cost efficiency is lower compared to the conventional banks). However, on one important criterion, serious doubts have been raised. That is the status of Shari’ah-compliance of the most popularly used products by Islamic financial institutions.

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