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 13: Challenges in rating Islamic financial institutions

Yeah Kim Leng and Mohamed Z. Othman

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

Extract

The role of credit rating agencies is reviewed in this chapter with the aim of elucidating the benefits, challenges and risks in rating financial institutions in the context of the strong growth of the Islamic banking industry particularly in the dual banking system in Malaysia. We address the often-asked question of whether there are significant methodological differences in rating Islamic banks compared with conventional banks. An eclectic view is taken of the role of credit rating agencies to examine the necessary conditions for the rating of Islamic banking and products to be effective not only in mitigating systemic risks but also in furthering the development of Islamic financial institutions, products and services. The latter is achieved through bridging the information gaps between depositors and borrowers, on the one hand, and between issuers and investors of Islamic banking services and financial products, on the other. Before examining the credit rating process, some overall indicators are presented of the Islamic and conventional banking industry in Malaysia and its performance.

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