IMPACT OF BANKING REGULATION ON THE EFFIENCY AND PERFORMANCE OF ISLAMIC BANK
Chapter 1
Introduction
Islamic banks today exist in all parts of the world and are looked upon as a viable alternative system. While it was initially developed to fulfill the needs of Muslims, Islamic banking has now gained universal acceptance.Islamic banking has been in existence since the 1970s, and it has shown tremendous growth over the last 30 years. The practice of Islamic banking now spreads all over the world from the East to the West, all the way from Malaysia, Bahrain to Europe and the US. As of 2004, the size of the banking industry assets has reached hundreds of billions of dollars from merely hundreds of thousands of dollars in the 1970s. Since early 1990s, studies that were focused on the efficiency of financial institutions have become an important part of banking literature (Berger and Humphrey, 1997).
Islamic banks are governed by Shari’a principles which make their functioning different from conventional banks. First, Shari’a forbids trading in speculative activities (gharar), dealing with derivatives and investing in non-permissible (haram) sectors and products such as tobacco, alcohol and pork. Shari’a also prohibits Islamic banks from paying or receiving interests (riba) to/from their financial and commercial transactions. The prohibition of interest makes the investment approach adopted by Islamic banks unique since they operate on profit/loss sharing arrangements. This principle requires banks to share with their customers the profits and losses resulting from co-funded projects.Product development must follow the guidelines and adhere to shari’a prior to its introduction. Islamic banking product need to be endorsed by the internal shari’a supervisory board. The variations in product, which have the same contract, may be due to the different interpretations by the shari’aadvisors.
Islamic banking has adapted the sharing of profit and loss through numerous ways. The first approach was through partnership (Musharaka), or the
Introduction
Islamic banks today exist in all parts of the world and are looked upon as a viable alternative system. While it was initially developed to fulfill the needs of Muslims, Islamic banking has now gained universal acceptance.Islamic banking has been in existence since the 1970s, and it has shown tremendous growth over the last 30 years. The practice of Islamic banking now spreads all over the world from the East to the West, all the way from Malaysia, Bahrain to Europe and the US. As of 2004, the size of the banking industry assets has reached hundreds of billions of dollars from merely hundreds of thousands of dollars in the 1970s. Since early 1990s, studies that were focused on the efficiency of financial institutions have become an important part of banking literature (Berger and Humphrey, 1997).
Islamic banks are governed by Shari’a principles which make their functioning different from conventional banks. First, Shari’a forbids trading in speculative activities (gharar), dealing with derivatives and investing in non-permissible (haram) sectors and products such as tobacco, alcohol and pork. Shari’a also prohibits Islamic banks from paying or receiving interests (riba) to/from their financial and commercial transactions. The prohibition of interest makes the investment approach adopted by Islamic banks unique since they operate on profit/loss sharing arrangements. This principle requires banks to share with their customers the profits and losses resulting from co-funded projects.Product development must follow the guidelines and adhere to shari’a prior to its introduction. Islamic banking product need to be endorsed by the internal shari’a supervisory board. The variations in product, which have the same contract, may be due to the different interpretations by the shari’aadvisors.
Islamic banking has adapted the sharing of profit and loss through numerous ways. The first approach was through partnership (Musharaka), or the