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Islamic and conventional banking could be differentiated due to interest, risk sharing and objectivity. This study
describes the Islamic instruction regarding Islamic banking and prohibition of Riba/interest, and also presents a
glossary regarding prohibition of Riba/interest in the light of the Holy Quran and Sunnah (Ahadith). Islamic banking is
desirable because it promotes cooperation and mutual benefit oriented behavior among different stakeholders
with the assurance of a welfare oriented society
An additional amount paid/ received on the principal amount according to an agreement due to a time period attached thereof. Even a
single additional penny on the principal amount or any other benefit attached this
transactions is considered as RIBA (REHMAN -1993).
“O ye wo believe! Devour not Riba, doubled and multiplied; but fear Allah; that ye may (really) prosper”.“Fear the fire, which is prepared for
those who reject faith”. And obey Allah and the Messenger; that ye may obtain mercy” (3:130-2)
Ibn Malik (R.A) narrated that the Holy Prophet Peace be upon him), said:When one of You grants a loan and the borrower offers him a dish, he should not accept it; and if the borrower offers a ride on an animal, he should not ride, unless the two of them have been previously accustomed to exchanging such favors mutually” (Kitab al Buyua). It reflects the careful treatment of monetary transaction to control Riba in the economy. It indicates that any excessive amount or even additional benefit and facility than the principal amount could be the part of Riba.
Good corporate governance is more than a good idea .It encourages flow of Investments, lowers the cost of capital, and supports strong capital markets. Corporate governance represents structures and
processes that entail Individuals carrying out business whilst exercising professional discretion in a way that exhibits integrity,
judgment, and transparency. These principles are essential to Shari‟aand Islamic finance
Risk are the uncertain future events which could influence the achievement of banks objective .
Failure of borrower to repay a financing
Fluctuations of foreign exchange rates
Fraud ,incomplete documentation
Non-compliance with shariah law and principles
Other events that may cause loss o the bank
2008 FINANCIAL CRISIS :
Lack of management /oversight
Weak risk culture
Risk management function marginalized
Over reliance on quantitative tools/methodologies
Poor liquidity management
Lack of relevant internal valuation models
“o my children ,do not enter capital of egyptby one gate and enter in to it by differentgates .however know it well that I cannotward off you Allah „s will for none other thanhe has nay authority what so ever ,in him Ihave put my trust and all wo want to relyupon anyone should put his trust in himalone .”
(surah yousaf –verse 67)
i. Identified
ii. Assessed
iii. Mitigated and controlled
iv. Reported and monitored
i. Specific risk
ii. Operational risk
iii. Credit risk
iv. Equity investment risk
v. Market risk
vi. Inventory risk
vii. Liquidity risk
viii. Rate of return risk
ix. Interest rate risk
Shariah non compliance risk
Risk arising from the failure to comply with the shariahrules and regulations .
Rate of returnrisk
The potential impact on the returns caused by unexpected change in the rate of returns
Displaced commercial risk
The risk that the bank may confront commercial pressure to pay returns that exceed the rate that has been earned on its assets financed by investment account holders. The bank foregoes part or its entire share of profit in order to retain its fund providers and dissuade them from withdrawing their funds.
Equity investment risk
The risk arising from entering into a partnership for thepurpose of undertaking or participating in a particularfinancing or general business activity as described in thecontract, and in which the provider of finance shares in the business risk. This risk is relevant under Mudharabah andMusharakah contracts.
BASEL Committee on Banking Supervision
Islamic Financial Services Board (IFSB)
Bank Negara Malaysia (BNM)
Institute of International Finance (IIF)
1988 Capital Accord (Basel I)
Regulatory based
Set out requirements to calculate capital charge i.e the amount of capital to be
set aside to absorb potential loss across banks and across countries
One size fits all
1996 Basel I (Amendments)
Market Risk was incorporated into Basel I
2004 International Convergence of Capital Measurement and Capital
Standards (Basel II)
Aims to make capital requirements more risk sensitive
Includes Operational Risk
Bank shall be subject to 3 mutually reinforcing pillars
2010 Basel III (Response to Financial Crisis)
Enhanced capital ratios, liquidity ratios, leverage rati
IFSB-1 Guiding Principles of Risk Management
IFSB-2 Capital Adequacy Standard
IFSB-3 Corporate Governance
IFSB-4 Transparency and Market Discipline
IFSB-5 Supervisory Review Process
IFSB-6 Islamic Collective Investment Schemes
IFSB-7 Sukuk, Securitizations and Real Estate
IFSB-8 Takaful
IFSB-9 Conduct of Business
IFSB-10 Shariah Governance Systems
Islamic Banking Act 1983
Guidelines on Capital Adequacy (CAFIB)
Guidelines on Financial Reporting
Guidelines on Anti Money Laundering
Guidelines on Prudential Limits and Standards
The need of uniform regulation and uniform supervisory of Islmic banks
Issues on risk management and guide lines on risk weight of assets
Capital adequacy ,liquidity management and issues of th e controlling of the assets of islamic banks
Issues in profitability and good governance
Adoption of new financial methods for Islamic system