A Comparative Literature Survey of Islamic Finance and Banking

Abstract

There has been large‐scale growth in Islamic finance and banking in Muslim countries and around the world during the last twenty years. This growth is influenced by factors including the introduction of broad macroeconomic and structural reforms in financial systems, the liberalization of capital movements, privatization, the global integration of financial markets, and the introduction of innovative and new Islamic products. Islamic finance is now reaching new levels of sophistication. However, a complete Islamic financial system with its identifiable instruments and markets is still very much at an early stage of evolution. Many problems and challenges relating to Islamic instruments, financial markets, and regulations must be addressed and resolved. In this paper, we provide a comprehensive comparative review of the literature on the Islamic financial system. Specifically, we discuss the basic features of the Islamic finance and banking. We also introduce Islamic financial instruments in order to compare them to existing Western financial instruments and discuss the legal problems that investors in these instruments may encounter. The paper also gives a preliminary empirical assessment of the performance of Islamic banking and finance, and highlights the regulations, challenges and problems in the Islamic banking market.

The governance, risk-taking, and performance of Islamic banks

“…Islamic banks differ from conventional banks through the imposition of certain religious principles on the products offered, which are free from the establishment of interest (riba) (see, e.g., Obaidullah 2005) and excessive uncertainty (gharar) (Abedifar et al 2013). The prohibition of receipts and payments of interest is the center of the Islamic financial system and is supported by other principles of Islamic doctrine that advocate for risk sharing, property rights, and the sanctity of contracts (Zaher and Hassan 2001). While conventional banks typically apply the concept of interest as a return on capital, Islamic banks rely on more sales-type products and services.…”

“…In particular, Muslim countries contain more than a quarter of the world's population. 1 The difference between Islamic and conventional banking is that Islamic banking discards the conventional interest-based financial system and follows the principles of Islamic law promoting property rights, profit-risk sharing, and the sanctity of contracts (Zaher and Hassan 2001;Iqbal and Llewellyn 2002). The prohibition of interest or usury (riba) in Islam does not mean that credit is prohibited, capital is not rewarded, or that risk is not priced.…”

Analyzing the Impact of Banking laws and Legislations on the Converting of Conventional Banks into Islamic in Libya

“…The supervisory regimes vary in each country. The main purpose of banking regulation is to maintain the integrity of the financial system (Ahmad and Hassan, 2007; Khan and Bhatti, 2008;Zaher and Hassan, 2001). A growing number of conventional financial institutions in the Middle Eastern countries are gradually but noticeably converting their operations to Islamic basis (Khan and Bhatti, 2008).…”

“…Financial institutions may encounter a number of legal issues in the process of conversion. Pakistan, for instance, has been criticised for trying to change too much and too quickly in changing the banking system at the state level (Iqbal and Mirakhor, 1987; Khan and Bhatti, 2008;Zaher and Hassan, 2001). As such, the regulatory and governance structure has a major impact on the success of converting conventional financial institutions into Islamic lines.…”

“…The purpose of Islamic banking and finance is to fulfil the teaching of Holy Quran (Zaher and Hassan, 2001). The principle in the Shariah (Islam Common Law) regulates the conduct and content of commercial transactions and thus it is imperative for Islamic financial banks to offer Shariah-compliant financial products and services to Muslim customers (Khan and Bhatti, 2008).…”