The Pros And Cons Of Islamic Banking

Islamic banks offer financing which is backed by assets. Islamic banks cannot deal in documents and it is due to the asset backed nature results in dynamic economic activities. Additionally, Islamic banks need to comply with conventional regulatory standards as well as Shariah standards. Islamic banks do not conduct business with tobacco, alcohol and other dangerous toxic producing companies. Islamic banks are not merely interest-free. Islamic banking transactions need to avoid other elements of fraud, deceit and uncertainty. It is implied from the Gharar-free nature of Islamic banking transactions that such complex conventional instruments like options, captions are not allowed in Islamic banking. Moreover, clean borrowing is not allowed in Islamic banking. Islamic banks provide financing to create assets. Therefore, Islamic banks do not offer credits cards, personal loans and running finance/overdraft. Islamic banking also does not permit transactions in most derivatives. However, Salam and Istina are close alternatives for Forward contracts in conventional banking. Ample risk management actions will get reflected in commercial success in the long-run, but the commercial success is not only criterion of risk management procedures. It is due to the fact that commercial success depends upon the quality of product, its USPs, its effective marketing, its simplicity and besides the cultural, political and macroeconomic context in which the product is launched and marketed.

According to Culp (2007) risk refers to those future happenings whose outcome is uncertain and it may involve the possibility of the organization being positively impacted or consequently negatively impacted by such events in terms of its value. He further highligh...

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...d that there are certain derivative instruments already available such as those of Salam and futures that have been developed keeping in mind the principles of Islamic banking and further efforts are on in order to develop such instruments that will be sharia compliant and thereby help these organizations to make effective use of derivatives for the purpose of hedging and thereby not lose out to not being able to apply such easy and convenient tools that are extremely important in the current financial backdrop of uncertainty and change and further to this it can be stated that certain essentials need to be ensured by these organizations before they can utilize such methods and that one of the most often stated requirement of Islamic finance today is that of developing a derivatives market and that enable such organizations to utilize their relatives to hedge risks.