The Origins and Emergence of Islamic Financial Institutions
16 Pages Posted: 2 May 2012 Last revised: 3 May 2012
Date Written: May 1, 2012
Islamic banking refers to the application of Islamic principles to banking. Over the years, these principles have evolved into particular Islamic banking strategies that compensate for disadvantages and capitalize on certain advantages in the regional and global markets.
However, global trade may challenge Islamic banking strategies with regard to identifying, measuring, monitoring, and managing fundamental risks. As Islamic financial institutions compete with commercial banks in an increasingly globalized market, concerns over effective and efficient strategic risk management arise. In order to cope with these challenges, Islamic banks have had to develop an appropriate framework, as well as the strategic instruments and institutional arrangements that constitute the primary tools they use to deal with changes in the trade arena.
There may be a great deal to do. For instance, if whole infrastructures change, the cost factor automatically becomes a concern. Large expenditures are difficult to agree upon, which means that smaller spending programs with more easily achievable consensus will have to take place. Less (or slower) investment in new infrastructure and related changes retards the process of conquering new challenges. However, constrained, well-considered spending on new infrastructure has its advantages: changes take place at a comfortable rate and progress smoothly.
Despite these apparent disadvantages, the Islamic banking industry continues to grow, particularly in the Gulf Cooperation Council countries. The Balkan nations and newly independent Central Asian Islamic Republics are also growing and might otherwise enjoy prosperous Islamic banking industries, but such an Islamic financial emergence has been delayed by the generally weaker economic conditions in these countries (Roy, 1991, p. 436).
Interest-free Islamic modes of financing, via the sharing basis and the synchronizing of entrepreneurial payment obligations with revenue accrual, remove the major sources of instability in a free market. In addition, linking financial intermediaries’ returns to their borrowers’ actual revenues redirects capital to more lucrative projects.
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