“Banks in an Islamic system would
face fewer solvency and liquidity
risks than their conventional
counterparts.”
From the above discussion, Islamic banking has three distin-
guishing features: (a) it is interest-free, (b) it is multi-purpose
and not purely commercial, and (c) it is strongly equity-ori-
ented.
The literature contains hardly any serious criticism of the
interest-free character of the operation, since this is taken
for granted, although concerns have been expressed about
the lack of adequate interest-free instruments. There is a
near-consensus that Islamic banks can function well without
interest.
A study by Zamir Iqbal and Abbas Mirakhor for the Inter-
national Monetary Fund in 1987 found Islamic banking to
be a viable proposition that can result in efficient resource
allocation. The study also suggested that banks in an Islamic
system would face fewer solvency and liquidity risks than
their conventional counterparts.”
The above is excerpted from “The Future of Islamic Banking in the
ticipation in risk’, Islamic banks would have to rely heavily on
project evaluation, especially for equity-oriented financing.
Thanks to the profit-and-loss sharing nature of the opera-
tions, bank-customer relations would be much closer and
more cordial than is possible under conventional banking.
Finally, the problems of liquidity shortage or surplus would
have to be handled differently in Islamic banking, since the
ban on interest rules out the money market and the cen-
tral bank. Chapra suggested alternatives such as reciprocal
accommodation among banks without interest payments
and the creation of a common fund at the central bank into
which surpluses would flow and from which shortages could
be met without any interest charges.
“Besides the outlawing of riba
(interest)...Islamic banks should,
since they handle public funds,
serve the public interest rather than
individual or group interests”
Global Market” by Dr Abdul Ghafar Ismail who conducted the re-
search under the AmBank Group Resident Fellowship at Perdana
Leadership Foundation. The book will be published in 2018.
Dr Abdul Ghafar Ismail is
Professor of Islamic Financial
Economics, Faculty of Islamic
Economics and Finance,
Universiti Islam Sultan Sharif
Ali, Brunei Darussalam.
He is also former Head of
Research, Islamic Research
and Training Institute, Islamic
Development Bank (IDB) and
Professor of Banking and
Financial Economics, Universiti
Kebangsaan Malaysia (UKM). He got his PhD from the
University of Southampton, UK. He is also Principal
Research Fellow, Institut Islam Hadhari; AmBank Group
Resident Fellow for Perdana Leadership Foundation; and
Chairman of the Shariah Committee of Citibank Malaysia.
PERDANA MAGAZINE 2017
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