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This book examines whether Islamic banks perform better than their conventional counterparts in times of financial crisis, as well as the extent to which systems for managing risk have to be adapted for Islamic financial institutions given the unique features of their assets and liabilities and the need for Sharī’ah compliance. It considers the challenges faced by Islamic financial institutions in an international system that requires banks under Basel III to have more capital and liquidity to cope with future shocks. Aside from risk management and risk mitigation, the book discusses governance issues and their implications for institutional stability and sustainability.

This chapter explores corporate governance, accountability and transparency in Islamic financial institutions (IFIs), with emphasis on internal Sharī’ah audit practices in Bank Islam Malaysia Berhad and Bahrain Islamic Bank. It first considers risk management in IFIs before proceeding with a discussion of operational risk and comparing an external Sharī’ah audit with a Sharī’ah compliance audit. It demonstrates the use of the Sharī’ah internal control list/questionnaire in Bank Islam Malaysia and Bahrain Islamic Bank to show that it can be adopted by the external Sharī’ah auditors to audit the IFIs.

In the wake of the terrorist attacks on the United States, the UN Security Council passed a resolution targeting transnational sources of terrorist funds. As the US and multinational institutions such as the IMF encouraged the Middle East governments to adopt policies of economic liberation, a new capitalism emerged based on Islamic values and beliefs. This book focuses on the emerging connections between Islamic capital, with particular attention to Islamic finance and Islamist political movements in the Middle East and North Africa. It includes not only the funds deployed by Islamic financial institutions but also the assets of the Muslim entrepreneurs who are associated with Islamically oriented businesses. The political associations as well as the political and economic constraints faced by Islamic banking are discussed also. The book is divided into two parts: first it provides thematic essays that serve as ground-work for the country-specific political analyses of Part II. In this introductory chapter, the growth of Islamic markets and the political opportunities and constraints faced by Islamic banks are examined.

This chapter examines the extent to which Sharī’ah reports can be used as an effective tool in risk management, with emphasis on non-compliance risks. Drawing on the experience of the ten leading Islamic banks, it considers how banks conform to the guidance issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) on Sharī’ah reporting. It shows that the banks differ in terms of conformity to the AAOIFI guidance, from 100 per cent for the Al Baraka Group of Bahrain to 18.2 per cent for the Kuwait Finance House parent company. The chapter argues that the Sharī’ah Supervisory Board, which is responsible for the governance structure of Islamic financial institutions, plays a key role in the management of Sharī’ah non-compliance risk.

Many criticisms have been made against the means of wealth mobilisation by conventional banks. For Kuran (1986), the interest used by conventional banks profits only certain sectors of the economy as it transfers wealth from the poor to the rich. While Islam encourages legitimate trade and commerce, hoarding is however prohibited and zakāh is imposed on unutilised wealth. In addition, while legal ownership is recognised as an individual right in the Muslim world, it is maintained that all ownership must be subject to moral obligations. In this context, Islamic banks are expected to be sensitive to the needs of the society, promote social welfare, establish funds for social development, and make contribution towards the poor and the needy. This chapter highlights the experience of two Islamic financial institutions in Malaysia, the Bank Keriasama Rakyat Malaysia Berhad (Bank Rakyat) and Bank Islam Malaysia Berhad (BIMB), in mobilising wealth. These two institutions were chosen due to their distinctive differences in operations, target customers and usage of the Shariāh principles. The chapter begins by providing an overview of Islamic banking in Malaysia. The section that follows elaborates on the history and development of the Bank Rakyat and BIMB, followed by a discussion on their deposit and lending activities. The last two sections of the chapter discuss other activities undertaken by the two institutions, and the issues and challenges they face.

Sharī’ah governance is an additional layer of governance within the internal structure of corporate governance in Islamic financial institutions (IFIs) and serves as an important mechanism for addressing Sharī’ah non-compliance risk, a specific type of risk exclusive to IFIs. This chapter examines Sharī’ah governance practices in thirty-five IFIs in Malaysia, the United Kingdom and the Gulf Cooperation Council (GCC) countries. More specifically, it considers the banks’ internal arrangements for Sharī’ah governance, disputes procedures and the legal authority of Sharī’ah boards, their work and operational procedures, and their competence, confidentiality and independence. The chapter highlights serious deficiencies in Sharī’ah governance, which are worse in the United Kingdom and the GCC than in Malaysia.

This chapter examines the outcomes of Sharī’ah governance in Islamic financial institutions, with emphasis on financial products that have raised objections from Sharī’ah board members, particularly eina (back-to-back sales that are commonly used for housing finance) and tawarruq (method of providing cash advances). It illustrates how the financial crisis has demonstrated the imprudence of such financing methods and argues that eina and tawarruq do not contribute anything to maslahah, the goals of the Sharī’ah.