Performance Of Islamic Banking Before The Financial Crisis Finance Essay - Free Essay Example

This research is intended to show how the Islamic banking survive from the recent financial crisis by the testing the Islamic banking system before and during the crisis, the worldwide economic crisis and credit crunch has previously yet again point out the weakness of the financial system around the world, there was so many reasons for this crisis point. The need of an alternative system is the main goals for all the world and here Islamic finance has qualified substantial expansion over the decades full amount global assets directed in harmony by the values of Islamic economics are approximate at over US$ 800 billion, through increasing of between 10% and 15% in the previous years. The major roles in this growth are for the Islamic banks and asset funds working in many different financial markets around the world. Islamic banks certainly stand for the mainly unique feature of Islamic finance because Islamic banks are supervised according to entirely assorted moraliti es such as the prohibitions of interest rate (Riba), Alcohol, Pork products and gambling. The Islamic vision on such features that lead to the crisis is obtainable and explains how Islamic Financial system is able to help out to convey stability to the global finance. The financial crisis affect the economic around the world, the economists discuss the theory of the Islamic finance and the Islamic banking system to be the solution for the current situation. They are many papers discussed the performance of the Islamic banking in general matter so hopefully this research will help to examine the performance before and during the crisis Iqbal, (2001), The Islamic banking system has observer regular continual growth for two main reasons, the first reason is the Islamic system (banking and other financial intermediaries) well know in quite a lot places in the planet include non-Muslim parts of the world. The second reason is challenge were started to change the entire economic sch eme to base Shariah law values in quite a lot of Muslim countries. The amount of Islamic banks and financial intermediaries is at the present more than one hundred. Also some literature focused on the increasing size of total assets of Islamic banks global are approximate at about $250 billion and are likely to increase by almost 15% per year. (ÃÆ'„Å’ihaacute;k and Hesse, 2008). The financial systems in Western countries more than the last 30 years have move their centre of attention from production to services. The service part now stands for more than 80% of the US economic system to a certain extent. The credit crunch might not occur in the Islamic intermediaries since this Islamic banking system work stand on partnership among the consumers and the banks. Also there is a community obligation surrounded by the Islamic banking system. (Kuran, 2003). The previous and recent theories discussed the performance of Islamic banking system according to their st ability, some authors stated that the improved position of Islamic banking system and finance increased rapidly because of entering new instruments in this business. (Sundararajan and Errico, 2002. Ainley et al, 2007. Sole, 2007. Jobst, 2007). The financial turmoil in 2006 to the present activate by a liquidity deficit in the banking system in the world. It is well thought-out by a lot of financial expertises to be the most horrible crisis since 1930s the great depression. The global is in the middle of this crisis which is warning the collapse of the economic, in 2007 the credit crunch in the United States threaten the world raising so many issues regarding to banking system. (Boeri and Luigi, 2008) The current global financial crisis has produced an optimistic understanding that the Islamic banking system (Shariah based system) is a better banking and financial keys in contrast to the conventional banking system. Such comprehension gets keen on explanation the different cap acity that are use to decide the useful ability common advantage and economic solidity obtainable by every of these banking systems. The facts shows that in larger cases the Islamic system (profit or loss sharing) represent the mainly creative publicly positive and lasting in a unstable economic market which the whole world facing now. (Cecchetti, 2008) Wilson, 2009, state that Islamic banks take pleasure in a fitted stabilizer to facilitate them manage with financial crisis as an alternative of giving interest to savers through deal (Mudaraba) its giving them shares in the banks returns. Therefore, if success turns down in an economic crisis or downturn, depositors are given lesser profits although if incomes increase they have the benefit of high profits. This income contribution decrease risk for the Islamic banks and therefore they are a reduced amount of to be expected to turn into bankrupt. On the other hand Islamic banks through the return they make equivalent reserve to b enefit from it through the financial crisis whenever it happen as pay outs so depositors will advantage as of several safeties of their income throughout financial crisis. The recent economic crisis has been complicated and terrible for equity depositors known the drop in stock market values worldwide. depositors in equities monitors by Islamic banks have too experienced or affected by the financial crisis in some ways although a smaller amount than their conventional banks which include fared in particular roughly for the period of the worldwide financial crisis. Islamic financial system considered to be the best ever increasing sections in the industry of financial services and the main reasons are the growing returns for the oils in some Islamic countries, this market is likely to keep growing according to their strategy of risk sharing between the parties of the transactions, Islamic banking system consider to be the most secure rather than conventional system in the western system and it might represent the solution for the recent financial crisis. The prohibitions of some instruments by Islamic banking system such as derivatives and short selling which it believed to be one of the main reasons for the recent crisis so there been arguments that if the world were applying the Islamic methods the crisis might be not happened because the Islamic system is supplementary determined in possessions asset and focus to the market variations of those properties. (Rarick, 2009) Through the real estate market fall and the existing crisis Islamic financing help equality in dealings and as ­serted associations, it carries contribution of risk and return, afterwards, it need transactions to bear fundamentals of materiality principal to a physical economic points, make sure resonance liquidity managing. (Seetharaman, 2008).