Finance Dissertation Example | Topics and Well Written Essays - 2000 words

Finance - Dissertation Example Islamic banking and finance is the new representation of financial institutions and it is also said to be the answer in looking for a better and fairer way of managing money and in underpinning the real financing activities. Since its origin, just over thirty years ago Islamic banking has been the fastest growing industry in the financial system and financial markets of several countries. It has â€Å"concentrated in the Middle East and Southeast Asia, but they are also present as niche players in Europe and the United States† (Cihak & Hesse, 2008, p.3). For instance, Islamic banking in the Kingdom of Saudi Arabia is more lucrative compared to conventional or commercial banks of the country (Parker, 2010). Aside from profitability, Islamic banks also are strong in asset growth despite of the abrupt decline of credit ratio compared to the average banking sectors in many countries. However, when global financial crisis had entered the real economy, Islamic banks started to incur more and more lucrative losses than their conventional counterparts, because Islamic investments are more prone to risk. The aim of this paper is to investigate the financial stability of Islamic banks versus conventional banks in the perspective of the global credit crunch. ... The growing literature mostly contained issues of comparison between the role of Islamic and conventional banking in the global credit crunch. When it comes to empirical analysis of financial stability the argument would always be about risk whereas when it comes to empirical papers, most of the arguments are discussing the efficiency of handling risks (Cihak & Hesse, 2008, p.3). The severe deficiency of money or credit which is also known as credit crunch has created a big impact on banking operations and practices around the world. Global credit crunch is a higher form of risk that distinguishes the differences executed by Islamic banks from those executed by conventional banks. Several institutions in various countries are now offering Islamic financial services like Murababa, Ijara, and Musharaka, wherein Muslims and non-Muslims can lend money without interest and no trading debt (Ahmad, 2010, p.38). According to the International Monetary Fund (IMF), the success of Islamic banks is present in almost all Middle East countries except Bahrain, Qatar, and the UAE. Based on the study of Hassan and Bahshir (2005), Islamic banks are said to be efficient when it comes to resources allocation, profitability, liquidity, development of assets, and many more. However, according to Schoon (2009, p.187), Islamic banks are settled in a less efficient and cost effective market as long as the average rate of return is elevated. He said further that Islamic banks are not efficient in terms of liquidity ratios because of an absence of liquid assets and accepted primary liquidity instruments such as cash, bank balances, negotiable instruments, etc. It also