Islamic Banking

Islamic banking is an emerging research theme in banking-related studies that can be further expanded owing to a dearth of extensive studies in this field. A major part of the literature contains a comparative analysis of Islamic banking and its conventional counterparts, based on performance and regulatory theme. The aim of this chapter is to demonstrate the extraordinary potential and depth of current and future research theme in Islamic banking domain. The chapter discusses the areas and issues that have been covered intensively in the recent literature, and also helps to identify the areas that have received relatively less attention. Finally, it also points to the newest areas of research that seem promising for future research in Islamic banking theme.

Islamic banking has attracted attention in financial economics literature due to its fast-paced growth. Concurrently, there is established amount of literature that presents the positive impact of banking development on economic growth, which attracts attention and debates whether Islamic banking would also have a similar impact and how Islamic banking could impact the economic stability? To answer these questions, this chapter examines the impact of the development of Islamic banking on economic growth and volatility by using a sample of 21 OIC member countries having both Islamic and conventional banks for the period of 2007–2013. Results show that, even though Islamic banking is relatively smaller in size, it is found to be conducive to economic growth but does not impact economic volatility. We also found that Islamic banking is playing a complementary role toward conventional banking practices in the selected counties.

According to Global Financial Development Report 2014, the proportion of adult population holding bank accounts in 25 out of 48 Organization of Islamic Cooperation (OIC) member countries surveyed stands below 20 %. Part of the reason is Muslims’ voluntary exclusion of interest-based financial services. On average, 28 % adults in the OIC countries hold a bank account at a formal financial institution. On the other hand, only 7.7 % of the poorest 40 % people in the OIC countries borrow from financial institutions. Furthermore, in the OIC countries, like Guinea-Bissau, Gabon, Chad, Sudan, Syria, Mozambique, Gambia, and Iraq, microfinance outreach are not even catering to the 1 % of the poor people in these countries. In 26 out of 36 OIC countries where sufficient data are available, we find that not even 10 % of the poor people are under the microfinance radar. Thus, this presents a challenge as well as an opportunity for Islamic banks to increase their outreach toward fostering inclusive finance in the OIC countries.

The study aims to address marketing effectiveness of both Islamic banks and conventional banks (CBs) by using a modified “chain-of-effect” framework. Against current literature, which is based on customer surveys, reports do not include marketing activities by the Islamic banks (IB); this study adopts a bank perspective to explore the IB’s behavior in this regard. Applying fixed-effect panel regression on the quarterly data of five IBs and five CBs in Malaysia, the study aims to explore the influence of marketing efforts on performance (both financial and nonfinancial) and if such relation varies by the type of banks in Malaysia. The findings of the study show that IBs are performing well in using marketing efforts to generate meaningful financial and nonfinancial performance.

This chapter discusses Islamic bank retail financing, its instruments, and operations. The discussion demonstrates that it is essential to have a banking system based on Shariah principles that fulfill the needs of Muslim consumers. The chapter examines the various personal financing products, their underlying Islamic contracts, and their computational mechanisms with appropriate examples. It also critically evaluates the products of Islamic bank retail financing. The availability of various personal financing instruments in Islamic banks allows Muslim consumers to achieve their financing needs. Moving forward, a greater variety of instruments that invite fewer Shariah issues must be offered in the market to ensure a more vibrant Islamic banking system.

Like many other financial institutions, Bahrain-based Arcapita Bank operating in the United States was hit hard by the Eurozone crisis that followed the global financial crisis. Unable to restructure its $1.1 billion debt obligations due in March 2013, the bank decided to file for Chapter 11 protection in the US Bankruptcy Court. This case study introduces Arcapita and its operations, explains the US Chapter 11 and its important aspects like debtor in possession (DIP) financing, highlights the most significant episodes of the Arcapita case, and concludes with important lessons embedded in the proceedings. The case as a precedent as well as Chapter 11 as the basis for a corporate insolvency law in Islamic finance is also discussed.