Islamic Banking

Topics: Corporate finance, Finance, Capital requirement Pages: 58 (18296 words) Published: June 12, 2013
Chapter 1 Introduction

1.1 Background
Islamic legal principles regulate the conduct and content of commercial transactions in Islamic Banking. The most important of these principles is the prohibition of riba, any predetermined or fixed return in financial transactions. As stated in Quran: “Allah forbids riba and permits trade.” While there is much debate about the exact nature of this prohibition on riba, there exists a widespread perception that the ban on riba implies ban on interest. Alternative “interest-free” financing techniques have been developed by Islamic Banks. The term interest free implies that banks cannot indulge in activities that involve payment and receipt of interest. Therefore Islamic Banks cannot give fixed predetermined return to their depositors and on the other hand they cannot provide financing to others on the basis of fixed predetermined return. Being a Muslim student, I have always been interested in studying the systems adopted by Islamic Banks that make them different from conventional banks. Also the success of Islamic Banks rather the fast growth of Islamic Banks despite their departure from the existing interest based banking has led me to see Islamic Banks in more detail. In this dissertation I will look at the financial structure of Islamic Banks. It will be studied that how the principle of “interest-free banking” affects the financial structure of Islamic Banks and Islamic Banks exhibit what kind of financial structure. 1.2 Objective

The objective of this dissertation is to study the financial structure of Islamic Banks as they operate on a totally different basis from conventional banks. It will be seen that whether Islamic Banks are prudent in making their financing decisions. Another aim is to compare Large and Small Islamic Banks to find out differences between them and to see which group is more cautious in maintaining its particular financial structure. 1.3 Methodology

The methodology followed in this dissertation is based on both Qualitative and Quantitative analysis. Qualitative analysis is restricted to the research of other authors who have worked on the theories of financial structure and on Islamic Banking. This work is cited in the literature review section of this dissertation. For Quantitative analysis, the methodology used in this study is taken from the paper “Corporate Financial Structures in India” by Green, Murinde and Suppakitjarak (2003). First a sample of Islamic Banks is selected on the basis of some defined criteria and then these banks are analysed using the balance sheet method. This method is further sub classified into Total Assets method and Net assets method. Different ratios are studied on the basis of these two methods. The purpose of all this analysis is to test the hypotheses that are derived from the review of literature. Finally these hypotheses are tested using the descriptive statistics and T tests and finally some conclusions and implications are drawn from this analysis. 1.4 Structure

The dissertation starts with literature review section where views of different authors about financial structure are studied. Also some ideas and facts about Islamic Banks are also presented in this section. The rest of the paper proceeds as follows. The chapter that follows the literature review section is on sample where different criteria for the sample selection are outlined and also some description of the sample Islamic Banks is given. Chapter 4 is about the analysis where Large and Small Islamic Banks are analysed from different aspects as mentioned in the previous section. In this section some hypotheses are also tested and finally some conclusions are drawn. The last section i.e., Chapter 5 ends this dissertation by first giving summary and conclusions of the study. Here the conclusions drawn from the analysis are linked with the literature review. This is followed by the policy implications that are conclusions have...

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Muljawan, D., Dar, H. A. and Hall, M. J. B. (2004), A capital adequacy framework for Islamic Banks: The need to reconcile depositors’ risk aversion with managers’ risk taking, Applied Financial Economics, 14, 429-442
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Sunder, S., Lakshmi, Myers and Stewart, C. (1999), Testing static tradeoff model against pecking order theories of capital structure, Journal of Financial Economics, 51, 219-245
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