Deposits Management by Islamic Banks (Islamic Finance)

These accounts, however, were found to be attracting relatively very little deposits but some of the Islamic Banks (Kuwait Finance House and Dubai Islamic Bank.
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Speaker of Parliament, Rebecca Kadaga told Parliament that they had passed the laws for Islamic banking but Bank of Uganda is reluctant to draft the regulations. Speaker of Parliament, Rebecca Kadaga told Parliament that they had passed the laws for Islamic banking but Bank of Uganda is reluctant to draft the regulations as well as issuing licenses for Islamic banking. According to Islamic laws, Muslims are not allowed to borrow money with interest.

Islamic banking principles prohibit interest paid on all loans of money and investment in businesses that provide goods or services considered contrary to Islamic principles such as pork and alcohol. David Bahati, state minister for finance said Parliament had passed the relevant laws for Islamic banking but he would find out why Bank of Uganda has not released the regulations for the service and the required licenses.

Risk Management in Islamic Banking

Financial experts have often criticised Islamic banking for higher creating costs and bigger risks, a situation that has not been remedied over the years. The critics also say Islamic banking has not included policies to uplift small traders and the poor. They caution that poor management has led to the collapse and challenges of managing many Islamic banks.

Islamic banks are not allowed to invest in any profit generating ventures such as Government securities as done by conventional banks which can create challenges. The lack of unique frameworks by the Government to regulate Islamic banking is the other challenge, leaving the Islamic banks to be regulated as other conventional banks. The International Monetary Fund IMF has warned that the rapid growth of Islamic finance in Kenya is happening without adequate protection of depositors as is the case with conventional banking.

Islamic banking as an ethical alternative

The IMF in a recent report warned that Kenya was yet to refine its regulations to cater for Islamic banking despite the fact that the Shariah banks are offering loan products that are guaranteed differently from conventional bank loans. Kenya is also yet to come up with a Shariah-compliant deposit insurance scheme and is continuing to manage deposit insurance premiums in a single pool for all banks a situation that could complicate compensation of depositors in the event a bank offering conventional and Islamic products collapses, the IMF warned.

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Islamic banking regulations soon to be released, says Mutebile. The fundamental requirements for earning a profit and to a bigger extent, how much we can earn from a transaction is the element of risk sharing, which mean both customer and financier takes some form of the risks of the venture. The amount of risk taken under an Islamic contract can be higher for contracts such as Mudharabah or Musyaraka financing but it must be reflective of the economic reality and available assets.

The risk assessment of an Islamic contract must then be enhanced to behave similarly to what a venture capitalist can accept.


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There will be direct risks on equity, investments and returns. There will be corresponding returns as well.

Does investment deposit return in Islamic banks reflect PLS principle? - ScienceDirect

But such concepts will be difficult to digest if the bank is set up based on traditional banking fundamentals, which caters for a totally different profile of stakeholders. As far as possible, the Shariah committee draws a line for transparency, fairness, and justice. Islamic Banking should be an extended but integral part of economics.

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Islamic Banking is supposed to be more than a bank. It shoulders a broader responsibility to the people by looking at needs and providing products that serve a purpose. The idea of responsible financing, transparency and customer service should be the by-word of an Islamic Bank. Corporate Social Responsibilities also play a role. In this repect, the Shariah committee plays an important role as gatekeepers to the products and services on offer. Because of the unfamiliar territory of Islamic products, Shariah insists that transparency is critical to avoid uncertainty gharar , the terms to the products are fair and the banks are ethical in its conduct to ensure justice.

Fees and charges must reflect actual costs. Efforts are made to help a customer in distress. And conduct of the bank must comply with the requirements of Shariah. Wherever the opportunity arises, the Bank must be able to quickly pass the risk of the asset or valuation to the customer.

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Such understanding is also apparent in Islamic Banks. Looking at most Islamic Banking contracts, their structure allows for the transfer of risks, which follows the transfers of ownership, responsibilities and obligations from one party to the other. The regular types of contracts that continues to share risks are Mudarabah, Musyarakah and Ijarah. As mentioned before, the risks faced by a conventional bank and Islamic Bank should be very much the same, except for risks arising to the execution of Islamic contracts or pronouncement of the Shariah.

While there will be common elements of risks for both types of Banks, the importance of Shariah ruling and decisions result in Islamic Banking becoming so unique. The following are the Risks commonly faced by Islamic Banks:. There must be deep understanding of the products and structure for the bank to be able to assess the risks associated. To manage an Islamic Bank and its risks, the bank must first identify each of the risks and form safeguards to settle the above.

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Then only an Islamic bank can formulate suitable controls to ensure the Shariah specific processes and Shariah pronouncements are being monitored and implemented with sufficient support internal or external. Salam Norhamirullah, In general, risks sharing is defined as arrangement where all parties share some form of the risks; either both parties hold the financial or valuation risks, or one party holding financial risks and the other holding other risks such as default, interest rate or market risks. My view is that if the arrangement protects one party but not the other, then it is a risk transfer structure and you see this in debt-based contracts.