Risk Analysis of Islamic & Conventional Banks in Pakistan for the period of 2005 to 2008
Introduction
Risk Analysis Of Islamic & Conventional Banks In Pakistan
Islamic banks have been a pass source to consequence distinction but Riba(interest) . According to Islamic law Riba(interest) is taboo in Islam as great as in any trade activities. “The supports of a blurb operation have been placed in distinction pity investment as great as additionally seductiveness is not paid upon a blurb operation deposits a/c in Islamic banking” (Archer & Karim, 2006). There have been a immeasurable series of risks that have been concerned in blurb banks with Islamic promissory note as great as additionally banks but Islamic fianacing. This paper investigate a twin major risks of a bank, credit risk as great as liquidity risk. Those convential banks that have been regulating islamic financing have substantial reduction credit as great as liquidity risk as comapre to alternative convential banks that have been not regulating islamic mode of financing (How, Karim, & Verhoeven, 2005). This essay yield a formula per islamic banks as great as required banks. This paper clear a risks in islamic banks as great as required banks, additionally yield a Freudian therapy in in in in in between these twin sector. It additionally minister to a immeasurable poetry upon a determinents of bank risks by a simplification of preceding celebrated commentary with apply oneself to a country that take a twin promissory note structure. Our formula uncover that required banks in pakistan have been some-more unsure than a islamic bank, that have low credit risk as great as liquidity comparativly.
The ruins of this essay is consisting a make up as great as indication of a banks. Which discuss it a numerical sum associated to a risks of required banks as great as islamic banks.
“Islamic banks do not compensate seductiveness upon customers’ deposition accounts. Instead, customers’ supports have been placed in distinction pity investment accounts” (Archer & Karim, 2006)
Literature Review
Islamic banks suggest monetary instruments that have been unchanging with a eremite ideology as great as informative characteristics of Muslim societies. The necessary underline of Islamic promissory note is that it is interest-free. 3 Islam prohibits Muslims from receiving or giving seductiveness (riba), tangible as any bound or bound lapse from monetary exchange together with both deposits as great as loans, in any case of a role for that such loans have been done or how low a rate of seductiveness charged is. The breach of riba is referred to in 4 opposite revelations in a Qur’an,4 that additionally declares that those who negligence a breach of seductiveness have been during fight with God as great as His Prophet. Some scholars have additionally put brazen mercantile reasons as to because seductiveness is banned
in Islam. The categorical complaint of all these monetary institutions is a manipulative impression of interest. As a monetary complement in Islam is formed wholly upon equity basement i.e. a financier of a collateral as great as a businessman shares in a distinction as great as loss, a Islamic banks have been additionally conducting their blurb operation upon a same pattern. I.e. distinction as great as detriment pity principal (Iqbal,Z. 1999). There have been a immeasurable series of theories upon a determinents of risks in islamic promissory note as great as required banking.
Even in really old times, people were great wakeful of risk factor…while receiving monetary as great as monetary decision, they knew that lending their income to a chairman with great credentials is many safer investment than lending their income to a bankrupt. However, risk is a single of a critical collection of preference creation as great as right away it can additionally be totalled as great as opposite values can be allot (ALi & ALgeri, 2003).
Those who advocates a intrest judgment in financing binds that intreset cause encourages as great as be a cause of a investors to deposit thier collateral insted of spending a income upon expenditure (Rabooy, 1991)
There is really genuine book (M.Ali)which include a disproportion list in in in in in between required financing as great as islamic financing.
Table 1.1 Differences in in in in in between required financing as great as Islamic financing
Conventional finance
Islamic finance
Primarily formed upon Interest rate
Facilitate monetary activities
Structured as great as formalised
Stress upon monetary efficiency
Restricted dignified dimension
Highly systematised in conditions of risk
management, accounting as great as alternative standards
Existing set of legislations to understanding with authorised issues
Highly grown promissory note as great as monetary product market
Existence of required income market
Availability of inter-bank funds
Strong as great as developed
secondary marketplace for securities
Existence of short-term income market
Interest is prohibited
Facilitate social, mercantile and
financial activities
Unstructured as great as still spontaneous in
many ways
Stress upon social, reliable as great as financial
efficiency
Strong dignified dimension
Standards for risk management, accounting as great as alternative activities have been still developing
Legal await still in growth with multiform authorised areas underneath doubt
Developing promissory note as great as monetary product market
Non-existence of poignant Islamic income market
Non-availability of inter-bank funds
Non-existing delegate marketplace for securities
Non-existence of short-term income market
Islamic Banking System in Pakistan
Islamic promissory note complement in Pakistan has been determined in 1980s. A immeasurable series of products have been introduced by Islamic banks, that promote a blurb operation to buy those products with easy conditions. These products have been fundamentally carrying 5 Islamic financing arrangements: Mudarbah, Murabaha, Al-Ijarah, Musharakah, And Sukuk.
Mr. Muhammad Ali Jinnah emphasized a virtues of Islamic principles, as great as in his residence during a initial rite of a state bank of Pakistan, he said, “I shall watch perceptiveness a work of your classification in elaborating promissory note practices concordant with Islamic ideas of amicable as great as mercantile life. We contingency work a future in a own approach as great as benefaction to a universe an mercantile complement formed upon loyal Islamic judgment of equivalence strength as great as amicable justice. (Azam, 1 july 1948) “
There have been 5 vital Islamic banks in Pakistan AL Baraka Islamic bank, Bank Islamic Pakistan limited, Dubai Islamic bank Pakistan limited, Emirates Global Islamic bank limited, Dawood Islamic bank limited, as great as Meezan Islamic bank limited.
There have been immeasurable numbers of blurb banks that yield Islamic as great as non Islamic financial products as great as a little have been a required banks that usually yield a non Islamic financing.
According to a Islamic Banking Bulletin of state bank of Pakistan, that Islamic financing banks have been augmenting in series as great as volume that shows a in effect as great as improved reply of these banks review to a required banks.
Data research as great as Methodology
Hypothesis
In this article, you set up up supposition upon a attribute in in in in in between Islamic financing with twin many critical risks, that have been credit risk as great as liquidity risk. Different aspects of these risks have been presented in this essay to investigate a stroke of these risks as great as additionally find a magnitude per these critical risks.
Credit peculiarity problems can outcome in bank penury or in a poignant empty upon bank collateral as great as net worth. We design Islamic banks to control “credit” checks as great as perform feasibility studies prior to entering in to a latest venture. Banks with some-more exchange in derivative contracts have been approaching to have aloft credit risk. (How, Karim, & Verhoeven, 2005)
H0: There is no disproportion in risk in in in in in between islamic financing as great as non islamic financing banks.
H1: Banks with islamic financing has reduce risk than a non islamic financing banks.
Data description
Our representation consists of 3 banks with Islamic as great as 3 banks with non Islamic financing. We surveyed opposite banks reports of opposite banks as great as found their 4 year interpretation from 2005 _ 2008. To find out a attribute of credit risk as great as liquidity risk by their resources as great as Equity, that give us a item per a banks with as great as but Islamic financing. Data collected from a annual reports from a sites of these banks, as great as additionally from a site of state bank of Pakistan. Total Assets, Equity have been a eccentric variables as great as duration credit risk as great as liquidity risk have been contingent variables.
Descriptive census data upon islamic banks in pakistan, 2005-2008
Period
Credit Risk
sum assets
Equity
2005
0.4933
21644708
2684223
2006
0.00403
43246940
5311067.7
2007
0.00257
58371715
5956019.7
2008
0.0048
64128099
5888889.3
Descriptive census data upon conventional banks in pakistan, 2005-2008
year
Credit Risk
sum assets
Equity
2005
2.02
268197787
24933457
2006
2.613
436826565
32159341
2007
3.06
537529091
14706172
2008
3.16
535628398
735287038
For Islamic Banks
Y = Bo + B1 X1 + B2 X2 + E
When
X1 is Total Assets
X2 is
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