Sai.m Essay Example | Topics and Well Written Essays - 3500 words

Sai.m - Essay Example h crises; moreover, the fact that the effects of recession on markets that are based on Islamic banking has been limited proves the effectiveness of Islamic banking scheme towards its western rival. Current study focuses on the examination of the solutions that Islamic banking can offer regarding the limitation of losses caused because of the credit crunch. In order to understand the potential solutions of Islamic banking against the credit crunch it would be necessary to refer primarily to the characteristics and the framework of Islamic banking as an alternative scheme of banking compared to the traditional (western) banking system. In accordance with Iqbal et al. (1987, p.29) ‘the central requirement of an Islamic financial system is the replacement of the rate of interest with the rate of return on real activities as a mechanism for allocating financial resources’. On the other hand, Saeed (1996) notes that ‘the investment activities of the Islamic bank would be based on the two legal concepts of Mudaraba and Musharaka, alternatively known as profit and loss sharing (PLS)’ (Saeed, 1996, p.51); in other words, the existing principles and mechanisms of Islamic banking can be used in order to control the pressure of the global market – which is based on the western banking system; in this case, an appr opriate customization of the rules of Islamic banking system would be required in order to suit to the needs and the potentials of customers worldwide (Scharf, 1983, p.18).On the other hand, Islamic banking system has an important weakness: the lack of an appropriate regulatory framework; this means that in case of failure the allocation of risk among the persons that participated in a specific investment initiative may not easy; furthermore, the recovery of damages would also face difficulties (Ledgerwood, 1999, p.56). The above problem is examined in the study of Venardos (2005); in the specific study it is noted that ‘an appropriate regulatory