Islamic Finance

The Financial Crisis Inquiry Report (FCIC, 2011) concludes, inter alia, that dramatic failures of corporate governance and risk management at many systematically important financial institutions coupled with a systematic breakdown in accountability and ethics were responsible for the financial crisis of 2008-10. Banking system globally halted during crisis but Interest-free Banks were not exposed and none of them needed government recapitalization. In this regard, Chapra (2010b) document that the resiliency of the Interest-free Banks was tremendous during crisis.

Developments in the Islamic finance industry in the last two decades have significant impact on both economies of Muslim geography and global financial markets.

The present paper attempts to study the economic and financial crises of fifteenth-century Egypt, which was ruled by Mamluk dynasty. During the fifteenth century, especially in its first half, Egypt faced horrible economic crisis caused sometimes by rulers' ill-governance and corruptions and sometimes by natural catastrophe such as over flooding of Nile or its drying up, outbreak of epidemics, crop diseases, etc. In many cases two or more factors simultaneously existed. Financial crisis mainly emanated from monetary mismanagement.

The purpose of monetary policy is to affect the economic activity through various channels  of monetary transmission. One of the transmission channels is via Islamic banking through financing to various sectors of the economy. The change of monetary instruments certainly affects economic sectors differently. Given the dual monetary system (Islamic and conventional) in Indonesia, it is interesting to see how those rates influence each of the economic sectors.

Banking regulations play an inevitable role for the stability of a country’s financial system and economy at large. Banking regulation on capital requirements known as Basel III will have a large effect on the world’s financial systems and economies. On the positive side, toughened capital and liquidity requirements should make national and global financial system safer. On the other side, enhanced safety will come at a cost, since it is expensive for banks to hold extra capital and to be more liquid.

This study aims to shed light on the risk structure in the presence of Islamic banking, in particular in Turkey. Islamic banking and conventional banking are considered to be different kind of sources for funding. Returns in the conventional banking expected to be heavily influenced by the interest rate in the money market. However, Islamic banking returns are interest-free so that interest rate changes are not expected to affect the deposit returns in Islamic banks. Interest rates in the economy is a proxy to highlight the general risk level of the economy.

Stress testing is an essential risk management tool that helps financial institutions to identify, assess and mitigate risks in their businesses. Stress tests have been and are an excellent tool for understanding the plausible impact of a what-if scenario in banking industry. The global financial crisis has placed the spotlight squarely on stress tests. Though, Islamic banks operate within the similar financial environment, and their balance sheet composition, however, calls for different treatment in stress testing.