The Islamic Banking is evolving to become an important part of the banking systems as the growth rate of this banking over the last few years has been very large recently. The Islamic banking activities are consistent with the Islamic law, which recognized as fiqh mualamat, the Islamic rules on transactions, which governed by the rules of Shariah (Calyon Credit Agricole CIB, 2008). For instances, Affin Islamic Bank Berhad in Malaysia, Jordan Islamic Bank in Jordan and Islamic Bank of Britain in UK and etc. are banks practicing the Islamic banking currently (IBF Net, n.d.). Thus, this banking system prohibited the payment and collection of interest (riba) and promotes profit sharing in order to advocates greater degree of equality in the banking activities.
According to the Pillar II of Basel II said that are necessitate to ensure that banks ...view middle of the document...
This is because Basel II suggests that a risk weighting in general of 50% for the purposes of estimating the lowest possible amount of capital needed to soak up the losses from the bad loans. Whist, Islamic banking system which exercising the non-interest bearing loan that will results banks have to allocate proportionately more protective capital of approximately 100%, which is double from the usual rate to absorb losses (Keefe, 2004).
Although Islamic banking is fast growing, but the size of these banks are usually relatively small. This shows that these banks would face some financial constraint in developing the tools, financial instruments, the secondary markets and liquidity of a sophisticated system as these entire required huge amounts of funds. Moreover, they will also suffer from short of data that cause difficulties when they trying to build their model (New Horizon Islamic Banking, 2008). As a result, it would be rather difficult for these small banks to successfully implement Basel II.
Hence, Basel II would be not suitable for Islamic banks as they are build on the principle that ban on earning of interest by lending money and share in the resulting profit or loss that will results in difficulty in risks evaluation and also lack of funds, that opposing Basel II.
Calyon Credit Agricole CIB. (2008, May). Calyon's expertise in Islamic banking. Retrieved September 2, 2008, from http://www.calyon.com/news-zooms-/islamic-banking.html
IBF Net. (n.d.). Islamic Financial Institutions. Retrieved September 4, 2008, from http://islamic-finance.net/bank.html
Chapra, M.U. & Khan,T. (2000). Regulation and Supervision of Islamic Banks. (Islamic Research and Training Institute). Retrieved from Islamic Development Bank: http://www.sbp.org.pk/departments/ibd/Regulation_Supervision.pdf
Keefe, D. (2004, January). Bringing Shariah and Basel into accord. Retrieved September 2, 2008, from http://www.globalriskregulator.com/archive/January2004-16.html