Islamic Banking and Finance: Fundamentals and Contemporary Issues

Salman Syed Ali

Therefore, the causes of financial crisis in the conventional banking
industry can be classified accordingly into following categories:

1. Those emerging from macroeconomic situation and policies
   which are mostly in control of the governments or planners.


2. Those emerging from microeconomic situation of individual
   banks and those arising out of the structure of the financial
   sector. This can further be divided between what is internal to
   the bank (i.e., bank’s control) and what is external to the bank.
   These are summarized in the following table.

Table- 1: Causes of Financial Distress: A Classification

CAUSES OF FINANCIAL DISTRESS AND BANKING CRISIS

Macroeconomic

Factors

Microeconomic Factors

External to the Bank

and the Supervisory

Authority

External to the Bank

(but in the direct control of

the supervisory authority,

central bank and

government)

Internal to the Bank

(i.e., in control of bank)

x Macroeconomic

situation

x Supervision

problems

x Inadequate

infrastructure

x Financial

liberalization

policies

x Political

Interference

x Moral Hazard due

to deposit

insurance

x Lack of

transparency

x Fraud and

corruption

x Banking strategy

x Poor credit

assessment

x Taking interest rate

or exchange rate

exposures

x Concentration of

lending

x Connected lending

x Entering in new

areas of activity

x Internal control

failures

x Other operational

failures