An Introduction to Islamic Finance: Theory and Practice

Issues and Challenges 371

fi nancing instruments that are generated through sale contracts and leasing
instruments. Informal observation of more recent balance sheets shows a
similar picture. The banks’ heavy usage of sale - based fi nancing has earned
this practice the title of the “murabahah syndrome.”^2
The reluctance of Islamic banks to use risk-sharing instruments such
as musharakah and mudarabah contracts is problematic for achieving the
true potential and promise of the system. The reason for shying away from
such instruments is a lack of appetite for risky assets, which is the result of
trying to emulate conventional commercial banks, where the preservation
of depositors’ principal is the foremost objective. By investing in fi nancing
and trade - related instruments, Islamic banks are able to provide low - risk and
safe investment opportunities. They should change this business model
and expand their portfolio to include risk-sharing instruments. The banks often
claim that their reluctance is a direct refl ection of the reluctance of depositors
for risk-sharing instruments. However, it is possible that the depositors’ low
appetite for such instruments arises from a lack of transparency and confi -
dence in the ability of the fi nancial intermediary. There is a lesson here that
Islamic banks would do well to heed when it comes to selecting and moni-
toring risk sharing assets and enhance the transparency of the investment
process by informing the depositors with good estimates of exposure to risks
taken by the fi nancial intermediary in investing in risk-sharing instruments.

FINANCIAL SYSTEM, ARCHITECTURE AND INFRASTRUCTURE

There is well - documented research suggesting strong positive linkages
between fi nancial development and the economic development of the real
sector of a country. In addition, the existence of a robust fi nancial system

Other

Istisna’

Salam

Musharakah

Mudarabah

Leasing and Hire Purchase

Murabahah and Deferred Sales

%100

%90

%80

%70

%60

%50

%40

%30

%20

%10

%0

Kuwait

Saudi Arabia

JordanYemenEgyptLebanonQatarBahrainUAE

Qard-ul-hassan

FIGURE 17.1 Asset composition of select Islamic banks by country, 2008

Source: MENA Flagship Report (2010)