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Credit Risk In Islamic Banking And Finance

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  • ELGARI, MOHAMED ALI

    (King Abdulaziz University)

Abstract

The concept of risk was well known in ancient societies. Even in financial decisions, people knew very well that lending to someone who is bankrupt has a high probability of losing the money as compared to a debtor with good standing. Nevertheless, risk became an important tool of decision-making when it became possible to measure it and to assign values to different situations. This paper argues that the concept of risk mentioned by jurists in their studies on the theory of contract has nothing to do with the concept of risk as known in modern financial studies. Such a distinction is important because when jurists refer to certain "risky" contracts and render them unacceptable from the Shari[ah point of view, some practitioners of Islamic finance take it as referring to risk in the jargon of finance. That is not correct. We should benefit from the great advances in studying risk and risk management techniques in finance. However, we have to develop our own theory that deals with the unique concept of risk from an Islamic perspective. This paper is an attempt in that direction.

Suggested Citation

  • Elgari, Mohamed Ali, 2003. "Credit Risk In Islamic Banking And Finance," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 10, pages 2-25.
    • Handle: RePEc:ris:isecst:0074
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    Cited by:

    1. Waemustafa, Waeibrorheem & Sukri, Suriani, 2015. "Theory of Gharar and its interpretation of Risk and Uncertainty from the perspectives of Authentic Hadith and the Holy Quran: A Qualitative Analysis," MPRA Paper 78316, University Library of Munich, Germany, revised 10 Jan 2016.
    2. Rashidah Abdul Rahman & Siti Balqis Noor & Tariq Ismail, 2013. "Governance and Risk Management: Empirical Evidence from Malaysia and Egypt," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 2(3), pages 21-33, July.
    3. Kabir, Md. Nurul & Worthington, Andrew & Gupta, Rakesh, 2015. "Comparative credit risk in Islamic and conventional bank," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 327-353.
    4. Lassoued, Mongi, 2018. "Comparative study on credit risk in Islamic banking institutions: The case of Malaysia," The Quarterly Review of Economics and Finance, Elsevier, vol. 70(C), pages 267-278.
    5. Salma Rhanoui & Khalid Belkhoutout, 2019. "Risks Faced by Islamic Banks: A Study on the Compliance Between Theory and Practice," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 10(2), pages 137-146, April.
    6. Rosle, Alia Nadira & Masih, Mansur, 2018. "Can the islamic banks’ credit risk be explained by macroeconomic shocks? evidence from Malaysia," MPRA Paper 107059, University Library of Munich, Germany.
    7. Nurul Syazwani Mohd Noor & Abdul Ghafar Ismail & Muhammad Hakimi Mohd. Shafiai, 2018. "Shariah Risk: Its Origin, Definition, and Application in Islamic Finance," SAGE Open, , vol. 8(2), pages 21582440187, April.

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