Islamic and conventional banking could be differentiated due to interest, risk sharing and objectivity. This study

describes the Islamic instruction regarding Islamic banking and prohibition of Riba/interest, and also presents a

glossary regarding prohibition of Riba/interest in the light of the Holy Quran and Sunnah (Ahadith). Islamic banking is

desirable because it promotes cooperation and mutual benefit oriented behavior among different stakeholders

with the assurance of a welfare oriented society

An additional amount paid/ received on the principal amount according to an agreement due to a time period attached thereof. Even a

single additional penny on the principal amount or any other benefit attached this

transactions is considered as RIBA (REHMAN -1993).

“O ye wo believe! Devour not Riba, doubled and multiplied; but fear Allah; that ye may (really) prosper”.“Fear the fire, which is prepared for

those who reject faith”. And obey Allah and the Messenger; that ye may obtain mercy” (3:130-2)

Ibn Malik (R.A) narrated that the Holy Prophet Peace be upon him), said:When one of You grants a loan and the borrower offers him a dish, he should not accept it; and if the borrower offers a ride on an animal, he should not ride, unless the two of them have been previously accustomed to exchanging such favors mutually” (Kitab al Buyua). It reflects the careful treatment of monetary transaction to control Riba in the economy. It indicates that any excessive amount or even additional benefit and facility than the principal amount could be the part of Riba.

Good corporate governance is more than a good idea .It encourages flow of Investments, lowers the cost of capital, and supports strong capital markets. Corporate governance represents structures and

processes that entail Individuals carrying out business whilst exercising professional discretion in a way that exhibits integrity,

judgment, and transparency. These principles are essential to Shari‟aand Islamic finance

Risk are the uncertain future events which could influence the achievement of banks objective .

Failure of borrower to repay a financing

Fluctuations of foreign exchange rates

Fraud ,incomplete documentation

Non-compliance with shariah law and principles

Other events that may cause loss o the bank

2008 FINANCIAL CRISIS :

Lack of management /oversight

Weak risk culture

Risk management function marginalized

Over reliance on quantitative tools/methodologies

Poor liquidity management

Lack of relevant internal valuation models

“o my children ,do not enter capital of egyptby one gate and enter in to it by differentgates .however know it well that I cannotward off you Allah „s will for none other thanhe has nay authority what so ever ,in him Ihave put my trust and all wo want to relyupon anyone should put his trust in himalone .”

(surah yousaf –verse 67)

i. Identified

ii. Assessed

iii. Mitigated and controlled

iv. Reported and monitored

i. Specific risk

ii. Operational risk

iii. Credit risk

iv. Equity investment risk

v. Market risk

vi. Inventory risk

vii. Liquidity risk

viii. Rate of return risk

ix. Interest rate risk

Shariah non compliance risk

Risk arising from the failure to comply with the shariahrules and regulations .

Rate of returnrisk

The potential impact on the returns caused by unexpected change in the rate of returns

Displaced commercial risk

The risk that the bank may confront commercial pressure to pay returns that exceed the rate that has been earned on its assets financed by investment account holders. The bank foregoes part or its entire share of profit in order to retain its fund providers and dissuade them from withdrawing their funds.

Equity investment risk

The risk arising from entering into a partnership for thepurpose of undertaking or participating in a particularfinancing or general business activity as described in thecontract, and in which the provider of finance shares in the business risk. This risk is relevant under Mudharabah andMusharakah contracts.

BASEL Committee on Banking Supervision

Islamic Financial Services Board (IFSB)

Bank Negara Malaysia (BNM)

Institute of International Finance (IIF)

1988 Capital Accord (Basel I)

Regulatory based

Set out requirements to calculate capital charge i.e the amount of capital to be

set aside to absorb potential loss across banks and across countries

One size fits all

1996 Basel I (Amendments)

Market Risk was incorporated into Basel I

2004 International Convergence of Capital Measurement and Capital

Standards (Basel II)

Aims to make capital requirements more risk sensitive

Includes Operational Risk

Bank shall be subject to 3 mutually reinforcing pillars

2010 Basel III (Response to Financial Crisis)

Enhanced capital ratios, liquidity ratios, leverage rati

IFSB-1 Guiding Principles of Risk Management

IFSB-2 Capital Adequacy Standard

IFSB-3 Corporate Governance

IFSB-4 Transparency and Market Discipline

IFSB-5 Supervisory Review Process

IFSB-6 Islamic Collective Investment Schemes

IFSB-7 Sukuk, Securitizations and Real Estate

IFSB-8 Takaful

IFSB-9 Conduct of Business

IFSB-10 Shariah Governance Systems

Islamic Banking Act 1983

Guidelines on Capital Adequacy (CAFIB)

Guidelines on Financial Reporting

Guidelines on Anti Money Laundering

Guidelines on Prudential Limits and Standards

The need of uniform regulation and uniform supervisory of Islmic banks

Issues on risk management and guide lines on risk weight of assets

Capital adequacy ,liquidity management and issues of th e controlling of the assets of islamic banks

Issues in profitability and good governance

Adoption of new financial methods for Islamic system