Editing Islamic banking and finance (section)

====Stability/risk====
Sources differ over whether Islamic banking is more stable and less risky than conventional banking.

Proponents (such as Zeti Akhtar Aziz, the head of the central bank of Malaysia) have argued that Islamic financial institutions are more stable than conventional banks because they forbid speculation<ref name="Bahru-5-5-15"/> and the two main types (in theory) of Islamic banking accounts – "current account" and ''mudarabah'' accounts – carry less risk to the bank.{{sfn|Khan|2013|p=330}}
#In a current account the customer earns no return and (in theory) there is no risk of loss because the bank does not invest the account funds. 
#In a ''mudarabah'' account the Islamic bank carries less risk of loan defaults because it shares that risk with the depositor since if the borrower cannot pay back part or all of the money lent to them by the bank, the amount going to the depositor is cut by an equivalent amount, whereas in a conventional bank the depositor is given fixed interest payments whether or not the bank's earnings decline from loan defaults.{{sfn|Khan|2013|p=330}}

This of course means that while the bank may be more stable, the depositors/"partners" of Islamic profit and loss sharing accounts (Islamic banks often use the term "partner" instead of "customer" or "depositor") are exposed to risks they would not be subject to in conventional banks.
Furthermore, 
<blockquote>In these institutions, investment-account holders neither have the protection of being creditors of the Islamic financial institution, nor do they have the protection of being equity holders with representation on those institutions' boards of directors. This introduces a host of other well-documented risk factors for the institution ...<ref>{{cite web|url=http://www.nubank.com/stories/islam/mutualize.pdf|title=A Simple Fiqh-and-Economics Rationale for Mutualization in Islamic Financial Intermediation|date=June 2006|website=nubank.com|last1=El-Gamal|first1=Mahmoud A.|access-date=22 January 2015|archive-date=22 January 2015|archive-url=https://web.archive.org/web/20150122191237/http://www.nubank.com/stories/islam/mutualize.pdf|url-status=dead}}</ref></blockquote>

On the other hand, Habib Ahmed —writing in 2009 shortly after the [[2008 financial crisis]] – argues that the practices of Islamic finance have gradually moved closer to conventional finance exposing them to the same dangers of instability.<ref name="2009:18">{{cite journal|title=Financial crisis: Risks and lessons for Islamic finance|url=http://www.kantakji.com/media/7513/c47.pdf|journal=ISRA International Journal of Islamic Finance|volume=1|issue=1|page=18|access-date=18 January 2018|archive-date=30 March 2016|archive-url=https://web.archive.org/web/20160330032958/http://kantakji.com/media/7513/c47.pdf|url-status=dead}}</ref>
<blockquote>When the practice of Islamic finance and the environment under which it operates are examined, one can identify trends that are similar to the ones that caused the current crisis.... In the recent past, the Gulf region has witnessed its own episodes of speculation in their stock and real estate markets. Finally, the Islamic financial industry has witnessed rapid growth with innovations of complex ''Shari'ah'' compliant financial products. Risks in these new Islamic financial products are complex, as the instruments have multiple types of risks ...<ref name="2009:19">{{cite journal|title=Financial crisis: Risks and lessons for Islamic finance|url=http://www.kantakji.com/media/7513/c47.pdf|journal=ISRA International Journal of Islamic Finance|volume=1|issue=1|page=19|access-date=18 January 2018|archive-date=30 March 2016|archive-url=https://web.archive.org/web/20160330032958/http://kantakji.com/media/7513/c47.pdf|url-status=dead}}</ref></blockquote>

In any event, a few Islamic banks have failed over the decades. In 1988 the Islamic investment house, Ar-Ryan collapsed causing thousands of small investors to lose their savings (they were later reimbursed for their losses by an anonymous Gulf state donor)<ref>{{cite book|url=https://books.google.com/books?id=pP315Mw3S9EC&q=Ar-Rayan+bank+egypt&pg=PA144|title=The Middle East and North Africa 2004|publisher=Psychology Press|year=2004|page=144|author=Taylor & Francis Group|isbn=9781857431841}}</ref> and dealing a blow to Islamic finance at the time. 
In 1998 the management of Bank al Taqwa's failed. with its annual report reporting a "loss of over 23 per cent of principal to both mudaraba depositors and shareholders". (It was later revealed that management had violated banking rules "invested in one single project more than 60 per cent bank's assets.")<ref name="[Kahf in Henry and Wilson, note #18, p.35]">Monzer KAHF. "Islamic Banks: The Rise of a New Power Alliance of Wealth and Shari'ah Scholarship," in Clement HENRY and Rodney WILSON (eds.). The Politics of Islamic Finance [Edinburgh University Press, 2004], p35</ref>{{sfn|Farooq|2005|p=27}}

The Ihlas Finance House in Turkey closed in 2001 due to "liquidity problems and financial distress".<ref name="SYED-ALI-2007-2">{{cite journal|orig-date=August 2006|date=January 2007|title=FINANCIAL DISTRESS AND BANK FAILURE: LESSONS FROM CLOSURE OF IHLAS FINANS IN TURKEY|url=http://www.irti.org/English/Research/Documents/IES/086.pdf|journal=Islamic Economic Studies|volume=14|issue=1 & 2|page=2|last1=SYED ALI|first1=SALMAN|access-date=10 July 2016|archive-date=8 August 2017|archive-url=https://web.archive.org/web/20170808044343/http://www.irti.org/English/Research/Documents/IES/086.pdf|url-status=dead}}</ref> Faisal Islamic Bank had difficulties and closed its operations in the UK for regulatory reasons.<ref name="faisal-reuters">{{cite news|url=http://uk.reuters.com/article/uk-faisal-idUKBRE84216320120503|archive-url=https://web.archive.org/web/20190415220448/https://uk.reuters.com/article/uk-faisal-idUKBRE84216320120503|url-status=dead|archive-date=15 April 2019|title=Troubled Faisal Bank up for sale|date=3 May 2012|work=Reuters|last1=DE SA'PINTO|first1=MARTIN}}</ref><ref name="SYED-ALI-2007" /><ref name=GKJTPI2002:280-1/>
According to the [[The Economist|Economist magazine]], "Dubai's debt crisis in 2009 showed that ''[[sukuk]]'' [Islamic bonds] can help to inflate debt to unsustainable levels."<ref name="Bahru-5-5-15" />

=====Recessions=====
During the [[Great Recession]], Islamic banks "on average, showed stronger resilience" than conventional banks, but "faced larger losses" when the crisis hit "the real economy," according to a 2010 [[International Monetary Fund|IMF]] survey.<ref>{{cite web|url=https://www.imf.org/en/News/Articles/2015/09/28/04/53/sores100410a|title=IMF Survey: Islamic Banks: More Resilient to Crisis?|date=4 October 2010|website=imf.org|access-date=10 January 2017}}</ref>

At the beginning of the [[Great Recession]], Islamic banks were "unscathed", leading to one Islamic banking supporter to write that the collapse of leading Wall Street institutions, particularly Lehman Brothers, "should encourage economists world-wide to focus on Islamic banking and finance as an alternative model."<ref name="PSIBAWEC">{{cite book|last1=Amran|first1=Muhamad Nur Adzim|title=Prospects for Islamic Banking after the World Economic Crisis|url=https://www5.cuhk.edu.hk/wylf/wylf_media/paper_poster/Economic_07_Muhamad_Nur_Adzim_AMRAN.pdf|access-date=19 August 2015}}{{Dead link|date=January 2019 |bot=InternetArchiveBot |fix-attempted=yes }}</ref> However gradually the effect of the financial downturn moved to the real sector, affecting Islamic banking. According to Ibrahim Warde, 'this showed that Islamic finance was not all a panaceas, and that a faith-based system is not automatically immune to the vagaries of the Financial system.'<ref name="IFGE2010:89">[[#IFGE2010|Warde, ''Islamic finance in the global economy'', 2000]]: p.89</ref>{{sfn|Khan|2013|p=330}}

=====Concentration of ownership=====
Concentrated ownership is another danger to the stability of Islamic banking and finance. Munawar Iqbal and Philip Molyneux write that only 
<blockquote>"three or four families own a large percentage of the industry. ... This concentration of ownership could result in substantial financial instability and possible collapse of the industry if anything happens to those families, or the next generation of these families change their priorities. Similarly, the experience of country-wide experiments has also been mostly on the initiatives of rulers not elected through popular votes."<ref name="Iqbal and Molyneux, p. 122">Munawar IQBAL and Philip Molyneux. ''Thirty Years of Islamic Banking: History, Performance and Prospects'' [Palgrave, 2005] p.122</ref></blockquote>

=====Macroeconomic exposures=====
Harris Irafan warns that the "macroeconomic exposures" of Islamic banks constitute a "ticking time bomb" of a "billions of dollars" in "unhedged currencies and rates". The difficulty, complexity and expense of hedging these in the correct Islamic manner is such that as of 2015, the [[Islamic Development Bank]] "was hemorrhaging cash as if it were funding a war. It simply couldn't swap dollars for euros or vice versa on an ongoing basis without resorting to the conventional markets." Regional Islamic banks in the Middle East and Malaysia did not have "specialized personnel trained to understand and negotiate Sharia-compliant treasury swaps" and were not willing to hire the consultants who did.<ref name="HIHB2015:163-4">[[#HIHB2015|Irfan, ''Heaven's Bankers'', 2015]]: p.163-4</ref>