CHAPTER 9
Exploring Perceptions of Risk and Risk Management Practices in Islamic Banking: Interview Data Analysis

This chapter focuses on the qualitative analysis of data assembled through individual in-depth interviews with Islamic banking professionals. In analysing the data, focused coding technique is used. The objective is to explore the responses of the interviewees in relation to risk practices as conducted in their financial institutions and banks. It is also considered that the findings from this chapter can help to substantiate the findings established in the earlier analyses, but also to develop further meaning in relation to the risk management practices.

In this chapter, the primary data collected through in-depth interviews is summarised and analysed. The outcomes and results are matched with the research objectives. Although the outcomes from the interviews are mainly discussed in this chapter, views and quotes from interviewees are used as supporting arguments throughout this book.

It should be noted that the focused coding method based on thematic understanding is utilised as the main method of analysis.

INTERVIEW ANALYSIS

A detailed explanation in relation to the process and analysis of interviews was given in Chapter 6 on the research methodology. It should be reiterated that the interviews conducted with bankers, financiers and Shari'ah scholars were audio recorded with the permission of the interviewees. When recording was not possible because of the spontaneity with which the interview was arranged, notes were taken in shorthand by the interviewer, and even when an interview was being recorded, shorthand notes were also kept.

Interviews were transcribed and the interview notes were read several times, which helped to create the thematic areas but also the focused coding. In other words, notes were transferred into segments representing complete thoughts on a single question or topic, in line with the original research questions. All transcribed interviews, thus, were broken into coded segments representing complete thought statements. After coding, the interview segments were transferred from word-processing format to a spreadsheet for further analysis.

FORMING THE MAIN INTERVIEW THEMES

The interview themes and questions were designed within the context of the main research questions and hypotheses explained in Chapter 6. The interviews covered the same topics as the questionnaire, as the main purpose of the semi-structured interviews was to prove or disprove the conclusions driven from the questionnaire data analysis. The main themes were:

  1. Risk perception in Islamic banking;
  2. Capital adequacy for Islamic banks;
  3. Islamic banking and the global credit crisis;
  4. Risk mitigation in Islamic banking;
  5. The dichotomy between the theory and practice of Islamic banking; and
  6. The next chapter in Islamic banking.

It should be noted that a theme may have occurred several times within an interview, but, for purposes of analysis, a theme was counted only once per interview.

INTERVIEW QUESTIONS

Prior to the interviews, an interview guide was prepared by listing the important topics to be covered and drafting a list of questions to be explored with the respondents, including sub-topics. Nevertheless, in-depth interviews are never rigidly defined. They are, by nature, structured to allow respondents the freedom to express their thoughts, feelings and insights. Therefore, during the interviews, the phrasing of questions and their order or sequence were redefined to fit the characteristics of each interview.

The following were the main interview questions:

Theme A – Risk perception in Islamic banking

  1. What are the main risks facing Islamic banks?
  2. Does the risk perception in Islamic banks differ from conventional banking, and in what sense? Are Islamic banks riskier than their conventional counterparts?
  3. Do you believe that Islamic banking products are structured differently as compared to conventional banking products?
  4. Do you think IFIs actually favour mark-up based contracts over profit-sharing contracts? Why?

Theme B – Capital adequacy for Islamic banks

  1. How suitable are the Basel II standards to Islamic banking?
  2. Do Islamic banks need to reserve more or less capital compared to their conventional peers?
  3. What impact will Basel III have on Islamic banks? Will the Basel III standards consider Islamic banking?
  4. Are the Basel III new regulatory standards more likely to prevent a major crisis similar to the recent one? Has Basel II failed in preventing the crisis?

Theme C – Islamic banking and the global credit crisis

  1. There is much debate about the resilience of Islamic banking against the financial crisis. Do you think that Islamic banking has really been resilient to the crisis, or does it suffer from the same flaws as conventional banking?
  2. Could the recent crisis have occurred under an Islamic banking system? Will the Islamic finance industry gain confidence after the current financial crisis?

Theme D – Risk mitigation in Islamic banking

  1. What do you think about risk mitigation in Islamic banking? Do you consider it Shari'ah-compliant? How important is hedging to the industry?

Theme E – The dichotomy between the theory and practice of Islamic banking

  1. How Shari'ah-compliant is Islamic banking within current practice? Do you believe that Islamic banks need to reform in order to be successful?

Theme F – The next chapter in Islamic banking

  1. What strategies should Islamic banks focus on over the coming decade? What do you believe are the catalysts for the growth of Islamic banking?

RESULTS AND DATA ANALYSIS

Risk Perception in Islamic Banking

This first part of the interview analysis aims at the participants' opinions regarding risk management issues in Islamic banking. Questions 1, 2, 3 and 4 explore how the risk perception in Islamic banking differs from conventional banking, the unique risk characteristics of Islamic financial institutions (IFIs), the risks inherent in Islamic banking contracts, and the risk management techniques used by IFIs. Tables 9.1 to 9.6 present the findings from the focused coding analysis for Question 1 about the main risks facing Islamic banks. The results of the analysis for Question 2 are presented in Tables 9.7 to 9.9, while Tables 9.10 to 9.12 summarise the findings for Question 3, which asks the participants whether they believe that Islamic banking products are structured differently to conventional products.

TABLE 9.1 Results for Question 1

Question 1 What are the main risks facing Islamic banks?
Focused Coding
1 Shari'ah-non-compliance risk
2 Liquidity risk
3 ALM risk
4 Concentration risk
5 Reputational risk
Theme: Main risks facing IFIs are liquidity risk, ALM risk, concentration risk, Shari'ah-non-compliance risk and concentration risk.

TABLE 9.2 Focused coding number 1 for Question 1

Shari'ah non-compliance risk
Interview 1 The risk of being perceived as non-Shari'ah-compliant could severely damage the creditworthiness of an IFI
Interview 3 AAOIFI has taken some steps in this regard with its institutional certifications of Shari'ah compliance
Interview 4 Interface between Shari'ah and civil systems create range of risks

TABLE 9.3 Focused coding number 2 for Question 1

Liquidity risk
Interview 13 IFIs suffer from managing excessive liquidity, especially with regard to the management of short-term liquidity and overnight liquidity
Interview 27 The liquidity/leverage trade-off for many IFIs is a double-edged sword
Interview 30 Liquidity management is structurally difficult at IFIs
Interview 33 Liquidity is one of the most critical issues for IFIs

TABLE 9.4 Focused coding number 3 for Question 1

ALM risk
Interview 23 Handling of asset–liability maturity mismatches is a challenge

TABLE 9.5 Focused coding number 4 for Question 1

Concentration risk
Interview 9 Reliance on limited funding sources
Interview 12 Concentration risk is a time bomb that might bring down many IFIs, particularly in the GCC
Interview 25 Real estate financing is one of IFIs' preferred habitats hence creating scary concentrations
Interview 29 High concentration risk made it necessary for IFIs to maintain strong capitalisation

TABLE 9.6 Focused coding number 5 for Question 1

Reputational risk
Interview 18 Because Islamic banking is at the infancy stage of development, its reputational risk is critical

TABLE 9.7 Results for Question 2

Question 2 Does the risk perception in Islamic banks differ from conventional banking, and in what sense? Are Islamic banks riskier than their conventional counterparts?
Focused Coding
1 There are specific challenges in the management of risks in Islamic banks
2 Islamic banking, as it stands today, carries more risks than the conventional model
Theme: Risk management for Islamic banks is more challenging than it is for conventional banks. Theoretically, Islamic banks are safer than conventional banks. Practically, the story is different.

TABLE 9.8 Focused coding number 1 for Question 2

There are specific challenges in the management of risks in Islamic banks
Interview 6 Risk management is not the same for conventional and Islamic banking
Interview 12 Risk management in Islamic banking is still evolving
Interview 21 There are distinguishable elements of an IFI's risk profile that need to be evaluated differently to those of a conventional bank
Interview 24 The Islamic financial model works on the basis of risk-sharing
Interview 27 Risks in IFIs must be assessed in an integrated manner
Interview 29 Risk management in Islamic banking is still below the desired level
Interview 31 Risk management for Islamic banks is far more of a complex issue when compared to conventional banking
Interview 33 Since the risk management needs of Islamic banking are not being met yet, the system is not functioning at its full potential

TABLE 9.9 Focused coding number 2 for Question 2

Islamic banking, as it stands today, carries more risks than the conventional model
Interview 12 Unfortunately, Islamic bankers made the industry more risky than conventional banking
Interview 14 Many IFIs swapped basic PLS concepts for conventional-like products
Interview 18 Islamic banking suffers from weak risk management practices
Interview 26 Islamic banking in its current practice is riskier than conventional banking
Interview 29 IFIs face a whole additional array of risks not faced by conventional banks

TABLE 9.10 Results for Question 3

Question 3 Do you believe that Islamic banking products are structured differently as compared to conventional banking products?
Focused Coding
1 Islamic banking transactions have inherent features that induce financial stability
2 Many Islamic banking products aim to essentially replicate the products and processes of the conventional system
Theme: Islamic finance products have special relationships between the contracting parties; however, Islamic banking has so far been unable to escape the trappings of conventional finance.

TABLE 9.11 Focused coding number 1 for Question 3

Islamic banking transactions have inherent features that induce financial stability
Interview 8 The overarching principle of Islamic banking and finance (IBF) products is that all forms of interest are forbidden
Interview 12 The PLS principle is a unique feature of Islamic finance

TABLE 9.12 Focused coding number 2 for Question 3

Many Islamic banking products aim to essentially replicate the products and processes of the conventional system
Interview 14 If IFIs continue to mimic conventional products, they will weaken their value proposition
Interview 17 Many Islamic banking products aim to essentially replicate the products and processes of the conventional system
Interview 20 Theoretically yes, very different. In practice, they are very similar
Interview 30 IFIs are excessively replicating conventional financial instruments

As can be seen from Table 9.1, several weaknesses and vulnerabilities among IFIs have been identified by the respondents in the areas of risk management and governance, particularly in terms of the handling of asset–liability maturity mismatches, Shari'ah-non-compliance, reputational risk and real estate exposure and concentration risk. Respondents identified Shari'ah-non-compliance, liquidity, concentration, asset-liability management (ALM) and reputational risks as the main risk facing IFIs. Tables 9.2 to 9.6 examine the respondents' answers regarding each of these identified risks.

Some interviewees, particularly Shari'ah scholars and researchers, regarded Shari'ah-non-compliance as a major risk, as it can have a material impact on the IFIs' risk profile, and its ripple effect can create other risks, particularly reputational and legal risks. Islamic finance disputes in courts, especially in international deals, are decided by judges trained under common law and not particularly under Islamic jurisprudence. This requires an interface between Shari'ah and civil law, thus adding additional legal risks. Moreover, respondents widely felt that the application of Shari'ah compliance as a commercial and defensive legal tool, like the case where the distressed Investment Dar Company's own Shari'ah board retracted its approval, undermines the credibility and ethical ethos that underpins Islamic finance. Given the consequences of such reversals, it is key for the industry that the approval process be extensively documented, formalised and open to inspection. One Shari'ah scholar in interview 3 expressed the view that Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has taken some steps in this regard with its institutional certifications of Shari'ah compliance, but for a deeper, stable and more liquid market the concept needs to gain wider acceptance.

As depicted by Tables 9.3 and 9.4, several respondents recognised liquidity and ALM risks as the most severe risks facing IFIs and stated that IFIs need to factor liquidity more fully into risk management. Respondents believe that both liquidity and ALM risks are strongly correlated. In the absence of a wide pool of Shari'ah-compliant and sufficiently liquid investment vehicles (especially in fixed income), IFIs find it difficult to manage their balance sheet from an ALM perspective, especially with regard to liquidity and margin-rate risk. IFIs use cash from deposits and short-term liquid assets to finance long-term liabilities. As a result, the liability makeup affects their funding structures differently and reflects an institution's specific ALM policies. Most respondents therefore believe that IFIs' funding mix tends to be imbalanced, with the dominance of deposits, PSIAs and equity making IFIs' funding profile predominantly short-term at a time when the maturity of their asset classes is widening. To mitigate nascent maturity mismatches, some IFIs started issuing medium-term sukuk to lengthen the maturity profile of their funding, but sukuk still represent a minor share of total liabilities. Subordinated sukuk and hybrid instruments have not been used yet; these are more expensive funding sources and incentives to issue them are limited given the relative abundance of capital in the region. IFIs are also increasingly focusing on retail deposits to boost liquidity, due to the deposits' sticky nature. As a result, according to the responses given by the interviewees, the Islamic banking industry is faced with a conundrum: its institutions maintain high concentrations in current/short-term liabilities, but, at the same time, they are exposed to highly profitable, but illiquid, long-term assets (e.g. property and infrastructure, and sukuk), and they have limited access to long-term funding solutions.

As Table 9.4 shows, some respondents opined that IFIs tend to have a concentration base of assets and/or deposits; they face high concentration by name and sector, as well as high geographical concentration. This is inflated by the IFIs' limited geographic reach, as most IFIs are domestic players and only very few have material operations outside their home country. The limited scope of eligible assets creates asset concentration risk. Non-deposit liabilities could have concentration risk as well, due to the relatively small number of IFIs available to participate in the inter-bank market. There is also a limited range of Shari'ah-compliant instruments available for managing or transferring risks. Participants opined that the focus on tangibles had led to increased property-related financings at IFIs, affected by the relatively undiversified nature of the economies. As real estate markets are highly volatile in the GCC, the concentration risk is magnified. The recent crash in the property market has put several Islamic banks whose assets are heavily concentrated in real estate in dire straits.

Reputational risk is the last among the top risks facing IFIs as identified by interviewees. Some participants, principally conventional bankers, indicated that reputational risk can have a material impact on the risk profile of an Islamic bank because the industry is still at the infancy stage of development.

Finally, it is interesting to note that the analysis of Question 1 revealed that the views of Islamic bankers, conventional bankers and rating agency analysts were quite similar. Shari'ah scholars and researchers, on the other hand, had different perceptions, which tend to be more academic in nature. Some respondents also expressed the view that due to the nature of Islamic finance contracts, risks are strongly bundled together.

Question 2 examines the difference in risk management perceptions in Islamic banking versus conventional banking. The results obtained are summarised in Tables 9.7 to 9.9.

As Table 9.8 shows, most interviewees believe that Islamic banking in its current state can be riskier than conventional banking because of the additional risk management and mitigation challenges and constraints the industry faces. As stated by the interviewees, since the risk management needs of Islamic banking are not yet being met, the system is not functioning at its full potential.

As depicted in Table 9.9, interviewees believe that no financial system is perfect. Although Islamic banking by default enjoys better risk management practices built into its principles, these principles tend to be ignored in favour of mimicking conventional risk solutions. Islamic banking products display unique features relating to credit, funding, liquidity and other risks that need to be considered and which have an impact on risk management. Moreover, most interviewees asserted that IFIs paradoxically suffer from weak risk management practices. In fact, IFIs face a number of challenges in terms of risk management. Many sukuk are structured to resemble conventional bonds, meaning the risks of ownership are transferred to the issuer rather than shared by the investors. Whereas risk management is practiced widely in conventional financial markets, it is underdeveloped in Islamic finance. This gives rise to an array of risks which are not well-comprehended yet.

Most respondents agreed that Islamic banking products display unique features, and that developing risk management tools and practices is one of the biggest challenges for Islamic banks. This challenge also offers some opportunities to develop unique solutions that do not suffer from the weaknesses in the conventional banking model. In addition, respondents criticised adopting risk models from the conventional banking practice or making minor adjustments to best practices as this poses major challenges. Participants indicated that, unfortunately, most IFIs closely mimic Western products, and hence IFIs are being exposed to similar risks to their conventional counterparts. Practitioners of Islamic finance to date have been mimicking conventional products. This mimicking has resulted in a close correlation between the two systems. With the absence of advanced risk management and mitigation tools, and with the bundling of risks in Islamic finance contracts, Islamic banking ends up being more risky than the conventional model.

In addition, participants indicated that through Shari'ah-compliant engineering most conventional contracts can be copied, at least conceptually. Some interviewees opined that if IFIs continue to mimic conventional products, they will weaken the uniqueness of their value proposition and the powerful nature of their natural factors of differentiation. Participants recognise that Islamic banking might find it difficult to innovate because it exists in a deeply-rooted conventional system. However, they strongly recommended that Islamic banks should start innovating Shari'ah-based solutions because if the industry is not innovating authentic products according to genuine Shari'ah principles, it might end up with the same failures as conventional banking. Results for Question 4 are depicted in Table 9.13.

TABLE 9.13 Results for Question 4

Question 4 Do you think IFIs actually favour mark-up based contracts over profit-sharing contracts? Why?
Focused Coding
1 IFIs want to share rewards without sharing risks
2 There is lack of appetite for risk-sharing assets
Theme: Fixed income contracts are widely used and the use of the PLS mode is negligible.

As depicted in Tables 9.14 and 9.15, interviewees, particularly Shari'ah scholars and consultants, agree that while Islamic banking is asset-based and centres on risk-sharing, in practice IFIs vary in terms of the level of risk-sharing. For example, on the funding side Profit-Sharing Investment Accounts (PSIAs) are being replaced in several IFIs by time deposits based on reverse murabahah transactions. These deposits do not have the risk-sharing features of PSIAs, since the return is almost guaranteed. On the asset side, risk-sharing is the exception rather than the rule. Most financing is in the form of murabahah or wakala, making the IFIs' activities similar to those of conventional banks. Interviewees recommend that practitioners should not create instruments and investments that are identical in substance to conventional ones by combining a redundant succession of trades and labelling them with ‘new’ Arabic names. The emphasis should be placed on innovation that encourages and favours particular types of investment (such as more tangible risk-sharing ones) and funding that is closer to Shari'ah principles. The tendency by some IFIs to blindly replicate and repackage some exotic products of conventional finance through cosmetic changes to make them Shari'ah-compliant should be curbed. Respondents expressed their worry that some initiatives to design some forms of ‘Shari'ah-compliant' subprime instrument had been undertaken before the crisis happened – fortunately there was enough wisdom among Shari'ah boards that these instruments did not really see the light.

TABLE 9.14 Focused coding number 1 for Question 4

IFIs want to share rewards without sharing risks
Interview 1 Risk-sharing is the exception rather than the rule
Interview 3 This ‘murabahah syndrome’ is a disgrace to the industry
Interview 24 Financial engineering in Islamic finance needs to focus on the development of products that foster Shari'ah principles instead of focusing only on the risk–return characteristics of the product

TABLE 9.15 Focused coding number 2 for Question 4

There is lack of appetite for risk-sharing assets
Interview 4 IFIs should engage on partnerships and equity-sharing financial assets, but in practice the portion of such assets on the balance sheets of Islamic banks is minimal
Interview 21 There is limited innovation, most of which is in the form of reverse engineering where the objective is to replicate the behaviour and risk/return profile of conventional products

Capital Adequacy for Islamic Banks

This section, through Questions 5, 6, 7 and 8, examines the suitability of the Basel II and III standards for IFIs, compares capital requirement levels between Islamic and conventional banks, and assesses the credibility of Basel II after it failed to prevent one of the most damaging of financial crises. The results obtained are given in Tables 9.16 to 9.28.

TABLE 9.16 Results for Question 5

Question 5 How suitable are Basel II (and potentially Basel III) standards to Islamic banking?
Focused Coding
1 Basel II can be applied to Islamic banks
2 IFIs need their own standards
Theme: With a few amendments Basel II becomes applicable to IFIs.

TABLE 9.17 Focused coding number 1 for Question 5

Basel II (and potentially Basel III) standards can be applied to Islamic banks
Interview 13 IFSB Principles are difficult to implement, particularly in the West
Interview 17 Application of Basel II is a matter of adjusting the standards to the needs of Islamic banks
Interview 21 Basel II can be applied to Islamic banks
Interview 30 Applying standards other than Basel II to IFIs will mean that it is not a level playing field

TABLE 9.18 Focused coding number 2 for Question 5

IFIs need their own standards
Interview 2 The risk-sharing feature necessitates the use of different capital rules
Interview 6 Cannot apply conventional definition of capital to Islamic banking
Interview 9 IFSB principles on capital adequacy provide motivation for better risk management
Interview 12 Basel II was drafted with conventional banking very much in mind
Interview 19 IFSB principles incentivise banks to be more transparent

TABLE 9.19 Results for Question 6

Question 6 Do Islamic banks need to reserve more or less capital than their conventional peers?
Focused Coding
1 Less capital
2 More capital
Theme: IFIs are exposed to higher risks, thus should reserve more capital.

TABLE 9.20 Focused coding number 1 for Question 6

Less capital
Interview 1 If IFIs genuinely apply Shari'ah principles, they will require much lower capital reserves than they currently do
Interview 2 The risk-sharing feature necessitates the use of different capital rules. The better the disclosure and risk-sharing the Islamic bank applies, the lower capital it needs to reserve
Interview 23 If PSIAs absorb losses, IFIs should keep less capital aside

TABLE 9.21 Focused coding number 2 for Question 6

More capital
Interview 8 IFIs have historically been keeping higher capital buffers anyway
Interview 11 IFIs have recently accumulated more capital buffers than their conventional peers due to rising non-performing loans
Interview 21 IFIs are more risky than conventional banks, thus should reserve more capital
Interview 25 Due to their nature of operations, IFIS should reserve more capital

TABLE 9.22 Results for Question 7

Question 7 What impact will Basel III have on Islamic banks? Do the Basel III standards consider Islamic banking?
Focused Coding
1 Too early to judge
2 Basel III will have bigger impact on conventional banks due to their business models
3 Basel III will impact all banks
Theme: Basel III will affect all banks, however, its impact on conventional banking will be higher than on Islamic banking.

TABLE 9.23 Focused Coding Number 1 for Question 7

Too early to judge
Interview 28 The ink is barely dry on the Basel III Accord
Interview 32 Basel III has an extended implementation period making its impact relatively irrelevant for the time being

TABLE 9.24 Focused coding number 2 for Question 7

Basel III will have a bigger impact on conventional banks due to their business models
Interview 12 Islamic banks have been addressing procyclicality issues way before Basel III proposals
Interview 13 Most IFIs are capital rich and have liquidity buffers, therefore the newly proposed capital and liquidity ratios will have minimal effect

TABLE 9.25 Focused coding number 3 for Question 7

Basel III will impact all banks
Interview 5 The increased risk-weighting for assets across the board will affect IFIs
Interview 21 Common equity will be squeezed much harder
Interview 23 Any new regulation will affect all banks, whether Islamic or conventional

TABLE 9.26 Results for Question 8

Question 8 Are the Basel III new regulatory standards more likely to prevent a major crisis like the recent one? Did Basel II fail in preventing the crisis?
Focused Coding
1 Failings of Basel II needed to be addressed, Basel III addresses those issues
2 The soundness of Basel III is mutually linked to powerful regulatory and economic reinforcements
Theme: Shortcomings in Basel II are definitely addressed in Basel III.

TABLE 9.27 Focused coding number 1 for Question 8

Failings of Basel II needed to be addressed, Basel III addresses those issues
Interview 12 Basel II totally failed to prevent the crisis
Interview 25 Basel II got it wrong on different fronts: procyclicality, liquidity, stress-testing, to name a few

TABLE 9.28 Focused coding number 2 for Question 8

The soundness of Basel III is mutually linked to powerful regulatory and economic reinforcements
Interview 4 Basel III is intended to promote a more resilient banking sector and eliminate systemic risk, but so was Basel II
Interview 14 Don't blame Basel II, blame the system based on greed and lack of morals
Interview 16 Basel II is correct in principle but wrong in implementation

Interviewees had varying views about the suitability of Basel II and potentially Basel III to Islamic banking. In general, respondents, particularly bankers and rating agency analysts, agree that with a few amendments Basel II becomes applicable to IFIs. The results of the focused coding analysis are summarised in Tables 9.17 and 9.18.

As demonstrated by Table 9.18, Shari'ah scholars and consultants interviewed shared the belief that conventional capital adequacy standards do not fully understand and appreciate certain aspects of IFIs, principally the fiduciary aspect, and that Basel II methodologies do not recognise the need for a different approach to capital adequacy calculation. Another problem mentioned by Islamic bankers related to the lack of ratings in IFIs and their corporate customers, and the fact that there is no historical data to implement Basel II. However, as Table 9.17 depicts, the majority of bankers and analysts interviewed believed that Basel II standards could be applied to Islamic banking with a few amendments to accommodate its unique model. They argue that, although there are some important differences between Islamic and conventional banks that must be properly understood and considered, these can be incorporated within the existing Basel framework. With Basel II being widely applied consistently across the globe, some regulators hesitate to apply bespoke capital rules to Islamic banks in order to ensure a level playing field for all banks.

Question 6 examines the participants' perception regarding the level of capital reserves that IFIs should hold in comparison to capital held by conventional banks. Looking at the theme in Table 9.19 and the respondents' answers in Tables 9.20 and 9.21, it is evident that most interviewees believe that IFIs should hold higher capital levels than their conventional counterparts because the Islamic banking business model in its current state carries more risks.

In theory, the risk-sharing principles inherent in Islamic banking should make IFIs less vulnerable to economic shocks and thus IFIs should need to reserve less capital than their conventional peers as they could ‘pass through’ economic losses to PSIAs. This is the view expressed by some participants, such as Shari'ah scholars and Middle Eastern consultants, as Table 9.20 shows. Unfortunately, the theory is a long way from fact in the current practice, as argued by the participants' views shown in Table 9.21. This submerges the inherent stability within IFIs, rendering them riskier than conventional banks, and hence requiring higher capital buffers. In addition, several bankers and consultants interviewed revealed that many IFIs do not have an internal performance management approach to measure the cost of liquidity and capital in their business decisions. This can lead to suboptimal choices being made by management teams. IFIs thus need to change how they measure performance by taking into consideration actual cost of liquidity and capital. By adjusting for true cost of liquidity and capital, the profitability picture can change considerably. As indicated by the respondent from interview 11, capital levels among IFIs have increased compared to prior years and are at levels much higher than their global peers. However, that extra capital buffer should not be taken for granted and IFIs need to be mindful of rising non-performing loans. Moreover, some interviewees warned that, with the tightening of new Basel III capital standards, IFIs have to pay greater attention to capital management as profitability will be impacted.

It is interesting to note that despite a general lack of absolute clarity about Basel III and its potential impact on IFIs, as indicated by Table 9.22, most interviewees agreed that Basel III is a fact that is here to stay. There is also a general belief among respondents that although Basel III is more demanding than Basel II with regard to addressing systemic risk, it may not be the last of the Basel series. This is mainly because risk is inherent in the complex global financial markets of increasing sophistication. Participants were generally divided among three groups, as summarised by Tables 9.23 to 9.25. The general theme agreed upon by most interviewees is that Basel III will affect all banks; however, its impact on conventional banking will be higher than on Islamic banking.

The first group believed that the Basel III new regulatory standards are still fresh and have a prolonged implementation timeline. No clear idea has yet been formed of their potential effects on IFIs. This group consists mainly of analysts at rating agencies and consultants.

Table 9.24 summarises the views of the second group of interviewees, which argued that the counter-cyclical capital buffer concept introduced by Basel III (as opposed to Basel II, which has been widely criticised for encouraging pro-cyclicality) has been at the heart of Islamic banking via profit and loss sharing (PLS) financing. IFIs will be less impacted by Basel III because of smaller market and counterparty risk exposures and lower levels of debt. They are expected to meet the more stringent requirements without raising additional capital. This group was dominated by Islamic bankers.

The third group of participants, comprising of consultants and solicitors, opined that the tightening of capital, leverage and liquidity requirements will affect all banks, Islamic and non-Islamic alike, while the definition of capital and the deductions in capital calculations are less likely to affect IFIs as their capital structures tend to comprise mainly core Tier 1 capital.

Question 8 aims to get the interviewees' perceptions of the failure of Basel II to prevent the recent crisis and of whether the newly proposed Basel III standards will help to prevent similar crises. Despite divergence among the participants' views, the theme as shown in Table 9.26 is that the shortcomings in Basel II are definitely addressed in Basel III. Participants expressed their doubt that Basel III will succeed in preventing another major crisis because crises are part of business cycles.

There was unarguably divergence among respondents regarding the question on the potential capacity of Basel III to prevent a major crisis such as the recent one and whether Basel II had failed in preventing the crisis. As the results in Table 9.26 show, those in the West are focusing on the need for increased buffers for both capital and liquidity, while those in the East are focusing on comprehensive coverage of risk management, enhanced stress-testing and the need for risk and capital management to align and be a core part of a bank's strategy. In general both camps agree that supervisory discretion will influence detailed implementation and leave scope for some jurisdictions to apply a more rigid interpretation of Basel III than elsewhere. Political issues and the debate around the implementation and operation of supervisory challenges mean ongoing fear of an uneven playing field. If different jurisdictions implement Basel III in different ways, issues seen under Basel I and Basel II with respect to international regulatory arbitrage may continue to disrupt the overall stability of the financial system. Moreover, compared with the implementation of Basel II, this enhanced level of dynamism, complexity and interdependency within the global regulatory landscape will add significant challenges to the implementation of Basel III.

A number of respondents, particularly researchers and consultants, believe that the Basel III proposals are unlikely to be the last word on reforms of the banking industry following the credit crunch. Interviewees asserted that Basel III is sometimes sold as the solution to the outstanding issues left by Basel I and II. Some stated that while history does not repeat, it sure does show similarities, and it is very unlikely that Basel III will be the answer to all banking problems. Banks must therefore retain flexibility to accommodate years of fine tuning and future reforms.

During the current tumultuous economic times, a higher capital buffer will generally reduce volatility and improve the intrinsic financial strength of banks. Increased capital requirements, increased cost of funding, and the need to reorganise and deal with regulatory reform will put pressure on margins and operating capacity. Investor returns will decrease at a time when banks need to encourage enhanced investment to rebuild and restore buffers. This will drive banks to go up the risk curve to make up for lost profitability.

Islamic Banking and the Global Credit Crisis

A lot has been said about Islamic finance being resilient in the wake of the global financial crisis, but once the dust of the financial crisis settled, it has become clear that everything is not necessarily well in Islamic finance. The assumption at one point early in the crisis was that Islamic banking would be totally unaffected and would sail through the crisis. However, the crisis has flushed out the false premise that Islamic banking is disconnected from conventional banking, and that it is immune to economic crises.

Questions 9 and 10 aim to explore the market feedback regarding the long-debated issue of whether IFIs are recession proof. Is Islamic banking actually more resilient than conventional banking? Could the crisis have occurred under an Islamic banking system? The results of the focused coding analysis are presented as follows. Results for Question 9 are illustrated in Table 9.29, while Tables 9.30 and 9.31 provide the Focused Coding analysis for Question 9. Results for Question 10 are depicted in Table 9.32, while Tables 9.33 to 9.35 provide the Focused Coding analysis for Question 10.

TABLE 9.29 Results for Question 9

Question 9 There is much debate about the resilience of Islamic banking against the financial crisis. Do you think that Islamic banking has really been resilient to the crisis, or does it suffer from the same flaws of conventional banking?
Focused Coding
1 IFIs were not caught by toxic assets as Shari'ah prohibits interest
2 Islamic banking had similar problems to conventional banking
Theme: IFIs have shown some resilience but they are not risk immune.

TABLE 9.30 Focused coding number 1 for Question 9

IFIs were not caught by toxic assets as Shari'ah prohibits interest
Interview 17 Islamic banks have been lucky so far
Interview 23 IFIs have displayed strong resilience

TABLE 9.31 Focused coding number 2 for Question 9

Islamic banking had similar problems to conventional banking
Interview 4 To some extent Islamic lenders were not applying best practices and that may have led to the large amount of non-performing loans and others
Interview 13 Lack of liquidity is squeezing sukuk issuance
Interview 21 IFIs are part of the globalised financial system – they are not immune from the credit crisis
Interview 25 IFIs have all been penalised by their investment portfolios
Interview 26 The industry faced its greatest ever test. Some IFIs came close to collapse
Interview 33 IFIs have always displayed funding imbalances, but this worsened as the crisis reached its peak

TABLE 9.32 Results for Question 10

Question 10 Could the recent crisis have occurred under an Islamic banking system? Will the industry gain confidence after the current financial crisis?
Focused Coding
1 The crisis served as a wake-up call for Islamic banks
2 The crisis had a less severe impact on Islamic banking
3 The crisis provides opportunity for IFIs
Theme: Even if Islamic finance had been prevailing, in its current state the crisis could have happened, but at a less severe level. Paradoxically, the reputation of Islamic banking has benefited from the crisis.

TABLE 9.33 Focused coding number 1 for Question 10

The crisis served as a wake-up call for Islamic banks
Interview 1 Allowed Islamic banking some time for reflection
Interview 3 In a way the crisis is a blessing in disguise for Islamic banking because IFIs so far have been following a close mimicry of Western products
Interview 32 The shake-out resulting from the crisis has been good for the Islamic finance market

TABLE 9.34 Focused coding number 2 for Question 10

The crisis had less severe impact on Islamic banking
Interview 16 Although IFIs have been more resilient, the shift in the environment did negatively affect some of them
Interview 20 The crisis highlighted additional risks that IFIs need to carefully understand and mitigate
Interview 24 Islamic banking can also face systemic failure
Interview 27 Islamic banks do not operate in isolation

TABLE 9.35 Focused coding number 3 for Question 10

Crisis provides opportunity for IFIs
Interview 2 Perceived now as more stable as it has an anti-speculation bent to it
Interview 7 The industry has come out stronger from the global crisis and learnt good lessons
Interview 11 Will emerge stronger from the crisis, provided some conditions are met
Interview 14 IFIs' reputation has benefited from the crisis
Interview 17 IFIs have been lucky so far, and they will be winners after the crisis
Interview 23 Despite flaws in the industry, the crisis has strengthened Islamic banking
Interview 29 The ideals of Islamic finance are receiving more attention in the crisis

As depicted in Table 9.33, respondents agreed that the credit crisis has allowed the Islamic banking industry some time for reflection. They gave examples of a number of renowned players in the management of Islamic funds, such as The Investment Dar (TID) and Global Investment House (GIH), that suffered major losses during the crisis and have become technically insolvent. Some IFIs had to undertake a painful restructuring process, and the legal battles are still to be fought. The global sukuk market is seeing smaller issuance and increasing defaults, led by the bankruptcy of the US-based sukuk issuer East Cameron Gas, followed by the Al Gosaibi and Saad Groups of Saudi Arabia.

Most interviewees agree that IFIs should therefore ensure that they do not overlook the lessons to be learnt from the financial crisis. As shown in Table 9.35, respondents believe that since the global economy is still recovering and the growth rate is much slower, IFIs should take this opportunity to clean up the house and tighten up the loose ends.

Interviewees argued that when the financial crisis erupted in mid-2007, the Islamic finance industry remained relatively healthy and insulated, and recorded robust performance. Some commentators wrongly labelled Islamic finance as a ‘risk-free’ sector. However, the significant defaults of TID and Gulf Finance House (GFH) since early 2009 and the growing difficulties of the rest of the Islamic investment banking community makes this assessment dubious, as the structural weaknesses of the Islamic financial industry started to become more obvious. Responses depicted in Table 9.35 reflect that the crisis was a unique opportunity for the industry to prove that it had the capacity and ability to react to and absorb shocks, although this did not apply to all its sub-segments. Some interviewees from rating agencies explained that, while the commercial banking sector seems to have emerged from the crisis relatively unscathed, the investment banking sector could not have been more different, as it suffered a very sudden and sharp dip in performance as losses mounted. And yet, until 2007, IFIs were portrayed by market participants as having significant potential, benefiting from cheap funding, high liquidity, exceptional profits and robust capitalisation. At the time, the combination of these four factors led them to pursue investments in riskier markets and asset classes – such as private equity, infrastructure or real estate, mostly in emerging markets ranging from the Maghreb to Southeast Asia. Some business was also booked in the private equity markets in Europe and the US. While GFH focused more on infrastructure, Arcapita invested heavily in private equity, and both were eager to improve their asset-management capabilities. Moreover, some other Shari'ah-compliant investment banks were beginning to discover the merits of unfunded business lines. Respondents gave the examples of Liquidity Management House (LMH, the investment banking subsidiary of leading Kuwait Finance House) and Al Rajhi Capital, which further enhanced their advisory and structuring services, until they eventually became significant players in the GCC's debt and capital markets. However, when the region's economy started to fracture under the stresses of the global liquidity drought, the pro-cyclical nature of IFIs became more pronounced. The illiquid nature of their investments contributed to rapid asset-value decreases at a time when their wholesale and short-term funding features were rapidly damaging their liquidity profile. This structural feature of IFIs' ALM – which was once a benefit when ample liquidity was chasing too few assets – started to turn negative when too many impaired assets were available to serve massive liquidity withdrawals.

Some interviewees explained that lower volumes, shrinking margins and deteriorating asset quality will all weigh on IFIs' profitability and ultimately their capitalisation. However, the impact is more manageable than for conventional banks. Fortunately, IFIs have been very profitable in the past and had therefore accumulated large amounts of capital, making them capable of absorbing these sorts of shocks. Strangely enough, IFIs' reputation has generally benefited from the crisis as it has exposed the weakness of a debt-based financial system. It is therefore the most fortunate time for Islamic banking to re-emphasise its equity-based approach. Interviewees think that this will help the industry to expand not only in the Muslim world but also in the West.

Some researchers interviewed stated that this is not the first time IFIs were tested with a systemic crisis, although previous crises were all on a regional scale. However, the recent crisis, with its unprecedented scale and scope, is the first global crisis to hit Islamic finance. The experiences of Kuwait Finance House in surviving the Kuwait Souq al-Manakh crisis in 1982, of Bank Islam in navigating the Asian financial crisis in 1997–1998, and of a Turkish participation (Islamic) bank in coming out of the economic crisis (2000–2001) should all convey a clear message that Islamic finance does have some inherent qualities that contribute to its resilience. Most interviewees, including non-Islamic bankers, actually see the Islamic financial industry emerging stronger from the crisis, provided some conditions are met as shown in Table 9.35.

In general, most interviewees opined that IFIs will probably be the big winners when the crisis ends. As a sub-set of ethical finance, IFIs are now considered not so much niche businesses standing at the margins, but rather as representatives of a credible, viable and sustainable alternative business model for sound, ethical and socially responsible banking. Many interviewees believe that mainstream finance has moved too far into excess leverage, meaningless innovation and value-destroying investments and therefore IFIs will undoubtedly find their reputations strengthened.

Risk Mitigation in Islamic Banking

Risk mitigation is currently one of the most contentious issues in Islamic banking. The unique nature of risks faced by Islamic banks, combined with the restrictions added by Shari'ah, makes risk mitigation for Islamic banks a difficult and complex process. There are risks that Islamic banks, like their conventional counterparts, can manage and control through appropriate risk policies and controls that do not conflict with the Shari'ah principles. However, there are other risks that banks cannot eliminate and that can be reduced only by transferring to or selling those risks in well-defined markets. These risks can generate unexpected losses that need capital insulation, and hedging can help to restrict the impact of unexpected loss. In this section of the interview analysis, the participants' opinions and perceptions were sought regarding risk mitigation in Islamic banking. Looking at the theme in Table 9.36 and the respondents' answers in Tables 9.37 and 9.38 shows that risk mitigation has become a must in Islamic banking, provided that it is used merely for hedging and not for speculation.

TABLE 9.36 Results for Question 11

Question 11 What do you think about risk mitigation in Islamic banking? Is it Shari'ah-compliant? How important is risk mitigation to the industry?
Focused Coding
1 Could be used for hedging purposes only and not for speculative trading activities
2 Hedging is urgently needed by IFIs
Theme: Risk mitigation tools highly demanded among IFIs but still there is a long way to go.

TABLE 9.37 Focused coding number 1 for Question 11

Could be used for hedging purposes only and not for speculative trading activities
Interview 1 Should be used solely for hedging and not speculation
Interview 2 The necessities permit forbiddance, but also the necessities are determined based on the degree of necessity
Interview 22 Many IFIs already use Islamic derivatives but they call them something else because Shari'ah scholars don't like the word ‘derivatives’
Interview 33 IFIs have a limited range of Shari'ah-compliant instruments for risk transfer

TABLE 9.38 Focused coding number 2 for Question 11

Hedging is urgently needed by IFIs
Interview 8 Not having hedging tools puts Islamic banks at competitive disadvantage
Interview 14 Without proper hedging approaches at our disposal, it feels like trying to clap with one hand
Interview 20 Islamic banking is still in its infancy in terms of hedging solutions
Interview 25 Islamic banking is not mature enough to apply existing conventional market risk mitigation and hedging techniques
Interview 27 Today lack of risk-transfer techniques is described as Islamic finance's Achilles heel
Interview 29 Islamic banks need to move quickly toward Shari'ah-compliant hedging solutions
Interview 30 There is growing demand for Shari'ah-compliant hedging products

Respondents almost unanimously agreed that the unique nature of risks faced by IFIs, combined with the restrictions added by Shari'ah, make risk mitigation for IFIs a difficult and complex process. However, there was clear disparity among respondents regarding the applicability of Shari'ah-compliant hedging solutions. Although derivatives were originally designed to manage or mitigate risks, they have been mutated to trade risks. Some respondents did not have a clear demarcation between the two. They stated that before the crisis, Islamic finance had been criticised because it could not freely hedge its risks using derivatives instruments. Today, this feature has been proven to be truly a blessing in disguise. In addition, the bankers interviewed asserted that even with the Shari'ah-approved structures, Islamic hedging currently costs much more than normal conventional hedging; it is documentation intensive and banks have to do dual murabahahs, rather than a single standardised transaction. Shari'ah-compliant tools are available; they need to be signed and accepted quicker and cheaper.

In general, most interviews reveal that there is growing demand for hedging and Shari'ah-compliant derivatives, which should be used merely for hedging and not speculation. Risk mitigation within Islamic banking is still to a large extent a grey area and work in progress.

The Dichotomy Between the Theory and Practice of Islamic Banking

This section examines the proposition that Islamic banking has been diverting from its roots by mimicking conventional banks. The theme in Table 9.39 indicates that although, in theory, the Islamic financial system is more resilient to economic shocks than the debunked Wall Street model, unfortunately the theory is a long way from fact in Islamic banking's current financial practice. The findings from the analysis through focused coding are presented in the following tables.

TABLE 9.39 Results for Question 12

Question 12 How Shari'ah-compliant is Islamic banking within its current practice? Do you believe that Islamic banks need to reform in order to be successful?
Focused Coding
1 Mimicking conventional became the norm
2 IFIs are in a constant struggle to reconcile faith and finance
Theme: Islamic banking has long been deviating from true Shari'ah principles.

As Tables 9.40 and 9.41 show, most interviewees criticised Islamic banking for trying to ‘shoe-horn’ Shari'ah principles into conventional product structures; where Islamic products replicate conventional products they are being exposed to the same risks. IFIs are also shying away from being sufficiently socially responsible. A number of respondents are of the view that some IFIs deviated to a great extent from the fundamental basis of Islamic finance; they have succumbed to the influence of conventional banking. Shari'ah scholars interviewed therefore emphasised that there is an internal logic to Shari'ah principles, which IFIs will see only if they stop trying to duplicate conventional structures.

TABLE 9.40 Focused coding number 1 for Question 12

Mimicking conventional became the norm
Interview 2 With sorrow there is a tendency to mimic everything that is offered by traditional banks
Interview 13 They are still heading in the same direction as conventional banks
Interview 21 Customers are fed up with the market imitating conventional banking
Interview 27 There is lots of form-over-substance compliance in Islamic banking
Interview 33 Big difference between practice and principles

TABLE 9.41 Focused coding number 2 for Question 12

IFIs are in a constant struggle to reconcile faith and finance
Interview 5 It is not fair to claim that current Islamic banking is merely a disguised version of the conventional substance
Interview 10 IFIs must resolve inner tensions
Interview 16 Everything that is not forbidden in the Holy Quran is ok
Interview 31 You can create and invest in very risky assets and still be Shari'ah-compliant

The Next Chapter in Islamic Banking

In this last part of the interview analysis, the participants' opinions and perceptions were sought on the future of IBF with a particular focus on risk management-related issues. The theme in Table 9.42 indicates that various strategies have been suggested by interviewees in order to achieve profitable growth and to enhance IFIs' competitiveness. However, participants asserted that while asset growth is important, addressing risk issues needs to be in place to support sustainable growth. Therefore, strategic focus needs to be timed, with risk management being implemented first, followed by growth. The findings from the analysis through focused coding are presented in Tables 9.43 to 9.46.

TABLE 9.42 Results for Question 13

Question 13 What strategies should Islamic banks focus on over the coming decade? What do you believe are the catalysts for the growth of Islamic banking?
Focused Coding
1 Enhanced risk management and mitigation
2 Diversification
3 Back to roots
4 Consolidation
Theme: Various strategies suggested. One thing most sides agreed on is the need for enhanced risk management and a return to Shari'ah principles.

TABLE 9.43 Focused coding number 1 for Question 13

Enhanced risk management and mitigation
Interview 9 The industry urgently needs more advanced risk management architecture
Interview 11 Think capital, think risk … the risk culture must change and must be embedded institutionally
Interview 13 Enhance risk management practices and culture
Interview 20 Without proper risk mitigation, I can't see how Islamic banking will be able to compete in a global competitive environment
Interview 28 Clearly there is substantial room for improvement in risk management
Interview 29 IFIs must manage the funding gap carefully

TABLE 9.44 Focused coding number 2 for Question 13

Diversification
Interview 25 Concentration kills; IFIs must diversify
Interview 27 Diversification: geographically and operationally

TABLE 9.45 Focused coding number 3 for Question 13

Back to roots
Interview 4 Back to basics and core values
Interview 19 Innovate do not replicate

TABLE 9.46 Focused coding number 4 for Question 13

Consolidation
Interview 18 Cross-border consolidation
Interview 21 Mergers and acquisitions; there are far too many small Islamic banks

As the findings in Tables 9.42 depict, recommendations given in terms of strategies that Islamic banks should focus on over the coming decade as catalysts for the growth of Islamic banking are numerous and diverse. Many challenges still lie ahead, as is clear from the interviews. However, the ongoing improvements in banks' risk management and mitigation techniques and prudential frameworks for Shari'ah-compliant banking give reasonable hope that the Islamic banking industry's growth will contribute positively to broader financial and economic stability, especially after the financial crisis has proved Islamic finance to be a more ethical and sustainable banking alternative than the debunked Wall Street model.

In particular, IFIs need to improve their liquidity management and diversify their activities from what is mostly a real estate and ‘vanilla’ lending play, to offer a comprehensive service suite including advanced treasury services, innovative asset-management and securitisation services. This will allow them to address the needs of underserved market segments such as sovereign wealth funds and private wealth clients. The bankers interviewed recommended that there is also a lot to be done in trade finance, which used to be the staple of Islamic finance but for many years has been unfashionable. The corporate finance and liability management areas are also open for huge expansion. IFIs should also exploit consolidation in order to benefit from economies of scale as well as enhancement of scope. Both approaches offer diversification benefits.

CONCLUSION

The objective of this chapter is to analyse the semi-structured interviews conducted with Islamic banking professionals. The responses of the interviewees were first individually recorded and later coded and the results of the coded answers presented in a table. The interview was then organised into various topics to simplify the analysis of the responses given by the interviewees.

As regards the findings, interviewees indicated that the IFIs' unsound risk management architecture is reflected by their concentration risks, poor sector allocation, imprudent liquidity management and imbalanced ALM. In addition, the interviews revealed that the Shari'ah-non-compliance risk is a significant risk facing IFIs. It is also noticeable that both Islamic and non-Islamic bankers had similar risk perceptions about risk management in Islamic banking.

In addition, the interview findings indicate that Islamic banking in its current state can be riskier than conventional banking because of the additional risk management and mitigation challenges and constraints the industry faces. As the participants stated, there are several risk management areas where improvement can be made to promote and enhance the functioning of IFIs. Empirical evidence also indicates that many Islamic banking products aim to essentially replicate the products and processes of the conventional system. Most IFIs prefer mark-up based contracts and shy away from profit-sharing contracts that they perceive as more risky.

Interviewees had varying views about the suitability of Basel II and potentially Basel III to Islamic banking and whether IFIs should keep higher or lower capital requirements than their conventional peers. In general, respondents, particularly bankers and rating agency analysts, agree that with a few amendments, Basel II becomes applicable to IFIs, and that IFIs should hold higher capital levels than their conventional counterparts because the Islamic banking business model in its current state carries more risks. It is interesting to note that, despite a general lack of absolute clarity about Basel III and its potential impact on IFIs, most interviewees agreed that Basel III is a fact that is here to stay.

Furthermore, most interviewees believe that although IFIs have been more resilient to the ongoing crisis than their conventional counterparts, the shift in the environment did negatively affect some of them. Since Islamic finance is not an island, it has suffered from the liquidity drought, to the point where a few IFIs have defaulted, but as an industry it now has a track record of resilience, which had not been tested before. While the global crisis gave Islamic banking an opportunity to prove its resilience, it also highlighted the need to address important challenges. The crisis has led to greater recognition of the importance of liquidity risks, and the need for more advanced risk management and mitigation.

Interviewees are also of the view that IFIs will not achieve their objectives by simply mimicking conventional products. While the ideals of Islamic finance offer some compelling ideas, the reality is that much of Islamic finance today is focused on replicating the conventional system.

Finally, the interviewees almost unanimously agree that there is now an opportunity for Islamic banking to thrive as it has the potential to contribute to a more stable economy. However, in its current form, Islamic banking has little to offer in terms of long-lasting solutions and sustainable financing, as the solution ultimately has to be a moral, not a material one. Islamic banking needs to aim for a truly alternative vision based on the ethical and moral safeguards within authentic Islamic concepts, together with improving risk management and mitigation techniques, enhancing liquidity management and reducing concentrations.

The empirical findings in this chapter provide efficient responses to the research questions and objectives. The findings of the interview analysis having been presented, Chapter 10 combines these findings with the quantitative findings from the questionnaire data analysis in an integrated manner within the context of the existing literature in order to provide a basis for an overall conclusion.

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