Oldfield And Santomero In Al-Tamimi: Case Study

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Question 1 The banks function as an intermediary between depositors and investors. It is depositor’s main aim to safeguard their saving while investors in the other hand need some financial assistance in order to fulfil their economic and financial objectives. Thus, it is a crucial responsible for them to fulfil the commitment towards few important goals to both clientele. Besides maximizing the profit to fulfil their obligation to the shareholder, banks also responsible to ensure soundness of the depositor’s saving. Thus, it is the bank’s responsibility to ensure prudential regulation in terms of managing risk that expose to their nature of business; market, operational, credit and liquidity risk. Oldfield and Santomero (1997) in Al- Tamimi …show more content…
In practice, conventional bank operates in higher leverage compares to capital that they hold. In contrast with Islamic banks, they are required to hold higher capital due to the unique variation of risk that they carry in their business. However, general confusion about this two issues always arise, since capital always being misled as asset which being ‘held’ or ‘set aside’ by bank. Although they are related to each other, the attributes of both is different thus, it brings different impact which explained by Farag et. al (2013) in Figure 1.0. In this paper, I would like to investigate whether having adequate capital is enough to manage the risks faced by banks by viewing related literature on the relationship between capital adequacy ratios with the risk (insolvency risk). I also would like to discuss this subject in the view of real practice between the conventional and Islamic banks. This will cover the risk faced by them and their level of resiliency during the recent financial …show more content…
Next, I will explore the risk faced by both conventional and Islamic banks, the management and level of resiliency towards crisis. M.Ariffin et. al (2009) found that Islamic banks carries similar type of risk in different level, which means, the understanding of risk in Islamic banking practitioner are alike with the conventional due to the similar regulation that they have in risk management and governance. In the case of Malaysia, Sairally et. al (2013) revealed there is conflict in complying with Basel III requirement that led to triggering the Sharia key issues especially in the capital instruments structure. Due to the fact that International Financial Services Board (IFSB) that act as regulatory bodies for Islamic Banks has uses Basel in order to come out with capital requirement documents, it creates this structural issues as Basel caters conventional banks. Ahmed (2014) also highlighted there is a barrier to fulfil Basel III liquidity requirement as liquidity instrument and development in Islamic bank currently is far left behind. He also believed that innovation needed to address the restriction that comes from Sharia ruling in order to solve the liquidity issues. Despite all the issues and challenge faced by Islamic banks, in the conflict of obligating to the religion’s principles and fulfilling the regulatory bodies requirement, during

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