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Using social welfare concepts to guarantee Islamic banks’ deposits

Bassam Mohammad Maali (International Accounting Department, German-Jordanian University, Madaba, Jordan)
Muhannad Ahmad Atmeh (TAG Graduate School of Business, German-Jordanian University, Amman, Jordan)

International Journal of Islamic and Middle Eastern Finance and Management

ISSN: 1753-8394

Article publication date: 15 June 2015

1384

Abstract

Purpose

The purpose of this paper is to examine the use of the social welfare concepts of Takaful and Tabarru’ (donations) as tools to guarantee deposits in the Islamic banking industry, and the effect of such practice on the concept of risk sharing in Islamic finance.

Design/methodology/approach

The study critically analyzes the Mudaraba contract used by Islamic banks to mobilize funds, the use of Profit Equalization Reserves and Investment Risk Reserves, the use of other income smoothing techniques and the insurance of Islamic banks’ by regulatory agencies in some countries based on the Takaful and Tabarru’ concepts.

Findings

This paper shows that Islamic banks are increasingly using the concepts of Takaful and Tabarru’, which are intended originally for social welfare, as tools to justify the move to more guaranteed-in-substance type of deposits, and hence, more risk shifting rather than risk sharing in the Mudaraba contract. This use, is argued, moves Islamic banking towards more market-oriented, but less Shariaa-compliant in substance.

Research limitations/implications

This papers examined the behaviour of Islamic financial institutions and Islamic scholars based on the available literature. No empirical analysis was conducted.

Originality/value

This paper contributes to the ongoing debate about the substance of Islamic banking transactions and the risk shifting inherent in such transactions. Furthermore, it is the first study that examines the extent of utilizing different social welfare concepts to legalize – from Shariaa perspective – Islamic banking transactions.

Keywords

Citation

Maali, B.M. and Atmeh, M.A. (2015), "Using social welfare concepts to guarantee Islamic banks’ deposits", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 8 No. 2, pp. 134-149. https://doi.org/10.1108/IMEFM-12-2013-0125

Publisher

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Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited

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