Several financial and economic crisis including the Asian Financial Crisis in 1997 and recent crisis; subprime mortgage crisis has triggered financial instability all over the world. The conditions in the global financial system has deteriorated sharply as the idiosyncratic funding and asset liquidity tighten and unexpected-larger losses associated with sub-prime related portfolios have weaken the balance sheet of global financial institutions. Furthermore, these disruptions in the financial markets also causing constraint to the flow of credit to household including families and to the business entity. Household balance sheets have come under pressure to arising job losses, falling net worth, and tight credit conditions (IMF, Global Financial Stability Report, April, 2009). Therefore, many governments have taken initiatives and scale up intervention measures in attempts to restore the financial stability in their financial system.
Reflecting the impact of the crises and excessive capital particularly in petrodollar country including the Gulf Cooperation Council (GCC) , therefore it provides an opportunity for Islamic financial institutions (IFS) globally including Islamic banks to grow significantly in recent years. For example, shariah -compliant assets rose by 28.6 percent in 2009, to $822 billion dollar from $639 billion dollar in 2008 (The Banker, November 2009). According to Moody’s, 2009, Islamic banking assets and assets under management are expected to reach USD 1 trillion by 2010. In addition, potential market for this system is worth at least USD 5 trillion.
IFS including Islamic banking has been incepted globally about three decades ago, and the number has grew from one in one country in 1975 to over 300 institutions in more than 75 countries and concentrated most in the Middle East and South East Asia (with Bahrain and Malaysia the biggest hub) with small presence in Europe and the United States (El Qorchi, 2005). The GCC states remained the dominant segment of Islamic finance, with $353.2 billion dollar or 42.9 percent of the total global aggregate Islamic banking assets, a 34.5 percent rise from $262.7 billion dollar in 2008. Moreover, Bahrain is acknowledged the main focal point of offshore Islamic banking in the Middle East as noted by Honohan (2010).
In the Islamic Republic of Iran and Sudan, the arrangement and use of financial services and instruments that conform to Islamic religious principles as delineated in the Quran and Islamic Shariah laws are adopted by all financial institutions assented Islamic banking (Sundarajan and Errico, 2002). The all inclusive implementation of the IFS is said taken place in Iran following the Islamic Revolution by transforming the banking system from nationalizing the system and streamlining it on the second phase (Khan, and Mirakhor, 1987). Moreover, in other countries including Egypt, Bangladesh, Indonesia, Jordan and Malaysia, Islamic banking is operated in parallel with...