Corporate governance in Islamic banking Assignment

Corporate governance in Islamic banking - Assignment Example Moreover, Islamic finance is one of the ways to accommodate Islamic value in finance, it insists on the importance of the accountability, transparency, and trust. Islamic banking refers to a system where all banking behavior is consistent with Islamic law and guided by the economics of Islam. Since the introduction of Islamic banking, the number of Islamic financial institutions has increased globally. This is because of the increase in Islamic population and the economic development of Islamic nations. Today, there are more than 300 institutions in more than 75 countries. In addition, there is the development of many Islamic financial products used in financial market activities, for example, trading, and investment. Corporate governance in Islamic finance entails the institutions abiding by the Islamic rules also known as Shariah. The rules govern the bank’s operations, according to Islamic principles that are derived from Quran and Hadith. Islamic financial institutions operate in the same space as the conventional banks and perform all functions expected from a financial institution. In addition, savers are able to collect deposits for the purpose of reward from both types of institutions. However, the difference comes in when agreeing on the reward. Under the conventional system, the reward is normally predetermined and fixed while in Islamic system, the reward is variable and the deposits are acceptable through Musharaka (Lewis, 2001). Additionally, the returns under conventional banking are usually higher on long-term deposits and low for short-term deposits. On the other hand, higher profit sharing is assigned to long-term deposits available for investing in long term projects, earning high returns and low weight for deposit that are short-term that cannot be spent in long term projects. Under Islamic banking, the risk and rewards are