Vulnerability of Islamic financial institutions in a financial crisis

This article examines the risks that the Islamic Banking industry may be exposed to in a financial crisis. In order to set the context, it first discusses the sources of bank finance in both the conventional banking industry and Islamic banking. It then examines the various types of risk exposure by conventional banks and Islamic banks. It analyses the types of problems which are unique to Islamic banking in contrast to conventional banking. It then considers what lessons can be learned from the global financial crisis, particularly for Islamic banking. This article argues that in order to ensure stability for Indonesian Islamic Financial Institutions, banks must address each of the identified risks. It points to recent illustrations of institutional failure because of failure to address the risk.