Challenges in Implementation of Capital Adequacy Guidelines in Bahraini Islamic Banks

Abstract

The main aim of this paper is to shed light on challenges and issues that are being faced by Bahraini Islamic banks with regard to the capital adequacy guidelines. In Muslim countries, ever-increasing Islamic financial activities, including participation, equity as well as ownership have played an important role in bringing Islamic banking and making financial instruments more attractive. In this study, the role and implementation of Capital Adequacy Ratio (CAR) was critically examined while viewing the gaps it has failed to fill to make Islamic banking more successful in Bahrain. The research found out that in terms of activities, both types of banks (Islamic and conventional) have a discrepancy that activities of Islamic banks are not just limited to financial intermediation. Various roles are played by the Islamic banks, such as a consultant, trader, financing house and financial advisor. Consequently, there are various modes of financing, which are Islamic, and each of them has its individual risk features which affect the balance sheet’s both sides. The research concluded that the protection of depositors and safeguard of assets is the key role of any managerial, financial body. For internationally active banks, capital adequacy recommendations are set by Basel II Accord’s Pillar 1. Sources of funds of a conventional bank are disregarded by the proposed guidelines in the Islamic banking system of Bahrain, and it also evaluates the risks of its actions which arise from the funds’ uses.