The Risk in Islamic Finance Instrument and its Impact on Capital Adequacy

Abstract

Islamic finance is evolving as a rapidly growing part of the financial sector in the Islamic world. Its current asset base of one trillion USD is experiencing annual growth of 15 – 20 percent. It is categorized by being interest free and depends largely on the principles of Islamic Law (Shari’ah). Now, Islamic finance is not restricted to Islamic countries, but is spreading wherever there is a sizable Muslim community. The Islamic financial services industry, containing Islamic banking, Islamic insurance and the Islamic capital market, is an area that has grown to become an increasingly substantial segment within the global financial market and has gained considerable interest as a viable and efficient alternative model of financial intermediation. This paper examines contemporary Islamic Financial Instruments and the risk of Islamic financial instruments. This paper analyses forwards, futures and options, examines the evolution of these instruments, their unique benefits and why they are needed