Examine the financial stability of Islamic bank of Britain in comparison with Islamic windows of HSBC and Lloyds TSB during 2005-2010 Period

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ACKNOWLEDGEMENT

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DECLARATION

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TABLE OF CONTENTS

ACKNOWLEDGEMENTII

DECLARATIONIII

CHAPTER 2 LITERATURE REVIEW1

2.1 Banking stability1

2.2 Bank stability and financial ratios3

2.3 Factors affecting financial stability of banks4

2.3.1 The liquidity factor4

2.3.2 The affect of capital management5

2.3.3 Risk management7

2.4 Islamic Bank products8

2.4.1 Murabaha8

2.4.2 Mudaraba9

2.4.3 Musharaka9

2.5 Debt Financing Contracts10

2.5.1 Ijara10

2.5.2 Bay Salam10

2.5.3 Istisna11

2.6 Past studies on Islamic banking system11

2.7 Islamic banks and global financial Crisis13

2.8 Conclusion15

REFERENCES16

CHAPTER 2 LITERATURE REVIEW

2.1 Banking stability

In the opinion of Esposito (2002, 102) the environment for banking has changed dramatically over the past decade. Since, the mid-seventies, the number of bank failures has risen to a record high. The number of bank failures in 1988 reaches an all time high of 221. From 1970 through 1979, there were 81 bank failures, representing a 42 percent increase over the previous ten years; and from 1980 through 1989, there were 1,228 bank failures, 15 times greater than the previous decade. For the first five (5) years of the 1980, there were 182 bank failures, as compared to 184 bank failures, 30 years prior still worse, the outlook for the 1990's paints an even grimmer picture in that the Federal Deposit Insurance Corporation (FDIC) estimates bank failures in 1991 to be 180 (Khan 2000, 19).

These statistics, along with instability in both the economy and the banking industry, have raised many questions and concerns by the public over the safety and soundness of the banking system. There have been a number of articles written and empirical studies conducted concerning bank failures and factors related to bank performance over the past decade. Most writers concluded that the major factors that relate to bank performance could be categorized as either external or internal factors (Khan and Bhatti 2006, 145).

External factors are considered to include such items as the economy, regulations, and competition. Khan and Bhatti (2008, 12) indicated that deregulation brought about a significant amount of market risk, interest rate risk, and liquidity risk which influence the performance of banks. Kazarin (2003, 21) contended that the regulators should not stand in the way of a banker and his profits, except in criminal misdealing. Jackson (2009, 79) wrote that the Texas bank failures were due ...