Capital Market and Facilitating the Allocation of Financial Resources in Islamic Banking

Authors

1 Associate Professor of Mofid University

2 Teacher of Hikmah Non-profit Institute, Qom

Abstract

Due to the discrepancy amongst motivations of bank and the recipients of bank facilities, there is always an information asymmetry between the two parties. This brings about risks for the bank in granting facilities. There are several methods which banks can employ in order to decrease the risks involved in granting facilities. One of the methods is using the generated opportunities in the capital market, especially secondary markets, for the screening as one of the methods used for reducing and managing credit risks. Respecting religious law in granting facilities is necessary in Islamic Banking system. Due to this fact, Islamic banks can also make use of religious screening based on Islamic law (Sharia) in capital market.
This paper is based on descriptive and content analysis method using library resources. It verifies the hypothesis of whether capital markets can help Islamic banking in improving the screening of the recipients of facilities as well as other economic sections. Other evident results of screening, using capital market, include reducing banks' outstanding claims, decreasing the limitations of benefiting from facilities by individual consumers, higher accessibility of bank resources for applicants, reducing the role of collateral in granting bank facilities, reducing the risk of adverse selection, improving facilities portfolio and reducing Sharia risk in Islamic banking.

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