Fixed Income Assets of Islamic Banks: Moving Forward To Adapt a New Role as a Trading House
By Muhammad Ali Shaikh
Abstract
Major portion of the asset portfolio of Islamic banks (IBs) consists of Fixed Income (FI) assets. The reason for keeping higher share of FI assets (e.g. Murabahah, Ijarah and Diminishing Musharaka) is obvious. The return paid to depositors depends on the earning potential of the asset portfolio. Risk perception about investment risk in PLS assets is high as compared to fixed income (FI) assets based on trading or Ijarah involving credit risk which is considered lower and easier to manage. Some failures of PLS financing in the first phase of Islamic banking in Pakistan in the eighties also created this impression without going in to the reasons of their failure. Islamic bankers coming from the traditional background of conventional banks were more familiar with credit and collateral based financing and related risk. Therefore, despite criticism regarding credit and collateral structure which creates similarity with conventional methods and questions about socioeconomic impact the initial structure of the asset portfolio of IBs mainly consisted of FI assets. However recent data shows a change in the trend showing improvement in the share of PLS assets but FI assets are still the main component of asset portfolio.
Since the portfolio risk is an important factor besides the requirement of halal income in deciding the asset structure the journey towards desired structural change may be longer than expected. It is not only the debate of PLS vs FI assets. Some situations like infrastructure financing and consumer financing may not be suitable for PLS financing leaving the fixed income type as the only choice. Even when all issues hindering adaption of PLS assets are resolved (apparently a distant possibility) complete switch over to PLS assets may not be practically possible. Therefore, FI assets will remain in the portfolio of Islamic banks although the percentage share may come down in the coming years. This paper deals in detail with issues involved in the practice of FI products particularly with reference to banks’ new role as a trading house and explains the ways how this role can be adapted by the Islamic Banks to make FI assets as undisputed viable Shariah compliant asset creation alternative.
Contents
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