Islamic deposit insurance in theory and practice

Abstract

The development and competitiveness of Islamic banking, as a relatively young segment of the global financial market, is conditioned, first of all, by the trust of current and potential investors in the ability of Islamic banks to manage entrusted funds by the contract and good business practice. Deposit insurance is one of the important instruments that can be used to strengthen depositors' confidence in the banking system's stability. This paper analyzes the model of Islamic deposit insurance. The paper's objectives are to review its theoretical basis and the features of its practice, possible deviations of business practice from theoretical postulates, and the challenges of applying Islamic deposit insurance in different legal systems. Analyzing the practice of Islamic deposit insurance, it concludes that in most countries it deviates from the Shariah-compliant model of deposit insurance. This was primarily contributed by banking regulations that generally do not recognize the specificity of an Islamic bank's relationship with its depositors and, therefore, the Islamic banks' need for an authentic approach to deposit insurance.

Keywords

• islamic banking
• deposit insurance
• shariah
• takaful
• kafalah bi al ujr