Applying Financial Efficiency to Mitigate Systemic Risk

Abstract

The main intent of the study is to ascertain the degree of financial efficiency in the product of Murabaha financing of Islamic banks vis-à-vis interest based short term business loan of conventional banks; so that the tools of Islamic Macro-prudential policy related to risk associated with Murabaha financing may be formulated and implemented along with the tools of Conventional Macro-prudential policy. Survey strategy is used to collect primary data through structured close ended questionnaires from the sample of 422 loan customers and 120 Murabaha customers of both the conventional and Islamic banks operating in Karachi, Pakistan. Similarly, 178loan officers of conventional banks and 98 Murabaha officers of Islamic banks were also inquired through the same strategy. Quantitative and qualitative techniques were used to analyze the data and the same is tabulated by use of frequency tables. The study finds that the financial efficiency of Murabaha financing is more than that of conventional interest based loan by 28% in the opinion of Murabaha and loan officers and by 6.5% in the perspective of Murabaha and loan customers. The study, therefore, suggests that the tools of both the conventional and Islamic Macro-prudential policies may be similar to certain extent but should not be the same.

Keywords: Murabaha financing, Financial efficiency, Systemic risk, Interest based loan, Islamic Macro-prudential policy.

JEL Classification Numbers: G01, G 21, G 28, G32, H21