Risk regulation in Islamic banking: Does Saudi Arabia need to adopt the risk regulation practices of Basel?

Proponents of Islamic finance often argue that the success of Islamic banks in the UK and Malaysia during the 2007-8 Financial Crisis is proof of the proposition that all Islamic banks (IBs) are immune from sub-prime-mortgage type shocks. The implementation of Basel practices in Saudi Arabia will be very difficult and is likely through various challenges. However, it is arguable that such practices may bring about change in a substantial way in the UAE market. Thus, this thesis will discuss features of IBs in the UK and Malaysia, and discuss the areas in which the Saudi market is mired in less risk than conventional markets in the UK and Malaysia. Using a qualitative methodology, this research sought to answer the primary research question, that is, “Does Saudi Arabia Need to Adopt the Risk Regulation Practices of Basel?” To be able to accurately answer this main question, it is necessary to determine whether the standardisation of accounting practices and regulatory principles can enhance Islamic finance organisations. It is likewise necessary to determine whether the Basel framework can be internalized by Islamic financial institutions to solve issues such as the inadequate coordination of financial markets in Saudi Arabia. The research sought to consider whether legal secularisation could be reconciled with Islamic models of finance in order to standardise banking processes across jurisdictions. It is vital to discuss this research problem as it is evident that Islamic banks are, by design, “safer” than conventional banks, which take fewer risks than conventional banking systems. Its ability to withstand the 2007-8 Financial Crisis can serve as example to other banking systems to follow to prevent the debilitating effects such a crisis can provide to the global financial system and the worldwide economy as a whole. This paper also discusses inherent risks in dealing with Saudi banks caused by structural weaknesses in the Saudi economy, further caused by a lack of transparency. Research from the content analysis and literature review demonstrated that certain components of Malaysian banking and banking in the UK, including Basel Frameworks (I, II, and III) can be adopted by the Islamic financial model in order to improve the overall banking structure in Saudi Arabia. Whilst Islamic accounting standards do not need to be as rigorous as some Basel Frameworks discussed in the study, implications for positive social change in Saudi Arabia include adopting policies which specialise in clearing defining risk management and policies which focus on improving corporate governance and bolstering transparency in Saudi markets. The central argument of this research therefore, is that the incorporation of pertinent Basel components, as well as those from the Malaysia and UK banking system, into the KSA banking system, will bring about improvements to the latter’s overall banking structure.