ACCA AFM Syllabus B. Advanced Investment Appraisal - Disadvantages of Islamic finance - Notes ^{9 / 19}

Disadvantages of Islamic Finance

Not all commercial risk is removed obviously...

1. Sharia interpretations of innovative financial products is not always agreed upon 

   Some Murabaha are based on prevailing interest rates rather than economic or profit conditions

2. Documentation is often tailor-made for the transaction,so high transaction/issue costs

3. Islamic finance institutions have extra compliance increasing issue / transaction costs. 

   Banks need to know more than usual so more due diligence work is required.

4. Islamic banks cannot minimise their risks as hedging is prohibited

5. Some Islamic products may not be compatible with international financial regulation.

6. Trading in Sukuk products has been limited, especially since the financial crisis

7. With no interest - it is hard to claim some Islamic instruments as debt - therefore losing the tax benefit and increasing the WACC

8. Can be difficult to balance the interests of the financial institution with those of other stakeholders.