The author wants to investigate the financial innovations that are produced in Conventional and Islamic banking to know which banking sector is providing better financial innovations without exposing the economy into a new financial crisis, and if their financial innovations are driven by regulatory avoidance or not. To make the comparison more realistic, the author will approach a bank that operates under Islamic and Conventional Banking. The main research questions to be addressed are:
1. Which banking sector (Conventional and Islamic) has higher risk appetite, and what precautions they follow?
2. What is the profit ratio from financial innovations in Conventional and Islamic banking?
3. Which banking sector provide a riskier financial innovation?
The author wants to study the effect of different variables such as: regulations, market risk, liquidity risk, and credit risk to know their influence on risk appetite, and how they affect the income from financial innovation. Moreover, the author will be able to know if both sectors (Islamic and Conventional) react in the same way to any change in these variables.
The outcome of this research will inform the practice of Islamic banking to identify financial innovations that have lack of transparency or driven by regulatory avoidance in order to avoid future financial crisis and to have a steady economy with lower risk and better return, which will generate a stronger economy.