Banks in distress present a threat to orderliness and stability in financial markets. Left unresolved, users and providers of funds in distressed banks quickly respond to uncertainty, rumors, and loss of confidence–all combined in precipitating a run on depositors’ funds. Evidence suggests that during bank runs, depositors fail to distinguish between good and bad banks (Hasan & Dwyer, 2007; Chen & Hasan, 2008).

This behavior was exemplified in the collapse of Islamic Bank Ltd (IBL) in South Africa in 1997. Associated with this failure was the seriousness of the bank run on muÌÉrabah-contracted deposits first occasioned by noise, then opaque operational information, lack of confidence, and finally contraventions of law, dodgy accounting, poor operational practices, and SharÊÑah non-compliance.

The result of IBL’s collapse showed up in reputational damage to the nascent development of Islamic finance in that country (Loonat, 2004). Its failure was not occasioned by a lack of faith in Islamic finance, but by a lack of good governance and management practices revealed in the South African Reserve Bank’s (SARB) Inspectors’ Report (IR).