1.1 BACKGROUND OF THE STUDY
Islamic banks considered as an active player in the world economies over two decades ago (Ahmed S., 2009). The principles accounting upon which Islamic banking is based have been universally accepted for centuries rather than decades. The fundamental principle of Islamic financial institutions is the prohibition of Riba (interest). It is manifest that Islamic accounting theory were practiced mainly in the Islamic country throughout the middle ages, development trade and business activities.
In order to understand what services that Islamic banks offer, it is essential to maintain an acceptable level of information of the basis behind it. It has been argued that the Islamic banks have not introduced any new services since their first existence in the 1970's, in fact they have tried to comply with the rules of the Islamic religion specified for these types of actions. High requests to assess Muslim customers perception and attitude toward Islamic bank services. Islamic banks understand that its paramount important to measure the degree of its customers awareness as well as to improve services. The financial institution follows the rules that Holy Quran and hadith have set to guide the Muslims in their financial matters. The Islamic financial system employs the idea of participation in the project, utilizing the funds at threat on a profit-and- loss-distribution basis (Ahmed, S., 2009).
1.2 STATEMENT OF THE PROBLEM
During the last three decades, Islamic finance institutions have been rising significantly, both nationally and internationally (Ahmed, S., 2009; Iqbal & Abbas, 2007). These firms were recognized in the emerging market of the Middle East to meet the order of investors and borrowers who are motivated by income maximization derived from the Islamic law (Shari'a).
Islamic finance institutions offer an extensive range of Islamic financial innovations from the simple agreement of profit-sharing agreement (Mudaraba) that is parallel to time deposit in conservative banks, to issue Islamic bonds (Sukuk) and derivatives. In gulf countries, the state of Kuwait banking industry considered on of the leaders in Islamic financial market. The growth of Islamic finance institutions in Kuwait has attracted some of the conventional financial firms (e.g., NBK IFIH, and Citibank) to add the service of Islamic windows to their clients.
In spite of the advantages that are fixed in Islamic finance system and management, Islamic finance institutions encounter numerous primary challenges to the prospect of being recognized internationally. The challenges exist in local as well as global markets. On of these challenges is to assess the degree of awareness in Islamic accounting theories. In their study, Gerrard and Cunningham (1997) reported that Muslim respondents, though aware of basic conditions in Islam, were almost wholly ignorant of the sense of specific Islamic financial conditions like Mudaraba, Musharaka and Ijara.
As result, many Islamic financial providers seek to assess the level of social awareness of their tools that incorporate with Shari'a. The understanding of customer degree of awareness are paramount important to determine firms endowment to promote Islamic accounting theories. Bankers also seek to explore the reasons behind dealing with Islamic banks to better understand and improve services provided.
Another challenge that faces Islamic financial institutions is that, as service provided they have to understand customer's perceptions and attitude toward the services provided to better understand customers need, want, and improve their services. With no understanding to customer perceptions and attitude Islamic banks may have no means to better develop their services and improve customer satisfaction and compete in the local as well as the international market. The current study seeks to assess the level of customer's awareness of Islamic accounting theories and to explore their perceptions and attitude toward these tools that incorporate with Shari'a.
1.3 OBJECTIVES OF THE STUDY
Islamic financing is an important area of contemporary academic and policy interest. Opposing views in the area are analyzed in the light of empirical evidence. Measuring the degree of customer awareness toward Islamic accounting theory and their perception and attitude toward Islamic tools will shape the future of Islamic financing. The current study attempts to reveals the degree of customers awareness toward Islamic and efforts bestows to improve their awareness in order to assist Islamic financial institution to determine the efforts needed to raise this awareness and improve their attitude and perceptions. Another objective of this study is to explore customers perceptive and perception toward Islamic transactions thus Islamic financial institutions can better understand their customers and improve services provided.
1.4 SIGNIFICANCE OF THE STUDY
Islamic banks provide many financial services and are competing heavily in the Middle East with conventional banks. Customers nowadays go for Islamic bank loans for buying home, cars and even business setup, as the conditions are very clear and there are no rising interest piling up. To overcome the fierce competition, Islamic bank need to bestow efforts in rising the degree of awareness toward Islamic accounting and finical tools and improve customer's perception and attitude. The study is of general theoretical importance as well as of particular practical significance for policy makers who intend to conform their existing financial systems to Islamic rules.
Furthermore, at the practical level, the study aims to assist Islamic bank manager in providing empirically evidence how of Kuwaiti customers aware toward Islamic accounting theory and Islamic financial services. The study also provide framework for bank managers in measuring customer's perception and attitude toward Islamic services and their usage of various products and services offered. At the theoretical level, the current study aims to develop the literature of Islamic accounting theory and explain how these theories are to be implemented in the Islamic financial institution who adapts Shari'a.
1.5 THE SETTING OF THE STUDY
In the Gulf Co-operation Council there are growing number of Islamic banks are also taking steps towards greater clearness and stronger authority structures. The state of Kuwait for example, has been taking a number of steps to reinforce its local Sharia-obedient institutions, including slowly moving in the direction of a latest regulatory framework for sukuk. In conversations with OBG, manufacturing insiders explained that due to a lack of suitable legal mechanisms, Islamic finance companies are not allowed to issue sukuk in Kuwait, which forces Kuwaiti companies to work through other markets, such as Bahrain. Given the massive increase in sukuk issuance worldwide, pegged at nearly $17 billion (in the Gulf alone, the growth rate since 2001 has been nearly 45%), Kuwait's financiers are keenly aware of the need for proper rules regulating sukuk.
Sheikh Salem Abdulaziz Al Sabah, the governor of the Central Bank of Kuwait (CBK), said earlier of 2008 that regulations are wanted, saying that the CBK is "keen to provide a legal system to regulate Islamic investment tools such as the issuance of sukuk, especially in light of growing demand. We are optimistic a solution will soon be found." In state of Kuwait, the Islamic financial sector and its sharia-compliant companies are the increasingly global. Kuwait Finance house Bank (KFH), as an example, in addition to its Turkey, Malaysia and Bahrain ventures, newly established a subsidiary with a pair of Chinese firms to discover real estate investments in the Chongqing region of a middle China. In a more high-profile move, Investment Dar, one of Kuwait's biggest Islamic investment companies, recently funded a takeover of British luxury carmaker Aston Martin to the tune of $925 million.
To achieve the purpose of the current study, the study focuses on a specific Islamic bank that located in the state of Kuwait. KFH has usually been one of the main engines behind the growth of Kuwait's sharia-acquiescent financial market; however, its enlargement and development indicates a growing maturity in Kuwait's sharia-compliant services zone, established by the push toward the regulation of Islamic bonds (sukuk) and the emergence of ever-stronger Islamic investment firms.
KFH was the first Islamic bank in Kuwait and one of the pioneers toward adapting of Islamic accounting and financial theory in the gulf region. Beside the convenience, the research believe that exploring the degree of Islamic accounting theories of this bank may reveals highly reliable evidence of generalizing the finding in the state of Kuwait. KFH considered the main Islamic bank in Kuwait and the second-main bank of any kind in the country. Also to the huge injection of capital, KFH lately unveiled plans to set up its own subsidiary in Amman.
The expansion of Islamic banks operations at home and overseas underlines the growing development of Kuwait's Islamic financial sector. Thus the study believe that investigating the customers awareness of Islamic banks toward Islamic accounting theory are justified and understanding their perception and attitude toward KFH is paramount important in attempting to improve service quality of Islamic firms.
1.6 LIMITATIONS OF THE STUDY
This study is concerns with Islamic banking that located in the state of Kuwait as its difficult to include all Islamic banks related to resource limitation and time restriction. The study also does not analyze all Islamic accounting theory as it is very vast subject to control, rather than focusing on basic Islamic accounting theory that adopted by Islamic financial institutions and banks. Other limitation could be found related to:
- Sample size: The sample size for the bank customer is very large. Therefore, the collection of customer feedback will be costly in term of time and money. The study aims to attain around (150) survey for the purpose of analysis, which may considered one of the study limitation.
- Data collection: It may be difficult to distribute and collect all data and forms since the study is targeting to collect feedback from the entire bank customers.
1.7 DEFINITION OF TERMS
The current study includes many Islamic terms and concepts that will be stated as in Arabic meaning, some of these concepts are:
- Halal: The actions or items that Muslims can have access to.
- Haram: The actions or items that Muslims are banned from
- Riba: What is known in the west as the interest.
- Maysir: It means Games of chance such as lottery, gambling and it is usually referred to as Haram.
- Takaful: It is a form of insurance in the Islamic religion which will be explained in the essay.
- Gharar: Deception, hazard, speculation, uncertainty, risk (literally, peril or hazard)
- Mudaraba: Is a trustee financing contract, where one party, the financier, entrusts funds to the other party, the entrepreneur, for undertaking an activity
- Mushakara: It is an equity participation contract, whereby two or more partners contribute with funds to carry out an investment
- Muqarada: Loan Participation
- Qard Hassan: It is a benevolent loan (interest free)
- Shari'a: It is Islamic religious law derived from the Holy Quran and the Sunnah
1.8 THESIS STRUCTURE
The current study includes five chapters: chapter one described the background of this study, and consisted of the introduction, objectives and significance of the research. Chapter two reviewed the literatures on Islamic banking and theories. Chapter three explained the research methodology. The data analysis techniques and research findings were demonstrated and discussions in chapter four. Finally, chapter five exhibited conclusions and future recommendation.
It's necessary to explore the literature of Islamic accounting theory in details in this chapter. This chapter attempts to review previous literatures on the topic of Islamic Accounting Theory and provides recent finding related to the degree of awareness of customers toward Islamic financial services. This chapter attempts provide recent study and articles about Islamic accounting theory that explain the nature of Islamic banks system.
Previous literatures and studies have revealed that the first recent research in Islamic banking filed was conducted in Egypt under cover, without projecting an Islamic picture, for fear of being seen as a demonstration of Islamic fundamentalism, which was abhorrence to the political government (Siddiqi l988). These studies remain until l967 where nine Islamic banks open in the country (Ready l98l). These banks was neither charging nor paying interest, investing mainly by participating in trade and industry, directly or in partnership with others, and shared the profits with their depositors (Siddiqi l988). For that reason, Islamic banks functioned basically as saving-investment firms rather than as commercial banks that based on charging interests. The Nasir Social Bank, established in Egypt in l97l, was declared an interest-free commercial bank, although its charter did not refer to Islam or Shariah (Islamic law).
Islamic banks appeared on the earth scene as dynamic players over the past two decades. Nevertheless, a lot of the values that based on Islamic banking usually accepted all over the world, for centuries more willingly than decades. The essential principle of Islamic banking is the ban of Riba (interest), while the essential occupant of Islamic banking - the prohibition of riba, a word that encompasses not only the perception of usury, but also that of interest - has rarely been recognized as appropriate beyond the Islamic world, a lot of its guiding values have. The majority of these values are rooted in simple ethics and general sense, which form the bases of numerous religions, including Islam.
Interest or “Usury” was forbidden in both the Old and New Testaments of the Bible, whereas Shakespeare and many other writers, mainly those writing in the 19th century, have attacked the barbarity of the carry out. Much of the ethics championed by Victorian writers such as Dickens - ranging from the fair division of wealth through to man's elementary right to work - is obviously present in contemporary Islamic society. "Although the western media oftenrecommend that Islamic banking in its current form is a recent occurrence, in fact, the essential practices and principles date back to the early part of the seventh century." (Islamic Finance: A Euromoney Publication, 1997)
It is obvious that Islamic finance was accomplished predominantly in the Muslim world during the Middle Ages, encouragement trade and business behavior. In Spain and the Mediterranean and Baltic States, Islamic trades became vital middlemen for trading actions. It is claimed that several concepts, techniques, and tools of Islamic finance were later adopted by European financiers and businessmen.
As Islamic finance is intertwined within its religion, the basis of the religion affects the finance in two important ways:
- Islam aims at building a socio-economic order based on justice and considers economic activity as a means to an end and not an end in itself. It enjoins Muslims to harness natural resources, which are a trust from Allah SWT, for carrying out rightful activities; but abhors exploitation and man-made inequalities of income and wealth (Al-Harran, 1993).
- Islam is extremely concerned with the problem of financial growth, but treats this as an significant part of a wider problem, that of total human progress. The crucial function of Islam is to lead human growth on right lines and in the right direction. Islamic principle deals with all sides of economic development in the framework of total human development (Al-Harran, 1993).
The reinforcement of Islamic banking coincided with the world-wide festivity of the advent of the 15th Century of Islamic calendar (Hijra) in 1976. At the same time financial assets of Muslims mostly those of the oil producing countries, expected a boost due to validation of the oil prices, which had up till now been under the power of foreign oil Corporations. These proceedings led Muslims' to struggle to model their lives in agreement with the principles and philosophy of Islam (Abbas Valadkhani, 2004).
Islam not only prohibits trade in interest but also in liquor, pork, gambling, pornography and anything else, which the Shariah (Islamic Law) deems Haram (unlawful). Islamic banking is an tool for the progress of an Islamic financial order. Some of the salient features of this order may be summed up as:
- Islam urges individuals to seek their economic well-being. Islam presents a clear difference between what is Halal (lawful) and what is haram (forbidden) in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic activity, which are morally or socially injurious. This God rule can be considered as a way to systemize the citizens.
- Islam makes it obligatory on people to spend their wealth judiciously and not to hoard it, keep it idle or to squander it while acknowledging them their right to ownership of wealth legitimately acquired. This can be compared with the communism principles that look for the welfare of the whole members of the society.
- While allowing an individual to retain any extra capital, Islam look for reducing the edge of the extra for the well-being of the society as a whole, especially the poor and underprivileged sections of society by contribution in the procedure of Zakat. It is the way the Islamic government intervenes to ensure that poor people can have a formal financial source.
- While making payment for the ways of human nature and yet not yielding to the penalty of its worst propensities, Islam seeks to stop the amassing of wealth in a few hands to the damage of society as a whole, by its laws of inheritance.
- Viewed as a total, the financial system, which visualized by Islam aims at social justice without inhibiting people project beyond the point where it becomes not only jointly harmful but also individually self-destructive.
The Islamic economic system employs the perception of contribution in the enterprise, utilizing the funds at threat on a profit-and- loss-distribution basis. This by no means implies that investments with economic institutions are necessarily tentative. This can be barred by careful investment strategy, diversification of risk and sensible management by Islamic economic institutions. This system supports people to invest their money in those financial institutions to exploit their utilities by making profits under the guidelines of the Shariah.
The concept of profit-and-loss sharing, as a basis of financial transactions is a progressive one as it distinguishes good performance from the bad and minimize the players in the market to be the people who know how to invest and when they inter the market to catch the goal.
The main goals of an Islamic Banking and Financial system are to:
- Implement the value system of the Qur'an and the Sunnah (tradition or practice of Prophet MuhammadSAW) in the realm of the Muslim socio-economic system. Ibn Taymiyahr.a. (n.d.), a distinguished scholar of Islam, explicates this as follows: “In mu'amalat (business transactions) all activities are permissible unless forbidden by revelation (Qur'an) or the practice of Prophet Muhammad SAW”. The examples of prohibited business activities would include dealing in gambling, liquor, pork etc. The financial contracts of Islamic banks need to be clearly documented, equitable and avoid the elements of Riba, Gharar and Maysir as explained in the following section.
- Foster the growth of the economy of Muslim nations by developing financial markets, institutions and instruments. A well-developed capital market, with efficient institutions offering diverse financial facilities, can reduce the overall cost of capital. It can enhance social welfare by facilitating the acceptance of projects whose; present value of all relevant cash in-flows (benefits) after tax is greater than the present value of all cash out-flows (cost) of the project; or the expected internal rate of return is greater than a minimum threshold rate (or cost of capital). Furthermore, these necessary conditions should also be satisfied for each party financing the project to alleviate agency effects. This entails economic development, which is promoted in Islam, as Prophet Muhammad SAW exhorted Muslims to undertake business ventures (tijarah) as described in the following hadith Nu'aym ibn Abd Al-Rahman has quoted the (narration). ProphetSAW as saying: “Nine tenths of earnings (Rizq) is in bai' (business ventures), and tenth in cattle”. This was reported by Ibrahim Al-Harbi (Al-'Iraqi, 1992) and by Sa'id ibn Mansur (Al-Suyuti, 1990).
- Dampen the shocks of extreme economic output by promoting risk-sharing instruments whose payoffs are strictly contingent on the profitability of a firm or project at a micro level. Financial facilities with fixed costs can severely strain the resources of borrowers during a slowdown, which lead to bankruptcies and structural impairment of the economy. The gist of Islamic financial securitization is summarized by the following well-known hadith quoted by Kahf and Khan (1992), “Al-kharaj bi al daman.” This implies that entitlement of return from assets vests in the one bearing the risk of it.
2.1 CONVENTIONAL BANKING
The main job for most of non-Muslim or conventional banks is preserved money and valuables and give loans, credit, and imbursement services, for example checking accounts, money orders, and cashier's checks. These banks furthermore may propose investment and insurance products, which they were once banned from selling. As a diversity of models for collaboration and integration amongst finance industries have appeared, some of the conventional distinctions among banks, insurance companies, and securities firms have reduced. Regardless of these changes, banks continue to preserve and carry out their main role—allowing deposits and lending funds from these deposits. There are several kinds of banks, which vary in the number of services they offer and the customers they serve. Although some of the distinctions among these kinds of banks have tapering as they begin to enlarge the vary of products and services they propose, there are still key distinctive behaviors. Commercial banks, which control this industry, provide a full variety of services for customers, enterprise, and governments. These banks come in a broad range of sizes, from large international banks to local and community banks. International banks are involved in global lending and foreign cash trading, additionally to the more typical banking services. However, a lot of commercial banks have also extended to present online banking, and some previously Internet-only banks are opting to release branches.
Savings banks and savings and loan associations, occasionally called thrift institutions, are the second biggest group of depository institutions. They were first recognized as community-based firms to finance mortgages for people to purchase homes and still cater mostly to the savings and lending requirements of individuals. Credit unions are another type of depository institution. Most credit unions are created by people with a familiar bond, for instance those who work for the similar company or be a member of the same labor union or church. Members pond their savings and, when they require money, they may borrow from the credit union, frequently at a minor interest rate than that demanded by other financial institutions.
Federal preserve banks are Government agencies that achieve numerous financial services for the Government. Their chief tasks are to control the banking industry and to aid implement our Nation's financial policy so our economy can run more proficiently by directing the Nation's money provide—the total amount of money in the country, including cash and bank deposits.
Interest on loans is the main source of income for most banks, making their diverse lending departments critical to their achievement. The commercial lending department loans money to companies to start or enlarge a business or to buy inventory and capital tools. The customer lending department handles student loans, credit cards, and loans for home developments, debt consolidation, and automobile purchases. Finally, the mortgage lending department loans money to individuals and businesses to buy real estate.
The money to loan comes mainly from deposits in checking and reserving accounts, certificates of deposit, money market accounts, and other deposit accounts that clients and businesses arrangement with the bank. These deposits often make interest for the owner, and accounts that offer checking supply an easy technique for creation payments safely without using cash.
Technology is having a main impact on the banking industry. such as, many usual bank services that once needed a teller, for example making a withdrawal or deposit, are now existing through ATMs that let people to right of entry their accounts 24 hours a day. In addition, direct deposit permits companies and governments to electronically transfer payments into different accounts. Also, debit cards, which may also apply as ATM cards, immediately deduct money from an account when the card is swiped across a machine at a store's cash register. Electronic banking by phone or computer permits consumers to pay invoices and shift money from one account to another. Through these channels, bank customers can too admission information such as account balances and statement history. Some banks have started offering online account aggregation, which makes accessible in one place detailed and up-to date information on a client's accounts held at diverse institutions.
Progressions in technology have also led to upgrading in the ways in which banks process information. Use of check imaging, which lets banks to store photographed checks on the computer, is one such example that has been applied by some banks. Other kinds of technology have deeply impacted the lending side of banking. such as, the availability and increasing use of credit scoring software lets loans to be accepted in minutes, rather than days, making lending departments more competent.
Other basic changes are taking place in the industry as banks vary their services to become more competitive. A lot of banks at the present offer their clients financial planning and asset management services, as well as brokerage and insurance services, frequently throughout a subsidiary or third party. Others are starting to offer investment banking services that assist companies and governments increase money during the issuance of stocks and bonds, also usually during a subsidiary. As banks reply to deregulation and as competition in this sector raises, the nature of the banking industry will continue to undertake considerable change.
2.2 COMPETITIVENESS OF THE ISLAMIC BANKING INDUSTRY
The crucial feature of Islamic banking is that it is interest-free. Although it is frequently claimed that there is more to Islamic banking, for example contributions towards a more fair distribution of income and wealth, and improved equity contribution in the economy (Chapra l982), it nevertheless obtains its specific rationale from the fact that there is no place for the institution of interest in the Islamic order.
Islam forbids Muslims from taking or giving interest (riba) in spite of of the reason for which such loans are made and despite of the rates at which interest is exciting. To be certain, there have been efforts to differentiate between usury and interest and between loans for consumption and for production. It has also been argued that riba refers to usury accomplished by minor money-lenders and not to interest charged by contemporary banks and that no riba is occupied when interest is compulsory on productive loans, but these arguments have not won approval. Apart from a few disagreeing opinions, he general agreement among Muslim scholars obviously is that there is no variation between riba and interest. In what follows, these two terms are used interchangeably.
The forbidden of riba is mentioned in four different revelations in the Qur'an. The first revelation highlights that interest removes wealth of God's blessings. The second revelation condemns it, placing interest in combination with illegal appropriation of property belonging to others. The third revelation enjoins Muslims to keep on clear of interest for the sake of their own welfare. The fourth revelation set up a clear difference between interest and trade, influencing Muslims to take only the principal sum and to forgo even this sum if the borrower is not capable to repay. It is further declared in the Qur'an that those who ignored the forbidden of interest are at war with God and His Prophet.
The forbidden of interest is furthermore cited in no unsure terms in the Hadith (sayings of the Prophet). The Prophet warned not only those who take interest but also those who offer interest and those who record or witness the operation, saying that they are all similar in guilt. It may be mentioned in passing that similar prohibition are to be found in the pre-Qur'anic scriptures, although the 'People of the Book', as the Qur'an refers to them, had chosen to rationalize them. It is remarkable that Islam has successfully warded off various subsequent rationalization efforts aimed at legitimizing the institution of interest.
Some scholars relays on economic reasons to explain the reasons on why interest is prohibited in Islam. scholars argued that interest is a pre- determined cost of production, which avoid full employment (Khan l968; Ahmad n.d.; Mannan l970). In the same tone, it has been challenged that international monetary crises are largely due to the institution of interest (Khan, n.d), and that trade cycles are in no small measure attributable to the phenomenon of interest (Ahmad l952; Su'ud n.d.). None of these studies, however, has really succeeded in creating a causal link between interest, on the one hand, and employment and trade cycles, on the other.
Others, anxious to maintain the Islamic position on interest, have argued that interest is not very effective as a monetary policy instrument even in capitalist economies and have questioned the efficiency of the rate of interest as a determinant of saving and investment (Ariff l982). A general line running through all these negotiations is the exploitative character of the institution of interest, although some have pointed out that profit (which is legalized in Islam) can also be exploitative. One response to this is that one must differentiate between profit and profiteering, and Islam has prohibited the latter as well.
"It began as a theological dream, but Islamic banking has become a practical reality across the Middle East. The question now is, how far will Sharia boards and western regulators let it spread?" (Josh Martin, Middle East, Jun2005 Issue 357, p50, 6p)
The Islamic prohibition on interest does not imply that capital is costless in an Islamic system. Islam realizes that money is a factor of production however; it does not permit the factor to pre-determined claim on the productive surplus in the form of interest. This has leaded to the question as to what will then substitute the interest rate mechanism in an Islamic framework. There have been propositions that profit sharing can be a viable alternative (Kahf l982a and l982b). In Islam, the owner of capital can officially share the profits made by the entrepreneur. What makes profit- sharing allowable in Islam, while interest is not, is that in the case of the former it is only the profit-sharing percentage, not the rate of return itself that is predetermined.
It has been argued that profit-sharing can help assign resources efficiently, as the profit-sharing percentage can be prejudiced by market forces so that money will flow into those sectors that offer the highest percentage of profit-sharing to the investor, other things being equal (Naqvi, l982). However, ordinary Islamic thinking on this subject obviously points to the need to replace interest with something else, although there is no clear agreement on what form the alternative to the interest rate mechanism should take. The issue is not determined and the search for an alternative persists, but it has not detracted from efforts to experiment with Islamic banking without interest. So according to these advantages and inducement, Islamic banking and finance is no longer designed to serve the needs of the Muslim society only.
The industry has started benchmarking its products to conventional suppliers in terms of consumer convenience, benefits, pricing, transparency of terms and conditions, and service standards. Consequently Islamic banking and finance products have expanded popularity with non-Muslim societies due to their competitiveness and efficiency. Recently Lloyds TSB Bank in the United Kingdom began offering its individual customers Shari'a-compliant current accounts and home finance products.
2.4 PRINCIPLES AND CONCEPTS IN ISLAMIC BANKING
Islamic banking has the same principle as conventional banking excluding that it works in accordance with the rules of Syariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The fundamental principle of Islamic banking is the distribution of profit and loss and the forbidden of riba' (interest). This section defines various concepts related to Islamic banking:
- Wadiah (Safekeeping): In Wadiah, a bank regarded as worth keeping of the funds. An individual deposits his money in the bank with bank guarantees to refund of the whole money that was deposit when the person demands for it. The depositor may be rewarded with 'hibah' (gift) as a bank appreciation for him for using his funds to finance their activities (Ali, R. 2008).
- Mudharabah (Profit Sharing): which is an agreement between a person or a bank who have capital and a businessperson, whereby the businessperson can move funds for its business activity. The profits generated from the business will be shared between the two parties depending on the agreed between, however losses are borne solely by the capital provider (Ali, R. 2008).
- Musyarakah (Joint Venture): which is business partnerships or joint ventures where the profits made are shared on an agreed ratio while losses incurred, will be divided based on the equity participation ratio.
- Murabahah (Cost Plus): which mean selling of goods at a price includes a profit margin agreed by both parties. The purchase and selling price, other costs and the profit margin must be clearly stated at the time of the sale agreement (Ali, R. 2008).
- Bai' Bithaman Ajil (Deferred Payment Sale): which is selling of goods on a deferred payment basis at a price includes a profit margin agreed by both parties(Ali, R. 2008).
- Wakalah (Agency), which mean that when a person appoints a representative to undertake transactions on his/their behalf (Ali, R. 2008).
- Qardhul Hassan (Benevolent Loan), which is a loan that extended on a goodwill basis while the borrower person is only required to repay the amount borrowed. However, the borrower may, at his discretion, pay extra (without promising it) as a token of appreciation (Ali, R. 2008).
- Bai' al-Inah (Sell and Buy Back Agreement): The financier sells an asset to the customer on a deferred payment and then the financier for cash at a discount (Ali, R. 2008) immediately repurchases the asset.
- Hibah (Gift): A gift or a given voluntarily in return for loan given or benefit obtained (Ali, R. 2008).
2.4 ISLAMIC LAWS ON TRADING
The holey Qur'an has prohibited gambling, similarly the hadith literature, in addition to prohibiting gambling has also prohibits bayu al-gharar (trading in risk, where the Arabic word gharar is taken to mean, Risk). The Hanafi school in Islam has defines gharar as "that whose consequences are hidden", while the Shafi school defines it as "that whose nature and consequences are hidden", similarly, the Hanbali school defines gharar as "that whose consequences are unknown" or "that which is undeliverable, whether it exists or not.". Finally, Ibn Hazm of the Zahiri school defines gharar as, "gharar is where the buyer does not know what he bought, or the seller does not know what he sold.”
Islamic scholar has clarifies that gharar is the sale of probable product whose existence or features are not certain, for the reason that risky nature that makes the trade same as gambling (Iqbal, Zamir & Abbas Mirakhor, 2007). There are a number of hadith inhibt trading in gharar, often giving particular examples of gharhar dealings (e.g. selling "the birds in the sky or the fish in the water", "the sperm and/or unfertilized eggs of camels", "the catch of the diver", "an unborn calf in its mother's womb", etc.). in their book, Iqbal, Zamir & Abbas Mirakhor (2007) explains that jurists have looked for many complete definitions of the term and they started with the concept of yasir (minor risk); a financial trading with a minor risk is considered to be allowable while trading in non-minor risk (bayu al-ghasar) is considered to be banned and prohibited.
Gharar was never fully determined upon by the Muslim jurists because of the difficulty in deciding what is and is not a "minor risk." (Iqbal, Zamir & Abbas Mirakhor, 2007) Recently, derivatives tools (such as stock options) have only become familiar relatively. Some Islamic banks offer brokerage services for stock trading and perhaps even for derivatives trading (Iqbal, Zamir & Abbas Mirakhor, 2007).
Islamic banking is in a rapidly growing stage as a feasible alternative to conventional banking. Although innovative solutions for some issues are still lacking, it would be unfair to compare its progress to that of established conventional finance. There will be no justification in looking for disadvantages in it in contrast to the problems of conventional banking today, especially in the light of the current crisis in South East Asia, where countries had to call out for a revamping of the conventional financial system. It is important to keep the spirit and flame growing in the progress of Islamic banking.
In fact, developments in Islamic finance are of great interest to us worldwide. As with conventional financing, Islamic banking benefits from their transparency, good governance and an internationally accepted regulatory framework that governed this important form of financing especially when the decision makers who govern the Islamic banking process manage to find the way for more competitiveness under the Shari'a umbrella.
Therefore, it is important for the Islamic banking industry to keep working with regulators in the West to make Shari'a-compliant products more available in the West, but much of the demand for these products will continue to come from the Muslim world. The Islamic banking industry can evolve into being more sophisticated and modern only if promoters of Shari'a technological organizations and professional advisers work together to meet the regulatory, legal and judicial challenges resulting from operating in jurisdictions which implement differing legal systems and compliance policies. Also, to overcome the main obstacles that slow the expansion of Islamic banking world-wide and to meet the worldwide demand for advanced and sophisticated Islamic products, the industry and its advisers will need to continue to work closely with many different regulators and developers to create legal structures within which to operate in a secure Islamic banking manner.
In this chapter, the study will present the methodology for the present study. The chapter will be divide into four sections; the first section presents the questions of the study, the second section presents the data collection instruments, the third section will presents the data collection procedures, and the final section presents data analysis.
3.1 RESEARCH DESIGN
Studies suggest that a study should have a clear plan to answer the research questions (Saunders et al., 2000). Similarly, Yin (2003) explained that a research design is the logic of collecting data to specifically answer a research question. This logic should thus support the researchers to empirically test the presented questions and hypotheses (Yin, 2003; Mouton, 2002).
Studies explain that selecting a research design is considered a very important decision of a study (Creswell, 2003). Moreover, studies suggested that there are two types of research designs to select from when conducting a study: quantitative or qualitative design (Hair et al., 2006). Qualitative and Quantitative approaches are often used in social science research studies (Zikmund, 2003; Churchill et al., 2002). These two research designs are dissimilar in using and the choice of a research design depends on the research problem (Hair et al., 2003).
The qualitative design suggests examining the variables in the natural context where they can be found. For the qualitative approach, the interaction between variables is essential. Qualitative research involves the non-numerical examination and interpretation of observation for the purpose of explaining the underlying phenomena (Zikmund, 2003). Qualitative design collects data through open-ended questions that provide direct quotations, while the interview is the main method of the investigation (Yin, 2003). The researcher is the main instrument of the study, while the data is collected through interviews (Yin, 2003; Zikmund, 2003). Studies suggest that qualitative design reinforce the process and meaning that are not deliberated in terms of quantity, amount of intensity, or frequency (Zikmund, 2003).
The quantitative research design stresses on examining the relationship between one thing (independent variable) and another (dependent variable) in the selected sample. Data gathered through survey provides numerical evidence that should answer the hypothesis or the questions of the study (Zikmund, 2003). Quantitative approach is deemed as the most effective way to address research hypothesis. Qualitative approach is used when the study considers a great closeness to the respondents, their usage and perspectives (yin, 2003). Qualitative approach is more flexible and largely depends on the researcher's explanations, reactions and emotions (Yin, 2003).
The current study carries out many questions that need a more flexible research design. Due to the nature of this study and the hypotheses presented, the current study uses quantitative data. As main instruments, the study uses questionnaires to collect numerical data. Furthermore, the researcher believed it important to clarify that the current study is applied research, as the outcomes and recommendations may assist Islamic banks in Kuwait to understand customer perceptions toward various issues related to Islamic Banking.
3.2 RESEARCH QUESTIONS
To achieve this purpose, the present study seeks to provide empirically based answers the following research questions:
- What is the degree of customer awareness toward Islamic accounting theory?
- What are the current efforts of Islamic banks in improving customer awareness toward their practice and theories?
- What are the most common Islamic services that customers utilize when choosing Islamic banks?
- What are the customer's attitudes and perception toward Islamic banks?
- What are reasons behind dealing with Islamic banks?
The scales used in previous studies provided the basis for developing the research questionnaire. Due to availability issue of the previous study in this field, the study will go through tests to check the validity and reliability of the survey and its procedures. In order to make sure the used survey is valid, the questioners will be send to 20 potential respondents and then evaluate their responses. To find out wither the survey is reliable or not we will measures the internal consistency which is the most popular methods of estimating reliability. The questioners will be arbitrarily split into two groups and then measure the correlation between the two subsets of questioners. For a better result we will use statistic known as Cronbach's alpha which is based on the mean (absolute value) inter-item correlation related to all possible variable pairs. Cronbach's alpha provides a conservative estimate of reliability, and commonly represents the lower bound to the reliability of a scale of items (Zikmund, 2003).
3.3 INSTRUMENT DEVELOPMENT
To answer the aforementioned research questions, a questionnaire in English was designed with a set of questions that were mainly developed from the literature especially the efforts of Kamal Naser (1999) in measuring the degree of customers toward Islamic services in Jordan. The data collection instrument is a 3-page self-administered questionnaire, which consists of two sections (see Appendix A). Section 1,2,3 and 4 was put in a way to collect information on customers perception and attitude toward Islamic banks. Using a 5-point Likert-type scale, respondents rated their agreement from (1) ‘Strongly Disagree' to (5) ‘Strongly Agree'. Each of these dimension were adopted from different study that was presumed to be relevant to this study. Customers perceptions were deemed to be very high if the mean (average) value was between 4 and 5. However, if the mean value was between 1 and 2, they were deemed to have difficulty to move across future or next generations. A mean value that equals 3 was considered to have average (moderate).
3.4 RELIABILITY AND VALIDITY
Previous studies suggest that it is important to check and measure the validity and the reliability of the questionnaire. Zikmund (2003) suggests that validity emphasizes on whether the findings of the study are really about what they appear to be about. He stressed that validity is a significant element for any research project because it is concerned with whether the findings are really about what we intend to measure. While, on the other hand, Reliability defined as; “the degree of which a study generates the same result on different occasions and by different researchers” (Saunders et al., 2000). The questionnaire items of this study were designed and implemented in prior researches and studies. However, to eliminate the possibility to getting wrong answers, a study should give more intention to validity issues (Saunders and Thornhill, 2003). The following chapter discusses and summarizes the validity and reliability of the questionnaire.
3.5 PILOT STUDY
It is important that a study checks the validity and reliability of the data collection instruments before the distribution process. Thus, a pilot test will be conducted by distributing the questionnaires to Islamic banks customers. A total of 15 copies expected to distributed as a pilot test. To test the validity and reliability, SPSS (Statistical Package for Social Science) version 19 and Cronbach's alpha test will be employed. Crombach's Alpha is a common statistical measure that is used for estimating the reliability of indicators. Methodologist suggested that the closer Cronbach's alpha is to 1.0, the more reliable is the scale (Zikmund, 2003). Accordingly, Crombach's Alpha computed and the results compared achieved the recommended cut-off-point (0.7), which indicated that scales were reliable (Zikmund, 2003).
3.6 SAMPLING DESIGN
Using random and convenience approaches, the study will distribute around 150 questionnaires among Islamic banks customers who come to the distribution location at bank complex in Kuwait city, where all Islamic banks are located there. The study will distribute the questionnaire by using both email and hardcopy approaches. Using his personal relationships and connections, the study attempted to enhance to respondents' rate. The study assured participants that their personal information and responses would be used only for research purposes and would be kept strictly confidential.
In order to analyze the collected data, the study incorporate Statistical Package For Social Science (SPSS) version 19 to analyze the results of the questionnaire. First, all the negatively worded statements were reversed coded before any statistical analysis was done. The study implements various statistical tools such as:
- Descriptive analysis (Logarithm Mean, Frequency, and Standard Deviation) was conducted. Descriptive statistical tools employed to describe the participant's personal characteristics and their general profiles.
- Chronbach's alpha test. Zikmud (2003) suggests that Chronbach's alpha value can be used to describe the reliability of factors extracted from multi-point formatted scales. He suggests that Alpha value of 0.70 is deemed a desirable threshold, while a value of 0.60 is acceptable as the minimum cut-off point.
- To test the relationship between the variables of the study, the Personal Correlation test will be implemented.
In summary, the chapter presented the methodology adapted in this study. The purpose of this study is explanatory in nature, while descriptive purposes were implemented to assist the primary research purpose. The study uses quantitative research design. The data collocation instruments were developed from previous literature and studies. Prior to the questionnaire distribution, a pilot study was implemented to make sure of the validity and reliability of the questionnaire. The sample of the study is Islamic banks customers in Kuwait who visit the interval location. The study employed various statistical tools to provide empirical evidence that would answer research questions and either support or reject the research hypotheses.