Growth of Islamic Banking in the UK
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Islam is one of the world's three major monotheistic religions; the other two religions are Judaism and Christianity. All three religions are the same historical origins and have many familiar beliefs.
The main principle of Islamic banking and finance are depend on Islamic laws known as Shari'ah which mean (interest) (Riba) free.
Interest is strictly prohibited in Islam which means Muslim cannot receive or paid interest in any transaction in which money is exchange for money.
The interest that you give in order to increase the wealth of the people does not increase in the sight of Allah and the Zakat that your pay in order to win Allah's approval, its payers do indeed increases their wealth. This is very powerful and superb statement of Holy Quran which shows that interest is .prohibited by Allah because interest only increases wealth of individual not the society.
Islamic banking is a financial system which is base on Islamic Shari'ah law and it is interest free financial system.
The concept of Islamic banking is interest free banking because interest (Riba) is totally prohibited in Islam.
The main belief of Islamic banking and finance is to discover the range of Islamic financial tools for investor and businesses that how they all collaborate without interest and what is the strategy behind all that and how the banks and financial institution encourage non- Muslims clients and offer them to use Islamic banking and finance system instead of conventional banking system.
The adverse impacts of interest on the world economy in general and economies of developing countries in particularly entail that it could be the biggest threat for the developing economies and also believed by many renowned economists. it is estimated that US$ 200 billion funds managed by Islamic banking. The client of Islamic banking is not only in Muslim countries but also spreading in over Europe, northern Africa and United States of America.
Islamic banking is growing day by day in different part of the world, that's why Islamic bankers, keeping speed with the stylish techniques and latest development have developed investment instruments that are both profitable and fairly motivated. Approximately 250 different Islamic and Financial institutions are operating worldwide.
The growth of Islamic banking is a big threat to a conventional banking system not only in UK but also all over the world. Islamic banking system has six main features according to its product analysis.
- Interest free product
- It is Trade-related and there is a perceived genuine need for the funds.
- It is in purest form, it is equity related
- Meant to avoid exploitation no interest
- Invests ethically
- There are retail, and wholesale applications.
In practice there appears to be more emphasis on the prohibition and restructuring of interest than on the potentially exploitative aspect of financing.
Islamic banks operate on the basis of profit and not on paying and receiving interest. The banks can earn profit from these ways like trading leasing and by direct financing in Profit and Loss sharing contracts. The structure and conditions of these transactions must confirm to Shari'ah and fulfil its objectives. This means that banks advance money for productive activities on the basis of profit sharing principles.
With the beginning of 21st century there is a radical change and the number of Islamic banks increased and their geographical spread grew exceptionally and 76 countries covering all continents. There are number of publications in Arabic and Urdu, one of the famous books of (Qureshi 1946) regarding 'Islam and Theory of interest' in which he seem that the public health and education is responsibility of government as a social services.
Islam is concerned with the problem of economic development, but treats this as an important part of a wider problem, that of total human development. The primary function of Islam is to guide human development on correct lines and in the right direction. It deals with all aspects economic development but always in the framework of total human development and never in a form divorced from this perspective (Al-Harran 1993)
Gerrard and Cunninghams' (1997) study establishes that, in Singapore, where Muslims are in minority. The concept of Islamic banking system was not present amongst them in Muslim and non-Muslim. There are two different herd having two entirely different thoughts regarding movement of Islamic banking. For example when asked them, if Islamic bank could not make enough profit to share out among them in a period of one year so what they will do. Fifty two per cent of Muslims said they will prefer to continue their deposit with the movement of Islamic banking, and fifty six per cent non-Muslims said they will prefer to take out their money from Islamic banking. Since 1960s too much literature has been written on the topic of selection process of the banking system. 'Holstius and Kaynak (1995), Kaynak (1986),Laroche et al (1986) and the working paper of Chan (1989)Eroland El-Bdour (1989)' evaluate the bank selection process in relation to 'conventional' and 'Islamic banks'. There were three very important principle in the banking process of selection for Muslims were: first the provision of a fast and efficient service second the speed of transaction and third friendliness of bank personnel and as regard the non-Muslims, the three most important bank selection principle were: first, friendliness of bank personnel, second the provision of a fast and efficient service and third, the reputation and image of the bank.
An Islamic bank is a mediator and trust of other peoples' money like all others conventional banks the only one important thing which distinguish the Islamic banking to conventional banking which is induce all customers share in the form of profit and loss. This difference introduces an element of mutuality in Islamic banking, making its depositors as customers with some ownership rights inherent within it. However in practice, Islamic banks hardly look different from its conventional counterpart in terms of organizational set-up (Dar and Presley, 2000). Tobacco, alcohol, gambling, and other undesirable business sectors are excluded from Islamic investment.
Ahmad, Chapter 7 Economics of Islam (Ahmad 1952), he give the picture of Islamic bank on foundation of a joint stock company with limited liability. According to his plan a current account of depositors where no pre-agreed interest and dividend would be paid. He gave the concept of Current account where depositors could participate with their capital as a partner with bank and get higher dividend as compare to account holder profit.
Siddiqi(1968) gave a pioneer model which provide brief outline of Islamic banking. 'His model depends on Mudarabah and Shirka (partnership or Musharakah as it is now usually called)'. He divided the operation of Islamic banking into three different groups. Islamic bank will charge fees to provide any services for example commission or fixed charges. Foundation of financing in Islamic bank would be Mudarabah and partnership and services will be provided without any charges. According to his theory Islamic banking system is a feasible substitute of conventional banking system.
Mohsin (1982) offered a new brief model of Islamic banking system in contemporary setting. His banking structure integrates the features of commercial, merchant, and development banks, mingle them in novel fashion. He include many non-banking services for example trust business, factoring, real estate and consultancy, as opinion that Islamic baking would be not stay alive with banking business alone.
The arrival of Islamic Banking and Islamic Finance
In accordance with the philosophy, culture and merit of Islam, the Islamic banking is describe as banking which is manage besides the conventional governance and risk management rules by the principle set down by Islamic Shariah. Interest free banking system is very fine perception that stands for with many banking instruments and operations, which keep away from interest. The ideology of the Islamic banking system is not only evading interest based transactions system which is proscribed in Islamic Shariah but also stay away from corrupt activities that contribute to accomplish the goals and objectives of an Islamic economy.
First Islamic bank was established in 1963 in Egypt. The activities of this bank were interest free but it was secret project that made no references to Islam as the establishment in power at that time was aggressive to any form of Islamization. The real emerging started in 1970s' as result of oil industry boom in the Gulf States, which flashed the appearing of liquidity and the revival of religious wakefulness in the Muslim world. In 1975 Dubai Islamic Bank was established, was a private initiative and it was established by Arab businessman. In the beginning governments did not greet this effort because Islamic finance disagreed with their investments in World Bank to get higher interest rate. In 1980s's the first Islamic banks united to form the Islamic Development Bank seen as the 'World bank' of the Muslim world, that covering 56 Muslim world and contributes contribute Muslim economic thought. But the 9/11 brought too much changes on world economy which changed the views of Arabs which and the rich Arabs withdrawing their investment from US $ accounts to be scared of having their accounts become frozen. All these scenarios created a great need of substitute of investment either in Middle East or in Europe, at the same time system was carrying out in the Middle East and its development was enhanced in Europe to fulfil the requirements of Muslim investors.
In 1977-78 Pakistan started Islamic banking and financial system. Pakistan was one of the major Countries among those countries in the world that had been trying to apply completely interest free banking system. In June 1980 the modification was implemented in the legal framework of Pakistan's financial and corporate system to authorize the issue of a new interest-free tools and modification were also created in the Banking Companies ordinance, 1962.
The prohibition against usury (interest) was in the Quran take place on a number of times and pointed out interest and the proposal to ignore coddle in this action in Christianity and Judaism to involves its survival and the troubles that it carried for the society. The feudal lord who by virtue charging higher interest rate according to the historian and had power over those were anxious need to finance their survival.
In the Old Testament (King James Version) Exodus, CHAPTER 22 M VERSES 25:
'If you lend money to any of my people that is poor by theem thou shalt not be to him as anusure, neither shalt thou lay upon him usury.'
Lecitcus Chapter 25, verses 34-36:
'And if the brother be waxen poor, and fallen in decay by thee; then thou shalt relieve him: yea though he be a stranger, or a sojourner, that he may live with thee.'
'Take thou no usuryof him, or increase: but fear thy God; that thy brother may live with thee.'
In spite of the counsel beside this apply against the system offered. The contemporary financial technique be taught a tutorial from this spiritually guidance and fully struggled to implement a structure that was inadequate the level of usurious abuse. To build the market of debt based upon competition which encourage unfair nature of usury which was supposed to be decided by the forces of market vie each other. If we bring light to current scenario of global arena, we can easily realize that it is a development of the ancient feudal system and different countries facing the same dilemma as individual did prior as the 'conventional Jewish lending system of the shylocks to the Indian feudal system'. Actually Debt to GDP ratio is the vigorous gauge for the countries who burden debt.
Islamic financial and banking system depend on the Islamic economy system and the success ratio of this system could be determine in such a way that conventional banks start their Islamic windows not only in Muslims countries but also in the non-Muslim countries where Muslims are not dominated.
Some famous Western banks have Islamic subsidiaries as, Citibank, American Express, HSBC, ABN Amro, Bank of America, Standard Chartered, Commerz bank, Barclays, Dutch Bank, ANZ Grindlays, Royal Bank of Canada and many others banks in the world and this list of bank is raising day by day. On the other hand some countries such as Pakistan, Sudan and Iran adopted 100% Islamic banking and they are successful in banking system.
It is fairly true that Islamic banking system is depend upon risk –sharing. The Islamic banks are involved in the practice of trading, leasing and various other modes of financing according to Shari'ah compliant. If the Islamic banks are stable to get Halal income, depositors as well get stable and Halal income definitely.
Interest (riba) is proscribed in Islam either getting or giving interest, despite of what reason the loans are composed and what the rates on which interest will be charged. This is the main opinion among Muslim scholars and all are agree on it that interest and riba is same thing.
Amanah is placed to recognize the formation and deal out the financial services that are linked with the necessities of the Shariah (Islamic Law). Islamic banking has the same principle as conventional banking except that it operates in accordance with the Shari'ah principles. The basic ideology of Islamic banking is the sharing of profit and loss and the proscription of Riba (Interest). Islamic banking has grown in the Muslim world and offer Islamic products and services to make sure that the procedure and practices of the bank abide by the sharpie principles. HSBC logged the Amana banking because to make it possible for the Muslims to bank in accordance to their values and beliefs and they do not want to lose their Muslim customers in Islamic countries as a result of the emergence of Islamic banking. Its headquarter is in the UAE and have regional representatives in the UK, US, Saudi Arabia, Malaysia, Bangladesh, Indonesia, Singapore and Brunei have resources of HSBC group and HSBC Amanah distribute the financial resources that are according to the requirements of the Shariah (Islamic Law). The western media suggest that Islamic banking in its present form is a recent phenomenon; in fact the basic practices and principles date back to the early part of the seventh century. (Islamic finance A Euromoney publication 1997).
According to Khalaf (2007) Due to the different believes in Muslims community Islamic banking facing deficient in affirmation of decisions.
Shortage of scholars is a big and serious issue in Islamic banking system because managers are not qualified and trained to practices the Islamic finance (Iqbal, Ahmad and khan,1998).
Islamic banking has not a big network in UK and Islamic bank of Britain has only eight branches in whole UK which is not enough to fulfil the requirement of Muslim customers.
The opening of Islamic window in conventional bank is a big threat. Islamic banking needs to improve their services and keep priority of Islamic Sharia.
Islamic banking has great opportunity to grow in UK. Because number of Muslims from different countries of world live in UK. Islamic banking is facing difficulties and challenges to growing in UK due to lack of understanding about Islamic banking in the customers and shortage of Islamic Scholars in UK.
The Research Process
Remenyi, Williams, Money and Swartz (2002:64-65), explains the research process as consisting of eight specific phases, namely:
- Reviewing the literature.
- Formalising a research question.
- Establishing the methodology.
- Collecting evidence.
- Analysing the evidence.
- Developing conclusions.
- Understanding the limitations of the research.
- Producing management guidelines or recommendations
According to Hussey, J & Hussey, R (1997:15), there are six fundamental stages in the research process, namely:
- The identification of the research topic.
- Definition of the research problem.
- Determine how the research is going to be conducted.
- Collection of the research data.
- Analysis and interpretation of the research data.
- Writing up the dissertation or thesis.
There will be two analysis methods that are used in this research. Factor analysis will be used reduce group and independent variables whereas logistic regression will be used to analyze the correlation between the categorical dependent variable with the independent variables found in the factor analysis. Primary data will be located for the purpose of analysis which will be further discussed in the collection of data section
Analysis of Data
The topic of my dissertation is The Growth of Islamic banking in UK as conventional finance, a look in to past, present and our hopes for the future. It is surprising to realize that how far and fast Islamic finance has come and how well it has managed to meet the challenges it faced in two decades. Islamic banking has worked reasonably well even in short history, but it always does face challenges. All of these challenges are technical in nature. The rapid growth of emerging market in developing countries is a very hopeful sign that with strong commitment in the next decade due to existing institutional and technical hindrances that may have hampered efficient operation of Islamic banking will be removed.
The dissertation is based on the following research questions.
- What are the component of Islamic banking and how it works?
- Why all the arguments about the rate of interest in Islam?
- What make Islamic bank differ from a conventional bank?
- How much better working of Islamic finance in the views of customers in UK?
- Why the growing rate of Islamic finance is high as compare to other European countries?
- Customer's satisfaction regarding Islamic banking system in UK?
- How Islamic finance as a substitute to conventional banking system in UK?
- Different prospects and threaten for Islamic banking system in UK?
Aims and Objectives:
Key aims and objectives were established, for accomplishing the project. They are thoroughly explained down below.
Aims of research project are:
To understand the basic principle of Islamic banking system.
To discuss the role of Shariah board and its importance in Islamic banking.
To describe the different financial contracts, which Islamic banking offers
Objectives of the project are:
To compare the major differences between Islamic and conventional banking system.
To explore the problems faces by Islamic banking.
To find out why the growing rate of Islamic finance is high as compare to other European countries
To give recommendations for the acceptance of credit card and some other problems.
Actually this study in groping in nature, therefore a review of peoples and bank Managers and sub-managers was appropriate method for data collections. The data collected by this method from UK and from individuals would mean that the data bring together is given that only estimation of entire population. A questionnaire was designed for the population to analyze the perceptions towards Islamic banking. Moreover the implication of this kind of exclusive study on this topic, there were numerous constraint.
From the informal interviews and from the Questionnaire survey together the primary data from the few important people from the banking industry are gathered. For this purpose information collected from senior management from HSBC and Islamic bank of Britain through emails telephonic and face to face interview. Questionnaire survey has been arranged amongst Muslims and non-Muslims population of UK.
The information gathered for this dissertation has been mainly obtained from the secondary data, which includes books, journals, research material and websites.
This result may not be indicative for the target respondents due to small sample size and limited time period.
Due to limited knowledge of respondent or unawareness about Islamic banking, their replies shown their own imagination or thoughts.
The data gathered from the respondents and from the country like United Kingdom where people have a limited knowledge of Islamic banking as against to the conventional banking even the Muslim of the country have an inadequate
knowledge of the Islamic banking. Therefore the result about the Islamic banking should be taken only as analytical and perspective rather than decisive.
The research will familiarize the readers with the principle of Islamic Sharia and provide an insight into the rules and principles of Islamic banking as well. In spite of the fact that Islamic banks are operating successfully along with the conventional banks and playing a significant role in the economy of the United Kingdom.
This study is limited to the findings and evidences based on my research mainly to the responses of the organisation involved in the project.
I am choosing not to observe multiple teams, even though such comparisons might be valuable, in order to allow more depth of understanding regarding the group on which I will focus.
Additionally, I will not use structured interviews in order to minimise my obtrusiveness.
I shall immediately report to my supervisor or my college if any difficulties encounters in complying with the ethical standards. In the final research report i shall describe how i complied with the ethical standards in carrying out the Project.
The identity of individuals from whom information is obtained in the course of the Project shall be kept strictly confidential. At the conclusion of the Project, any information that reveals the identity of individuals who were subjects of research shall be destroyed unless the individual concerned has consented in writing to its inclusion beforehand.
According to the definition given in the 1997 New Webster's Encyclopedic Dictionary of the English Language, plagiarism is "the unauthorized use of the language and thoughts of another author and the representation of them as one's own" (508).
Pyper (2000) defines plagiarism as: '.. simply theft. It is taking the words, ideas and labour of other people and giving the impression that they are your own..'
To avoid plagiarism
I will document the sources properly using Footnotes, Endnotes, or Parenthetical References, and i will write a Bibliography, References, or Works Cited page and place it at the end of the research paper to list the sources used.
I will credit another person's idea, opinion or theory
I will credit any facts, graphs, drawings, any pieces of information that are not common knowledge.
I will credit whenever i use quotations of another person's actual spoken or written words or paraphrase of another person's spoken or written words.
I will try to use my own words. I am not expecting to write as professionally as the authors of the books and journals which i am going to read so i will be confident enough to write my own ideas in my own words.
I will Plan my assignments in good time, so i am not tempted to make shortcuts.
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