Islamic Financial Services In Islamic Bank Of Britain Finance Essay
The main parts of first chapter are research question and research objectives. Other part in the chapter includes introduction of topic, introduction to organization and rationale of study. These all points are very important consideration for author as these will build future research.
1.2 Area of Study
According to Alexakis and Tsiknouras (2009) Islamic Laws are called laws of Shari’a. Muslims spend their lives under these laws. Most of the laws tell Muslims that how to spend their lives. If any point, someone needs to elaborate then Islamic philosophers research on that point and give some suggestions accordance with the Islamic Laws of Shari’a.
One of the basic principles of Islam about banking is forbidden from interest. Islamic Finance model shares risk instead of giving one party risk free rate of interest like conventional banks do. All parties enter in contract share agreed level of risk. Investors and investee both share profit and loss. There is another characteristic of Islamic banking system that they do not invest in the project which is harmful for society like trade in alcohol, betting and drugs. Islamic banks do not give loan to other banks. (Alexakis and Tsiknouras (2009)
Hassan and Lewis (2007) stated that Islamic banking system developed all standard financial products according to Shari’a law. The product bucket of Islamic banking system consists of personal loans, mortgages, current and saving accounts, etc. Bank avoids even indirect transactions with the main stream banks those are based on interest.
The simple theme of Islamic Finance is that one cannot make money from money. Only way to earn money is through investment and trade activities. These activities should be in socially responsible way. An interest factor includes two components risk on investment (like liquidity risk, credit risk, solvency risk and technology risk). The other part of interest is risk free rate of interest. This is most controversial part because investors do not do any effort to get this money. In other words, this is free money offered to investors. According to the law of Shari’a, in this way richer in society will become more and more rich and poor will get poorer. This will create unequal distribution of wealth. (Hassan and Lewis, 2007)
Jomadar (2007) said that almost all the high street banks of United Kingdom offer Shari’a complaint Finance system. Offerings of their products are in accordance with the Shari’a accepted principles. Islamic bank of Britain is one of these banks who specialized for Shari’a complaint current account, mortgages and person loan.
HSBC developed its new product of current account and mortgages. There are number of traditional and well known banks of Middle East provide Shari’a complaint product tailored for United Kingdom. (Jomadar, 2007)
1.3 Research Context (Islamic Bank of Britain, Manchester)
The head office of Islamic bank of Britain is in one of the biggest Muslim community city ‘Birmingham’. There are different branches scattered around the country. Manchester City is the third biggest city of United Kingdom. The main focus of this research is Islamic Bank of Britain, Manchester.
UK government allows operating bank with no interest application on its financial products. This act of government encouraged bank to introduce new financial products which are specially designed for Muslim community. This activity involved many other non-Islamic banks to developed Islamic assets. (IBB, 2010)
According to IBB (2010) Islamic bank of Britain does not give loan or mortgages to its customers on interest but they give them actual ownership and charge agreed fee. These fees are used to operate Finance activities. If a customer buys a computer through bank, banks will buy computer for customer at fixed amount of payment. However if customer gets defaulter during this period then bank takes ownership of product back. Islamic bank of Britain has very clear policy that not to invest in very risk product which can damage society or bank’s own financial system.
Islamic Bank of Britain invested initial capital of 14 million pounds. The investment is done by rich Muslims in United Kingdom and United Arab Emirates. Bank grew up very quickly and its capital rose by 40-60 million when bank gone for IPO in London Stock Exchange. (IBB, 2010)
1.4 Problem Statement
The role of Finance model that is more socially responsible increased due to recent financial crisis and role of main stream banks. The main stream banks are more focused on getting short term profit for its shareholders who are making Finance system more risky. The risk taking activities of main stream banks are losing public confidence very quickly. As people or organizations are getting more and more corporate socially responsible, they are more concerned about activities related with their investment i.e. whether these are investing in project which is socially good and have more probability to return positive cash flow or on the other hand is project of junk nature who offer more return but with extremely risky investment.
1.5 Research Question
Critically evaluate the Islamic financial services in Islamic Bank of Britain in Manchester
1.6 Research Aim and Objectives
To identify fundamental principles and philosophy of Islamic Finance
To distinguish different financial services provided by Islamic bank of Britain, Manchester
To examine the difference between Islamic finance and conventional finance
Chapter 2 Research Literature Review
This chapter consists of secondary information about topic. It will briefly discuss about different authors saying about some key areas in Islamic Financial System. Here author will discuss fundamental principles of Islamic banking system and will compare these with main stream banking system.
2.2 Islamic Finance
Usmani, (2002) pointed out that the basic element of banking system is interest. In Islam, interest is called Riba (cost of money). The concept of interest avoidance in Islam explains this process as the money cannot be used as an actual asset. This is because money has no intrinsic value in itself. It is only medium of exchange and settlement of transactions.
Islamic Finance is only asset based Finance not currency based. Currency is used here only as a source of transaction settlement. The total Finance system in Islamic societies comes from two sources. One is called Quran which is fundamental source of guidance for all activities of life. The other source of guidance is called Sunnah these are the way told and translated by the Holy prophet Muhammad (PBUH). (Shubber, 2008)
2.2.1 Main principles of Islamic Finance
Islamic Finance is not a new philosophy. It is simple as it was in the beginning of Finance history. The traders and banks twist this policy and in race to get money from investors, they offered them more and more return. They continuously twisted the existing banking structure and made it so complicated. There are number of financial assets in banking structure which are more risky, less regulated and unnecessarily complicated. These include forward contract, option and derivatives. These assets are sold number of times during their life cycle and if any person during this chain process gets default then it affects flows forward and backwards. Such assets became reason of economic shock number of times and recent credit crisis is one of the supreme examples of such collapse. Islamic banking system still keeps old time simplicity in banking system. (Shubber, 2008)
Islamic banking system prohibits interest (Riba) but does not stop the parties to come in agreement to give the certain amount of money agreed by both parties. Islamic banking system does not put any restriction on the real risk (liquidity, solvency, currency, micro and macro-economic risk, etc. It is against risk free rate of return part. So bank charge its fee according to time period involves in transaction settlement and real risk exposure to the bank. (Usmani, 2002)
Visser (2009) discusses that it is focus point that risk should be shared by two parties. The entrepreneur shares risk by giving assets to its customer. In case of profit banks will take equal amount of return. This is fair deal; investor and investee are agreed with this rate of return and level of risk posed of both parties.
Speculative activities are strictly prohibited in Islamic banking. In main stream banking bullish and bearish trends are created by many financial activities like hedge funds and other pooling of money. By investing a huge sum of money in stocks to create a positive trend such investors created a favorable market for a particular company. The smaller investors also get attracted towards these companies. At reasonable return rate the huge investors of money pull their amount back by leaving small investor struggling will sharp decline in their share price. Such activities are strictly watched by Islamic system and put restriction on these by putting number of penalizing actions. (Visser, 2009)
2.3 History of Islamic Finance
The concept of Islamic Finance is as old as Islam itself. It exists from last 1500 years. It remains the part of Muslim society from that time. However, modern Islamic Finance system remains in literature from 1940. There were number of Islamic scholars in sub-content who proposed such system with number of solutions and recommendations. 1970s was perfect time for practical implication of this system. There were two reasons for this development. One the petrol-dollar boom in 1970-1975 and the other reason behind this development was start of new century of Islamic calendar. (Khan and Bhatti, 2008)
Khan and Bhatti, (2008) described that for the practical implementation of Islamic Finance, governments of Arabs countries make an Islamic development bank. This bank is promoted the concept by involving Islamic scholars in research and development of concept. With continues research and development program, the system covered all the areas of complication and received guidelines to develop system. There are many banks in Middle East those completely follow this system and keep themselves away from any type of transaction with external banks which involve interest or any activities which is against Islamic banking system. There are number of banks which are performing dynamic role with aim to capture both markets. By looking at Islamic banks and demand of Islamic financial product HSBC, UBS and city group have open their Islamic Finance arms in UAE and Western countries.
2.3.1 Recent growth in Islamic Finance
Jomadar (2007) reported that there are more than 300 Islamic institution spread more than 75 countries around the world till 2007. The Islamic banking industry has maintained a constant growth of 155 from last 10 years. It is expected that this will grow in next few years. The main reason of this improvement and growth is;
Muslims are getting more and more awareness about Islamic banking system.
Muslims countries especially countries in Middle East are getting richer. These Muslims are investing more and more in Islamic banking and convincing western banks to consider Islamic finance in their banking practices. (Jomadar, 2007)
Islamic Finance is more focused on society and its welfare and hence more socially responsible. Customers are experiencing number of problems with main stream banking in terms of their public related policy. The objective of banks, shareholders and the stakeholders’ conflicts. Islamic banks on the other hand have no obligatory pressure from shareholder to increase their wealth at the cost of society.
Islam is fastest growing religion in the world and it is second minority in USA, UK and France. This indicates its probability of long term existence in the market. (Jomadar, 2007)
2.4 Islamic banking market in the UK
There are 1.80 million Muslims live in United Kingdom and 50% of these Muslims are living in London and surroundings. These are 3% Muslim of total population of United Kingdom. Nearly half of million Muslims visit to United Kingdom every year. There are about 12 million Muslims in EU mostly live in France, Germany and United Kingdom. United Kingdom is however pioneer of Islamic banking facilities. There are number of high street banks in the country. These banks tailor financial product like mortgages, loans and current and fixed assets for Muslims. (Hassan, et al, 2009)
Hassan, et al, (2009) reported that in 2004 FSA allow Islamic bank of Britain to carry on its activities in United Kingdom at the same time they also EU investment Islamic Finance to Europe. This is first bank of its own nature. London is financial hub for many of world business activities and many of these investors trust only of Islamic banking services. The main controlling place for Islamic banking services is Middle East and Gulf. Islamic banking has estimated 200-500bn dollar assets worldwide and banking is growing at the pace of 10-15% per annum
2.5 Typical Islamic products and financial services
Following are the products of Islamic banking services.
2.5.1 Shariah compliant Current and Saving Accounts
Without interest investor would not invest its asset in bank for the sake of society only. There would be some charm of investor as well in their investment. Islamic banks offer its investors an opportunity of profit sharing by investing in project which returns in positive cash flows. This profit is not same as conventional banking system. Islamic banks offer overdrawn limit to its customers which is called Quard –Hassan. However it is not obligation on bank to give such overdrawn limits. (Farooq, 2009)
2.5.2 Murabaha (Cost-plus sale)
This is just like normal purchase and sale transaction. Bank buys a product from third party for its customers and gives it to agreed mark up to its customers. It is not however the financial, It should be tangible asset. Bank buys products and gives it to customer who pay bank regular installment to certain point of the product. When these agreed payments are completed then product’s ownership is transferred to customers. The customer in this case will pay a regular agreed payment without any exposure of extra risk of interest rate fluctuation. (Chong and Liu, 2009)
2.5.3 Ijara (Leasing)
It is leasing contract between two parties mostly within the bank and customer. Bank bears all risks and gets certain amount of installment on return on lease during the life time of lease. Bank for example gets a product on lease for customer to another party. Banks charge a certain amount on the performance of asset. (Chong and Liu, 2009
2.5.4 Musharaka (Equity Participation)
It is just like joint venture where bank and other party share finance and skills. Mostly customers invest money in bank and bank on the basis of its expertise invests their asset in a project with high probability of return. There is very important condition of such product that both parties should contribute some to buy the product or make project successful. (Al-Salem, 2009)
2.5.5 Mudaraba (Partnership Financing)
It is trustee and finance contract. Here one party is providing finance and other party provides labor (Al-Salem, 2009)
2.5.6 Istinaa (Commissioned Manufacture)
It is contract between banks and manufactures of goods. Bank makes an agreement with manufactures of goods or services that they want certain amount of goods or services at certain data in future at specific time. Bank takes the risk of changes in prices. For this risk, bank charges fee from its customers by selling these products or services. (Al-Salem, 2009)
Chapter 3 Research Methodology and Design
This chapter will mainly discuss research design. The main parts of this chapter are selection of research strategy and research methodology. However, author also pin pointed research philosophy, method of data collection, sampling and ethic of research.
3.2 Research Philosophy
Realism is research philosophy applied in this research. Realism is combination of two philosophies. One is interpretivism which purely reflects human social aspects and other part of the realism is positivism which is mostly scientific way to answer human related topics. Positivism is most desirable in modern organizations to study some social issues. (Jankowicz, 2005)
3.3 Research Strategy
Saunders, et al (2009) stated that to answer research question right and appropriate, it is important to find right research strategy. Strategy should reflect the nature and importance of topic. Social science is very complex in selection of their research strategy because of their social nature but it desires to get more comprehensive and accurate results.
Author in this research will use mixed strategy which includes survey and case study. Both in combination will provide desired results from chosen objectives and right answer of the question asked in chapter one.
3.4 Research Methods and Approaches
This study will constitute with two different methods to explore the research objectives. These are given below.
3.4.1 Quantitative Methods
This method is numerical way to find out some aspects of social study.
Mathematical and statistical approach
Blamed as not suitable for social research due to human diversity in thinking and freedom express
Not suitable for new concept
Lack in ethics and description
3.4.2 Qualitative Methods
Fowler, (2008) said that this method is aim to explore real and genuine impact on human being. This is more applied method of social search and consideration of ethics is very important.
more in-depth information about an issue
more close to human nature
best for new product or services launch
more time consuming in data collection
No statistical validity involve in test
Fewer samples can be selected due to time and cost factors.
Conclusion from research is hard to extract as person can extract two different results from same research.
More skills are required to get right results from qualitative methods.
3.5 Secondary Sources of Information
Secondary information is existing information which may be collected for another purpose which is more or less similar to once new research. The data can be collected by government agencies, financial agencies, specialized data collection agencies or any other international body. This data can be extracted and manipulated with different sources of data collection. This data is then tested by different statistical techniques like regression, correlation and pie query test. This method is better for the topic of research which is already tested. However it is not good idea to use this method for testing of new and innovative ideas. (Fowler, 2008)
3.6 Primary Research
Saunders, et al (2009) discusses that it is first hand information. This can be collected for particular purpose and hence is more reliable and valid. This is based on once own experience, observation or research about an issue. The data collected remains once own intellectual property until he is not allowing third party to buy his copy right. Primary research includes interviews, questionnaires, observation, focus group interviews, and customer attendance programs for new product development.
3.6.1 Telephone Interviews
Primary information can be collected by arranging telephonic interviews with target respondents. Questions in this research will be asked from respondents about the key variable. Where possible more cross questioning can be done to make interviewer mind more clear about topic. (Silverman, 2004)
The questionnaire is designed for research to explore a particular issue. It consists on number of statements. Author will distribute this questionnaire to number of respondents to get desired results.
3.7 Sample Size
Sample size is taken from whole population, test in some condition and then again generalized back to population. More will be the sample size more appropriate and accurate the result will be.
3.8 Data Reliability and Validity
Data validity is linked with consistency of results i.e. if same research would be conducted under same condition the same results should come every time. The validity is related with the power of results i.e. right approach, correct data and statistical techniques can be applied to get final results. (Silverman, 2004)
3.9 Research Ethics
The author will use combination of ethics in this research. For qualitative research the applied ethics have been used while for the quantitative research author used descriptive ethics. The difference between these is application and no application of value during research.
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