Literature Review On Islamic Banks In General
In this paper we are interested in observing Islamic banking that have been operating for decades attracting customers who are seeking for implementing Islamic Sharia'h in their financial matters.
Another aspect the project is observing is, make Islamic banking deliver a high quality services to accept their customer satisfaction, protected it stand in the banking industry by winning their customer loyalty to continue ahead with the rise of other competitors and new rivals of traditional banking who started to establish an Islamic banking system services in some branches in the region.
The information on Islamic Banking as well as Finance is presented on various forms, e.g., PhD dissertations (……………), books written by leading academics and practitioners (……………), published research in the form of reports (……………) and journal articles (……………). Because of Riba, Islamic banking has had to develop financial products which are not in conflict with the Sharia'h. The task has been achieved by creating a number of significant financial products (……………).
1) Literature that wrote about Islamic banks in general:
Islamic banking industry are growing rapidly in the region, and we are trying to understand the reasons behind that growth; is it because of the finest quality services provided or the specific Islamic services or because customers do not have any other choices "captured" because no one ales are providing these Islamic services.
The main thrust of Islamic financial contracts is on profit and loss sharing, which can be deemed as equity (Musharakah) and mixed (modified Mudharabah and Ijara) facilities (……………). However, the risks of these vehicles are inherently higher than conventional ones as espoused by (……………). One definition of an Islamic Bank is a bank that, by its own range, opts to comply with two sets of law: the law of the Land (Jurisdiction); and the Islamic Law (Shari'ah). This is why Islamic bankers have two types of legal counsel: traditional "lawyers" and "Shari'ah Councils" (……………).
"Islam is deeply 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 of economic growth but always in the structure of total human development and never in a form divorced from this perspective" (……………). The Shari'ah specifies, inter Alia, rules that apply to the allocation of resources, property rights, production and consumption, and the distribution of income and wealth (……………).
Islamic banking advances the next set of beliefs: interest as a reward for saving does not have any status as a moral foundation; abstinence from spending of current income does not deserve a financial reward; and to benefit from resources is to transform the money into investments, conditioned to take risks and bringing the knowledge of other factors of production together (……………).
The fast growing retail business portfolios of Islamic banking in the Islamic world are proving tough competition toward the retail case of conventional banking. Conversely, Islamic banking is based on teachings from the Holy Quran, which was visible through reference to the prevention of Riba, which is sometimes, defined the same as excessive interest. On the other hand, Muslim scholars have accepted the term to mean any fixed or guaranteed interest payment on trial advances or deposits. Furthermore, as an example UAE currently have 48 banks of more than 360 branches. In addition, twenty-eight of them are foreign owned. Conversely, the central bank deposits capital levels in addition to places controls on credit in favor of these institutions. Furthermore, banks are categories in four types, which are commercial banking, merchant or investment banking, Islamic banking as well as industrial banking. Additionally, five banks hold almost two third of the deposits in addition to total assets of the commercial banking. Consequently, they together like a premier 70.57% of the total deposits through local banks. Nevertheless, Islamic Banking were defined as they are those companies who utilize the Islamic Sharia Law and so as to their operations would be conducted agreement depend on the Islamic Sharia Law.
In Muslim communities, the first modern Islamic bank, Nasser's Social Bank, was established in Egypt in 1971; the first Saudi Arabian Islamic bank began in Jeddah in 1975; the first Bahraini Islamic bank was founded in 1979. Bahrain now boasts eighteen Islamic financial institutions. However, UAE has only three Islamic Banks. The need for Islamic banking is driven because such an Islamic investor should avoid association through industries prohibited toward Muslims: alcohol, gambling, pornography, meat packing (of pork), weapons production, as well as liquor. On the other hand, an Islamic enterprise is to avoid interest (riba), along with gambling, plus, accordingly, restrictions exist on trading in debt securities moreover in futures options; this is besides that Many Muslim investors tend to be attracted toward enterprises observing Islamic ethical as well as moral standards.
However, we can find that changing customers’ attitude toward products was integrated by changing belief about certain products, services, brands, or advertisements can plus do affect whether or not we will purchase a certain product or service. Attitudes will also affect whether or not we become a loyal customer plus whether or not we recommend it toward a friend. However, it is necessary to understand how an attitude is formed furthermore if there is any way of changing consumers’ attitudes.
The future trend of banks focuses on Islamic banking, as a result of increasingly doubled banking profits earned through banks offering products (services) corresponding through Islamic Sharia more than those offered through traditional banks. These profits are the result of making use of customer’s attitude goes for Islamic banking, hence increasing the profit margin to be doubled.
Islamic banking is increasingly growing at a range of 15% – 20% annually, in addition to the volume of their industry all over the world reached around 260 billion dollars in 267 financial institutions. GCC countries share is about 25% of this market. Moreover, Islamic finance volume exceeded 750 billion dollars, while Islamic banks assets (All of them) exceeded 265 billion dollars; their investments exceeded 400 billion dollars as well as their deposits exceeded 200 billion dollars.
Islamic banking has come of age since its beginning in the 1980s as (……………) mentioned , and expanded to contain 20% of banking assets in some of Gulf countries, and the Islamic assets poised to grow more rapidly than conventional banking over the next half decade.
Islamic banks work on extending their customer sector base plus pay attention to free profession owners, handicraftsmen as well as small merchants. As their functions are based on participation leading to full ownership all the way through financing minor as well as intermediate projects. Furthermore, Islamic financial system opens wide horizons in favor of economic thought in the world along with rescue from exploitation, domination, extortion in addition to extraction of wealth as well as capital through economic plans. Additionally, Islamic banks take in consideration the investment of their own monies in addition to those deposited through others on behalf of making 'permissible' profit, common benefit toward the society as well as financing projects.
From the above it becomes obvious with the intention of Islamic banking has a philosophy entirely different from the traditional banks philosophy, the same as these banks trade in money through selling plus buying credit besides making gains from the differences. They are based on usury, not on dealing with commodities or services, except current banking services free from any risks.
Part of the study of (……………), conducted in Jordan, aimed at establishing the perspective of local people towards Islamic banking. The results suggest that religious stimulation did not seem to play a fundamental role in bank selection; the introduction of new branches was not a decisive factor in increasing the utilization of financial services provided by Islamic banking; while 39.4 per cent of respondents would withdraw their deposits if an Islamic bank did not generate sufficient profit to make a distribution in any one year, 30.4 per cent would retain their deposits because the Islamic bank could allocate a higher return the following year.
(……………) study establishes that, in Singapore, which has a minority of Muslims in its population, both Muslims and non-Muslims are generally unaware of the philosophy of Islamic banking. Also the two distinct groups have different attitudes towards the Islamic banking division, with the degree of variation depending on the nature of the particular matter value to them. For example, when asked what they would do if an Islamic bank did not give sufficient profits make a distribution in any one year, 62.1 per cent of Muslims said they would keep their deposits within the Islamic banking division, while 66.5 per cent of non-Muslims said they would withdraw their deposits.
Much has been written since the early 1960s on the theme of the bank collection system (see, for example, the published articles of (……………); compared the bank selection process in relation to "conventional" and Islamic banking. (……………) Compared responses about the bank selection criteria of both Muslims and non-Muslims.
In addition to establishing attitudes towards Islamic banking, (……………) sought to establish, and then compare, the bank selection criteria of customers of conventional and Islamic banking in Jordan. (……………), among other things, sought to determine the relative importance of effective bank selection criteria using a variety of Muslims and non-Muslims, none of whom had to be patronizing an Islamic bank at the time of the study. The three most critical criteria in the bank selection process for Muslims were: first, "the provision of a fast and efficient service"; second, "the rate of the transaction"; and third, "accessibility of bank personnel". As regards the non-Muslims, the three most prestigious bank selection criteria were: first, "accessibility of bank personnel"; second, "the provision of a fast and efficient service"; and third, "the reputation and image of the bank".
2) Islamic banks reporting and accountability and how it relates to Islam:
The entry of Islamic banks keen on retail business has already started making a difference toward their bottom lines. Additionally, Islamic banking products enclose a strong retail appeal, in addition to greater customer reliability than conventional banking products. Hence, on behalf of the banks themselves, the availability of Islamic investment funds is a significant added attraction. But in order to access these funds, a bank needs first to be operating in an Islamic way.
Loans made through a bank toward a permissible venture are not subject to fixed repayments. Justice as well as fair play prevails in all contracts, in addition to rates of profit plus loss cannot be determined beforehand. So long the same as the business continues to function; the risks as well as the profits are shared through the Bank.
Main forms of Lending are like Loans with a service charge for the bank lends money without interest although they cover their expenses through levying a service charge. This charge might be subject toward a maximum set through the authorities. Another one as a no-cost loan where each bank is expected to set aside a part of their funds to grant no-cost loans toward needy persons such as small farmers, entrepreneurs, producers, etc. as well as to deprived consumers. Also we can add that Overdrafts as well are to be provided, subject toward a certain maximum, free of charge.
It will provide short-term advances, in addition to short-term as well as medium-term loans, which can be for durations of less than a month, less than a year and less than three years, respectively. Borrowers will pay the cost of borrowing on all loans as well as advances. However, one or more components of the cost of borrowing might become zero, depending on the type of loan. For example, compensation in favor of inflation will be collected from all loans of three months or more duration although this component will be zero in shorter-term loans; short-term advances will not comprise the service cost component; in addition to inter-bank loans will entail only the overheads charge, all others being zero. Islamic banks the same as they operate today find it difficult to provide needed services in many key areas. These include short-term advances to tie oversee throughout liquidity problems, medium-term loans to set up small businesses, short-term loans (or working capital) to running businesses, as well as consumer credit, on a viable commercial basis. Additionally, these are among the most respected banking services, which are required in any economy. Inter-bank credit is as well an added indispensable necessity in a conventional banking system; nevertheless Islamic banks are unable to provide it. Under the proposed riba-free bank these loans moreover advances can be provided remarkably easily.
Islamic Banking is a name which captures a public acceptance for the reason that it provides better features compared in the direction of conventional banks. Muslim customers, who accept moreover understand its operation, request it the same as an alternative toward conventional banking. They will come in the direction of an institution which they know offering such Islamic product. For example, many corporate customers come toward Islamic Bank to purchase machinery throughout Islamic Banking facility, for the reason that they know the benefits so as to the facility has to offer, for example, full margin of financing also lower penalty meant for late payment. Islamic Banking as well gains support from the non-Muslims. In several institutions, a good percentage of their customers are non-Muslims. They can see the advantage of signing up Islamic Banking facilities, which is 1% penalty designed for late payment, at the same time as compared toward conventional banks which imposes 8% penalty. Apart from being utilized through banks, trading company as well as others furthermore adopt conventional banks concept in their businesses. Therefore, Islamic Banking facilities can be a competitive facility that can be utilized through all also should not be limited toward financial institutions only.
On the other hand, changing beliefs about the competitive brands includes, which is the main issue here is how to break all the way through hooked on a market which has long been occupied through a more established conventional banking product. This is particularly true in the case of car financing whereby conventional banking has long established its name as well as reputation in the market. This naturally poses an enormous challenge in favor of Islamic Banking facilities to penetrate addicted to the market appealing toward customers who are more accustomed in the direction of the conventional product.
The problem is further exacerbated especially when many customers still perceive Islamic banking facilities is certainly no different from conventional product except in their use of religious or Arabic name to cover up the current established practice. Similarly, the dealers as well as bankers are more accustomed through conventional banking mechanism. With the lack of religious principles, they might opt to offer customer the conventional product instead of Islamic one, not only for the reason that they are more familiar with the conventional transaction in addition to mechanism but also they feel both products are actually the same, hence, fewer obstacles as well as more convenience. One more arising issue through respect toward competition is cost-efficiency. Naturally, as a relatively new product, Islamic banking facilities faced a challenge on how it can be offered at a lower cost compared toward its corresponding item. Since Islamic banking facilities requires more documents in addition to paper works to be filled through both parties, the cost issue will naturally pose an inevitable challenge toward banks.
This is besides hat changing the relative evaluation of attributes, is the extent to which a given consumer sees a certain attribute of a new product or service to be better than the attributes of similar existing products or services. If a consumer sees the new product attribute the same as better than existing ones, it does not necessarily mean that attribute is actually better. This means that this product characteristic is based on consumer perception.
(……………) lays down four elements of a contract for a property (mal): they are lawfulness, existence, deliverability and accurate determination. (……………) Explains that profits on Murabahah facilities are generally higher than conventional loans because Islamic instruments are structured to share the risk of the property or enterprise. Hence, the "profits" and "interest-charge" implied are similar in the outcome, although not by design (……………). (……………) Is of the view that Riba, Gharar and Maysir manifested in the conventional system can wreak havoc in an economy as advanced as the USA, as depicted by the massive failures of US savings and loans institutions of the 1980s. Islamic banking aims to promote economic growth through risk-sharing instruments whose payoffs fluctuate with economic output and do not structurally undermine the economy in the sort of extravagant fixed-interest debt does in a poor economic conditions such as a recession (……………).
The potential of Islamic fixed income securities backed by an Ijara facility is discussed by (……………).
Islamic Derivatives: This comprises both Islamic Futures and Embedded Options in a contract. However, the evolution of it is largely unrealized (……………). (……………) Recommends to produce, develop and implement Islamic hedging and risk minimizing facilities such as Islamic futures (Bai Al-Salam/Istisna), Islamic swaps, etc. (……………). (……………) Further recommends designing, develop and implement Islamic facilities that enhance the competitive ability of Islamic banking and reduce their risk exposure.
The excessive use of credit facilities by Islamic banking globally has drawn the ire of scholars such as (……………). Conventional futures are highly controversial with the Ulema - religious scholars (……………). It should be noted that certain Ulema such as Justice Taqi Usamani have given their decision allowing contracts with embedded options (……………).
Moreover (……………) in the result of their research on commercial banking in Bahrain they perceive that the diversity of Islamic Banking in the bank selection process appears to be primarily a religious based decision. However, this comparative benefit has been threatened in recent years with some conventional banking lunching their Islamic investment units.
On the other hand as, (……………) agreed on the previous feature on their research on Malaysia, they mentioned that a recent study indicated that Muslims patronized Islamic banking not mush because of the religious factor, but more because of the returns they would receive from their investments. Also Islamic bank should not over emphasize, and rely on, the religion factor as a strategy in its effort to attract more customers. The Islamic bank should be aware that only 40 per cent of Muslims believe that religion is the primary factor in why people keep an account with Islamic bank.
3) Islamic windows and their role in Islamic banking:
The enormous growth potential in the retail segment is attracting a number of new participants who want get a portion of the profitable market throughout either an Islamic window or all the way through a fully dedicated Islamic finance company. Nevertheless, retail Islamic banking products comprise an incarcerated market in the country. For that reason, on the corporate side of the business too, they contain opportunities to offer lease financing based on Islamic principles.
Moreover (……………) point out that international banks such as City bank have been involved in Islamic finance, they develop their range of banking products to compete with Islamic financial institutions, and other banks also established a separated network of Islamic branches spread Islamic products in a "window".
They mentioned also that perhaps 15 to 20 % of all consumers have a strong preference for a purely Islamic source, but most consumers seem willing to use Islamic products for conventional banks.
(……………) observed in their studies that Islamic banking and commercial banking both offer similar services and play a vital role in economic development of their societies, however Islamic Banking operate within the boundaries of Islamic Sharia'h. Nowadays International conventional banking are showing interest in the Islamic banking system, and the importance of it is that Islamic banking operating in Islamic countries are facing a stiff competition not only from Islamic banking but also from non Islamic rivals. When such competition appears it is the customer satisfaction that can affect the performance of an Islamic bank and determines its competitiveness and prosperity.
A research presented by (……………) about Islamic banking in Singapore, a country that have a large number of Muslims in its citizens seeking to understand the level of awareness that Singaporeans (Muslims and non Muslims) have toward the philosophy of Islamic bank. Their determination showed many salient point, like Muslims were far more of the opinion that religion and profitability reasons motivate people to deposit monies with Islamic bank, others belief that increasing on the number of branches will lead to a wider use of Islamic bank, other would retain deposits within the Islamic banking move even if that Islamic bank did not make any profit in any one year, and more strongly other agreed that granting of interest free loans by Islamic banking help the people in a just and efficient manner.
There is a direct relationship between positive relative advantage as well as new product adoption rates. The more a consumer views a certain attribute as being better than those of existing product attributes, the more rapid rate of adoption. A new product’s/service’s relative disadvantages, such as increased prices in addition to the increased time it may take to learn how to operate the new product will, of course, enclose an opposite effect on the adoption rate.
As discussed earlier, there is not an essential difference between Islamic banking facilities as well as conventional banking, except in respect of formal prohibition of interest as well as prohibited (haram) elements, requirement designed for a hiring contract at the beginning in addition to a sale contract at the end, signing of an acceptance letter (‘Aqd letter) to point toward the parties’ intention of accepting the terms of agreement, as well as late penalty charges. Apart from these requirements, Islamic banking facilities can benefit from several rules provided through Central Bank which make Islamic banking facilities comparatively in an advantageous position the same as compared toward the conventional banking. Provisions like giving an option in the direction of the customer to use a fixed or variable rate in the transaction, protections of customers moreover guarantors in addition to clear procedure of repossession will attract prospective customers toward Islamic banking facilities, in addition to its built-in Shari’ah-compliant characteristics like interest prohibition as well as supremely minimal late penalty charges.
Realizing the potential of Islamic banking facilities, several banks increase the number of branches which offer the facility. Encouraging initiative is even taken through a bank to make wider scope of financing. They as well admit so as to a strong commitment through the Central Bank has led toward a rapid growth of Islamic products. In order to comply with the direction, financial institutions contain no additional mean except in the direction of fully mobilize their Islamic products, the most practical one is Islamic banking facilities.
Finally, this can be accumulated as adding attributes with the competitive environment, which is within the dual system caters a significant advantage in favor of the promotion of Islamic wealth management services throughout product innovation as well as development. However, it demands close analysis from Shari’ah perspective to ensure the authenticity of the product. In many instances, as evidenced in the case of Islamic banking facilities, the Islamic financial products are repackaged along the features of conventional financial products, while eliminating elements that are not in-compliant through the Shari’ah. While the adaptation will still continue, Islamic financial products are likely to expose to certain conventional practices that are in conflict through Shari’ah principles, thus description the practice to be invalid. Islamic bankers in addition to Muslim scholars have attempted to resolve a few basic in addition to operational issues in order to make Islamic banking facilities operation more viable as well as acceptable through Shari’ah.
Islamic banking is not necessarily without difficulty transportable toward either non-Muslim country, additionally there are problems of Islamizing banking systems in predominantly Muslim countries themselves. Thus, the nature of Islamic banking besides support at all, in that do the same as it is practiced even in Western countries, it does not seem to put on a look up to capitalist social relations seeing that we give the image to see them, with the exception of the prevention of exacting products out of the way. On the converse, Islamic economics appears to support inter as well known the same as constructive entrepreneurship.
Focusing in the banking sector, which flourished due the diverse variety of products in addition to services they provide just the investments products like mutual funds as well as bonds. Islamic banking is gaining success for the basis that it uses alternatives to interest charges besides the fact that they are following the sharia rules in this Islamic state. The investment atmosphere in is stipulated in a way that attracts foreign investment.
Islamic banking is an extremely young idea. Yet it has already been implemented at the same time as the only way to two Muslim countries; there is Islamic banking in many Muslim countries in addition to a few in non-Muslim countries as well. Therefore, with only minor changes in their practices, Islamic banking can get rid of all their unwieldy, hard plus sometimes controversial forms of financing in addition to provide a moral as well as effective interest-free banking. Furthermore, participatory financing is a distinctive feature of Islamic banking, also can provide reliable financing toward socially in addition to economically relevant development projects. This is an additional service Islamic banking offer by as well as above the traditional services provided through conventional commercial banking. Moreover, we used a few of our selected financial terms while we are explaining the concept of this section, along with mentioning the different meaning of each time in some individual countries. Besides we gave our attitude toward the proper meaning of the same word.
One of the important conclusions of (……………) research is that the majority of customers banked with Islamic bank because of religious reasons as the bank implement Islamic Sharia'h principles, and customers deal with Islamic bank are prepared to accept any form so long as the bank observes Islamic Sharia'h principles, and they expect the bank as regards their money and in its ability to meet religious concerns. However: (……………) mentioned that Islamic Banking have not made sufficient use of their natural competitive advantages within the Muslim community.
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