The Activities Of Islamic Banks
The purpose of this research is to evaluate the activities of Islamic Banks in the shadow of international financial and economic crisis. The study partitioned the evaluation to five aspects. The first aspect concerned with the procedures applied powering the Islamic banks to develop financial products catering different needs of customer. The second concerned with the impact of international financial crisis on Islamic bans. The third aspect is the measurement of the extent Islamic bans geared to comply with the changes resulting from the international financial crisis. The fourth one measuring the extent Islamic banks gain competitive advantage from the impact of international financial crisis. The fifth and last concerned with the prospect with developing the concept of Islamic finance and economy in the broader banking and financial sector in light of the international crisis. This chapter will discuss literature findings regarding the different previous aspect in attempt to answer the questions of this study.
2.2 Islamic banks’ products
The increase of Islamic banks activities and distribution worldwide was response with the Islamic people attempts to apply the Islamic instructions in their daily life financial transactions to avoid sins “haram” (Asutay, 2007). Still, the extent of Islamic bank commitment to the application of Islamic instructions will affect its activities among Islamic people (Yousif, 2008). So, the products and variety will be affected by the extent of application of Sharia’a in Islamic bank activities. Some Islamic banks have been established recently for profit purposes away of applying the spirit of Islam instructions. Still, the products of Islamic banks with high commitment succeeded in satisfying customer needs because it satisfies both their life banking needs and their Islamic commitment (Yousif, 2008).
Accordingly, the variety of products developed by Islamic banks is not less than those products developed by traditional ones. The products of Islamic banks satisfy the customers’ needs in all life aspects under the umbrella of Islam. Some recent studies have shown that some structures applied in Islamic banks are similar to those in traditional banks (Ifran, 2008; El-Gamal, n.d.). The products and methods of transactions execution is completely different in Islamic finance system compared to traditional ones.
2.2.1 Diversity of Islamic bank products
The diversity of products will insure customer attraction and loyalty for the Islamic bank. Al Zaabi (2006) has shown that the United Arab Emirates citizens are interested in Islamic banks and in providing high diversity of services. The increase of diversity of services will increase the targeted sector of people benefited of these services. Kattak (2010) research in Pakistan has shown the wide interest of different services introduced by Islamic banks. The research has shown that the interest in Islamic bank services depend on customers financial position and economical interests. The Hand Book of Islamic Banking Products and Services show the wide variety of products introduced by Islamic banks and its meet of the different interests of customers (Islamic Banking Department, n.d.). Khan et al. (2008) have shown that there is no relationship between the length relationship and the customers’ knowledge in availability of services in Islamic banks. This indicates that the customers should seek the kind of services that matches their needs in Islamic banks to figure out its existence.
2.2.2 Customers’ satisfaction and awareness of Islamic banks products
Different studies investigated customers’ satisfaction and awareness of Islamic banks or Islamic finance system. In Pakistan, the research has shown that Muslim people believed that the Islamic banking system offers limited facilities for customers. On the other hand, in the same study, the majority of respondents believe that the Islamic banking system provides a wide variety of services (Kattak, 2010). In other research in Bangladesh, the high respondents were interested in Islamic leasing for vehicles, while high proportion of respondents were interested in having current accounts and saving deposits in Islamic banks. The lowest use of products was registered for Islamic banks bonds. These results reflect customers’ satisfaction of Islamic banks products in these two Islamic countries. In United Arab Emirates, the citizens show high interest of Islamic banking services. Respondents show interest of the application of all Islamic instructions in Islamic bank and they assure compliance of the different services introduced with the Islamic doctrine (Al Zaabi, 2006).
Research is showing that France is leading the way to be the next big market for Islamic finance and banking. There is a significant Muslim population in the country and opportunities exist not only amongst the practicing Muslim population, but also with individuals who have been through the financial crisis and are seeking safer alternatives to managing and investing their money. The government of France is in discussions regarding Islamic finance and how to integrate it into the financial system. Research shows spending on technology for Islamic banking will increase significantly in the coming years, upwards of 60 million USD. It is noted that conventional banks will turn their eyes on Islamic finance and begin to embrace it, as the financial crisis continues and institutions look to assure customers that they are “safe” and open for business (Dominic, 2010).
2.3 International crisis and Islamic financial system
2.3.1 The effect of International crisis on Islamic banks
The international financial crisis calls the attentions for the Islamic financial system. The interest of worldwide bankers concentrated on understanding the essence of the Islamic financial system (Nagaoka, 2010). The International financial crisis did not produce any financial effects on Islamic banks. The financial experts worldwide started discussing that the Islamic financial system can be used as a tool to eliminate such crisis in the future (Ahmad, 2008). Islamic economical experts explained the cause of the Islamic international financial crisis in western countries is the interest rate, which is prohibited in Islam “Riba” (Hassan, 2009). Other contributed in justifying the international financial crisis for lack of transparency, good legislations and proper regulations (Cecchetti, 2008, Adrian and Shin, 2008; Goodhart, 2008). The international financial crisis was started through the crisis in the mortgage market in USA. The high prices of houses and the low ability for purchase make the US government to introduce facilities to support the housing system in USA. The lending banks insured the loans by other financial institutions with different interest rates (Nagoaka, 2010). The resell of loans to different financial companies inside and outside USA cause the crisis to expand to most world countries (Ahmad, 2008). The Islamic financial system prohibits resell of loans as well as the prohibition of interest rate (Riba) and any investments with other parties that do not follow the Islamic law (Chipra, 2008). The status of the conventional system was representing in budgets imbalances, deficits in payments, and the lack of aids for recovery, while the Islamic system seeks to establish equity, welfare, and justice (Hassan, 2009). This is one solid factor that led Islamic banking to remain steady and profitable during the downturn. The impact has been a positive one, with Islamic institutions remaining in place and developing new lines of businesses (Timberg, 2010).
The stability of the Islamic financial system financial crisis and the core of the Islamic financial system are considered by many economists as a tool to provide protection and to use the Islamic financial system to alleviate risky investments (Al-Zoubi and Maghyerbeh, 2006). The share of profit and loss has been considered a tool to decrease the risk of banks. The share of risk between the bank and the investor will makes it possible to provide healthier deal between them. The structures of the Islamic financial system are built on the share of profit and loss which decreases the risk on Islamic banks (Chapra, 2008).
One of the major roles of any financial systems is to establish the welfare of society. This purpose was the spark lead to the international financial crisis. USA government seeks to establish citizens’ welfare through facilitating crediting for houses purchase. The other economical hard conditions of citizens decrease their ability to commit for the payments deserved. This phenomenon increased to cover United States and so to extend to other countries due to the financial ties with these countries with USA economy (Asutay, 2007). The crisis cause many international banks and economical enterprises to announce their bankruptcy. These banks have a negative welfare effect on citizens which contradicts the role economical system of any country. Islamic banks worldwide continued to introduce its full services for beneficiaries. The Islamic financial system is built on introducing services which satisfy the needs of customers to establish welfare (Asutay, 2007). The Islamic financial system concerning assets uses “murabaha”, purchasing assets using a “salam” or “bai bithman ajil” that provides different methods of payments or ownership of assets (Jobst, 2007). These systems make its possible for the Islamic banks to introduce these services without revising their lending roles as happened with banks in the conventional banking system after the international financial crisis. These consequences gave indicators for the ability of the Islamic banks for continuity under financial crisis coming from the conventional systems.
The continuity of Islamic banks without being affected by the international financial crisis make the economists namely in Arab countries to think about the Islamic financial system as a tool for recovery. The severe effect of the international financial crisis in Dubai makes it one of the first countries seeking the recovery through the application of Islamic financial system which is seen as a tool to boost competitiveness (Middle East Monitor, 2010). The new attitudes toward the Islamic financial system after the international financial crisis emerge through the dual deal of the Islamic one for profit and society welfare (Hassan, 2009).
2.3.2 Comply with changes resulted from international crisis
Islamic financial system should make actions to get modified accordingly to the international changes in commitment of “Sharia”. The ability of the Islamic finance system to revise its roles and to add new services will increase the trust. Most authors studied the integration and stability of the Islamic financial system and the ability to use this system in international financial markets (Nagaoka, 2010).
Literature showed that the core of the international financial problem is the interest rate and reinsurance on mortgage loans practiced by the USA banks (Chapra. 2008). The Islamic financial system prohibits the interest rate and using instead “murabaha”, but its principles is not known for the bankers worldwide. This requires additional efforts to explain these mystery systems.
The guaranteed return on deposits was considered advantage in the conventional financial system, but after the crisis, it was looking as disadvantage because it increases banks financial overburden and decrease liquidity (Haq and Smithson, 2003). On the other hand, does the Islamic financial system in its current power able to finance all kinds of industrial activities worldwide? The answer through the literature is that the Islamic financial system is not able to finance all industrial activities practices, so, Islamists should work hard to increase the investment in this financial system and modify procedures that make it possible to finance these industries according to Sharia laws (Chapra, 2008).
One of the important issues the Islamic financial system should work hard to modify it is making compatibility between the audit systems used in different companies and that applied through the Islamic financial system. The Islamic financial system should provide systematic standards for rigorous audit system to be applied in the auditing works worldwide (Haq and Smithson, 2003).
2.3.4 Competitive advantage gained of international financial crisis
Prior to the global financial crisis and credit crunch, Islamic baking was not held in the high regard it is today. If anything, Islamic banking was looked down upon as too conservative and old-fashioned. Many large financial institutions dismissed it without properly examining it, its principles and widespread usage around the world. In fact, a number of Western financial firms saw Islamic banking and finance as one that was not up to date with more complex markets and not creative or diverse enough to become competitive players in global finance. Islamic banking was considered to be a means of religious facet, as opposed to a business model (Hassan, 2009).
Islamic finance does face a few challenges, but nothing like what conventional banks are going through today. The global financial crisis has, however, brought Islamic banking into the spotlight and it is now a key player in international financial transactions. Islamic finance and banking is also undergoing growth, not just in Muslim-dominated nations, but worldwide. Islamic financial institutions see their potential to not only gain market share but to become dominant institutions in the global marketplace. Islamic banks have become a reality in the banking and international life after it made its way in the banking environments quite different in terms of foundations and rules and mechanisms from those of Islamic rules and spirit (Khattak and Ur-Rehman, 2010; Hassan, 2009; Chapra, 2008). Islamic banks are a new test, and have proven to be a successful means of conducting business in a dominant and demanding capitalist system where traditional banks were based on one foundation, which are interest rates. Islamic banks have taken Islam to be the source of practicing the banking and have also taken the Islamic investment modes to guide it but complied with the legal provisions to face banking updates. Islamic banking see significant potential to be a larger component of the global financial markets (Khattak and Ur-Rehman, 2010).
The international financial crisis served the Islamic financial system seriously. The first advantage gained by the Islamic financial system is the attention given to this system specifically from western world (e.g. Jobst, 2007). The researchers worldwide started to search for the aspects that strengthen the Islamic financial system and kept it away of crisis.
The international financial crisis creates the interest to establish Islamic banks to alleviate and overcome the sequences resulted of the conventional banking system (Rammal and Zurbruegg, 2006; Ahmad, 2008). In Arab world, the interest to establish new Islamic banks has been increased in the last time to decrease the effect of such crisis in the future (Middle East Monitor, 2010). Some authors argued the possibility to benefit from the Islamic finance system to minimize the effect of such crisis in the future (Chapra, 2008). The Islamic financial system as a system operating though “Sharia” gained a small share of the international financial market. It could have effect on the International financial system but not in the close soon (Chapra, 2008). The major reason of the low effect in the International financial system is the belief that the Islamic finance is a system has been founded for Muslims only. The support received by the conventional financial system is very high through the biggest industrial system in the world despite it has proven its failure to face the last financial crisis (Nagaoka, 2010).
The research concerned with the Islamic financial system was concerned with two parts that increase competitiveness: First, increase investment in technology so as to make a real breakthrough in Islamic banks use of modern technologies. Also, a strong focus on electronic banking services that Islamic banks find a competitive advantage in, such as Islamic banking services, second, the preparation and training and development of human resources skills in dealing with the modern mechanisms in order to increase the prospects for growth and profitability of Islamic banks (Al-Rawashadah, 2009).
2.4 Prospects of developing the concept of Islamic finance and economy in the broader banking and financial sector in light of the international financial crisis
Despite the high attention given to the Islamic finance, it is still facing many challenges and shortages. The highest challenge face the Islamic finance is that the most developed countries are non-Muslim countries. This minimizes the interest and the application of such system in these countries (Ahmad, 2008). One of the challenges face the Islamic financing system is the weakness of frameworks functioning in the Islamic banks concerning the legal aspects and institutional structure according to the point of view bank officers in UK. Moreover, some officers indicate difficulties regarding accounting standards and violations resist policies (Ahmad, 2008).
These points of view concerning the Islamic financial system initiates the needs to develop strong and solid policies to be applied inside the Islamic finance system to control managerial operations in one aspect and auditing aspects on the other hand. This requirement can be done through the corporation of Islamic scholar and Islamic bankers to increase the trust in Islamic finance system.
The other challenge facing the Islamic financial system represented in being emerged in countries with strong conventional financial system which is increase the competence (Hassan, 2009). This reflects the need for high capitals to establish Islamic banks in western countries to be able to compete and to concentrate on countries with Muslim citizens to increase the opportunities to success.
Large investments use specific standards to prepare financial statements. These standards are comparable with the standards of the conventional financial system indicating that the large investments will find it easier to deal with conventional financial system (Ahmad, 2010). This requires for Islamic bankers to double the efforts to find strategies and schools that develop the methods of auditing for large investments and make it is more simple. One of the serious aspects that should be considered is that the international financial standards are designed and created for the conventional financial system. This requires very hard effort to modify and develop standards matching the Islamic finance system. Designing Islamic financial instruments for monetary operations will not be an easy task. Islamic finance stands to benefit and even thrive in a broader economic sense in such that studying and taking on new ideas while remaining Shariah compliant can aid in its integration into the more mainstream financial sector, thus enabling it to be a major player in global markets (Sarker, 2005).
Supervisory frameworks are considered one of the aspects that require improve in the Islamic financial system according to the point of view of bank officers in UK, who show that there is a shortage in this regard (Ahmad, 2010). The lack of information about the methods of calculating the percentage of “murabaha” by customers will minimize their attempt to deal with Islamic finance. This requires of Islamic scholar to illustrate the methods used to calculate the percentage of “murabaha”. According to Dar and Presley (2010), the sharing of profit loss sharing is far more favorable from a shari’ah perspective, at least in their arguments. Within Islam, it is considered unjust when debt based financing the fee is guaranteed. Essentially, it is much more fair for both the creditor and debtor that they each have a share of profits or losses; In other words, a profit share, for example, may exceed the market rate of interest and be more in keeping with the input of the creditor. Therefore profit shares not only serve the debtor more fairly but also the creditor. This method can aid growth as well as prolonged sustainability of Islamic finance. Clearly this is one concept that can be adopted for the greater good of all involved.
The international financial crisis should call Islamic bankers to develop integrated documented Islamic financial system to make it available for interested people worldwide. Islamic financial sector should care for the providence of enough number of supervisor and Islamic scholars who provide guidance for the processes required to develop the Islamic financial system.
The international financial crisis directed the attention to the Islamic financial system as being not affected by this crisis. The authors started to make intensive research about this system to study the dimensions, the differences and the integrity of this system. Other researchers investigated the challenges, satisfaction and convenience of customers of the Islamic banks. The previous research shows that the Islamic financial system has different strong positive attitudes, while on the other hand, it has many shortages and gaps to answer all questions raised in the financial context. Despite literature showed the positive aspects of the Islamic financial system, others show the shortages of this system to comply different international industries and other financial systems.
Literature showed that the Islamic financial system can be used to stand or protect of other crisis. The authors show that the Islamic financial system can compete the other international system, but the support received by the conventional system by the developed countries makes it impossible for the Islamic financial system to compete the conventional one practically.
The literature shows that the Islamic financial system received high advantage after the international financial crisis, but this advantage required more wok by Islamists to improve the mechanisms of this system and to provide more supervisors to distribute this system among citizens who are considered the target of any financial system. To attain higher levels of efficiency, Islamic jurists will have to continue their process of understanding the modern financial practices, and developing an Islamic jurisprudence that is appropriate for today’s legal, regulatory, and financial realities.
Even the literature of Arab and Islamic countries shows the advantage of the Islamic financial system for Muslims of these countries, but on the other hand, they show that the citizens of these countries have accounts in conventional banks because the Islamic banks do not satisfy all their requirements.
The next parts of this study will explain the methodology used in this research as well as the findings and results will be discussed and compared with the literature show the similarities and differences in findings.
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