A possible amalgamation of Islamic and Conventional Banking

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System is changeable and upgradeable to bring welfare to mankind, hence why not banking system? People work hard and keep their savings aside with an expectation of generating maximum return for rainy days. To ensure security and utmost return, an advanced secure and reliable banking system is inevitable. Islamic financial system is a value-based system which can bring the maximum rate of capital growth triggering to a withstanding economical development and fair opportunities to everyone by offering common conventional banking functions (like lending, borrowing and investment) in a risk-sharing method. Its main aim is to make certain moral and material welfare for both the individual and the society in general. Its vision of socio-economic justice based on wiping out usury and any other interest-related as well as exploitative components from the economy. Moreover Islamic finance allows market forces to decide the capital efficiency instead of swindling it in priori, as an 'interest rate' to damage the free market mechanism and to reinforce speculative activities (khan and Bhatti, 2008; Naqvi, 1982; Zarqa, 1983; Ahmed, 1994; Siddiqi, 2000).

This proposal will aim to conduct a research to compare the performance and profitability of Islamic banking instruments to conventional ones on a global perspective; which will thereafter assist to proposing a possible amalgamation of Islamic and conventional banking system to yield a dynamic, secure and sustainable banking system for future to tackle any unforeseeable financial crisis.

This proposal will comprise of six main sections to complete the research which are: background, research findings, research methodology, major ethical issues, limitations and conclusion.


The basis of Islamic financial system is on Islamic commercial law called fiqh mu'amalat (Kamali, 2002), which focuses on the fairness in commercial transactions, equity, social justice issues, the promotion of entrepreneurship, the protection in property rights and clearness in regulations (Turk Ariss, 2010). Most of the activities in Islamic finance conduct under the legal code, called Shria'h, which allows the business transactions that is permissible (Thomas, 1995) in Quran and Sunnah. Sharia'h does not allow any financial transaction which involves in Riba (interest) (Thomas, 2006), gharar (uncertainty), (El-Gamal, 2006) maysir (gambling) and haram (prohibited) activities (such as, selling pork food, alcohol, prostitution, pornography or any other unethical activities). Therefore, now-a-days the people (both Muslim and non-Muslim) are becoming more and more interested to invest in Islamic financial products due to its socially responsible as well as ethical approach. According to Kerr (2007), recent balance sheets indicate Islamic banks' (worldwide) accumulate Shari'a -compliant assets are about $500 billion. Aggarwal and Yusef (2000) discuss the size of Islamic financial industry is still very small compare to the size of conventional banking industry, however the rate of growth is remarkable, in average around 15% over the last thirty years. Hence a glorious future may appear in banking industry if Islamic banking discipline can be moulted with conventional banking system respectively.

As far as my knowledge concern, there isn't any specific research has been carried out so far, to seek the possibility of offering a new combined banking system by amalgamating conventional banking with Islamic banking discipline. However, early literature in Islamic finance mostly focuses on conceptual feasibility and sustainability of Riba-free financing, and recently a lot of researches have been occurred in various areas of Islamic financial industries. Such as, Zaher and Hasan (2001) discuss the challenges that Islamic financial industries may experience while spreading in cross-countries. Iqbal (2004) investigates on intermediation and the structure of an Islamic financial model; Shahimi, et al. (2006) examines the Islamic banks' participation in various fee-income activities; Samad (1999) researches on the efficiency of Conventional and Islamic financial industries; Samad and Hasan (1999) prove the Islamic banks' are currently performing better than conventional banks using financial ratios. Hassoune (2002) examines that under the same balance-sheet structure, Islamic banks' can be more profitable than mainstream banks; Haron (1996) finds the Islamic banks' products are more profitable in competitive market. By using the ratio of stock market capitalisation as well as the total deposit assets to GDP, Bashir (2003) investigates the performance indicators and controls of Islamic financial industries for dissimilar financial models; also Hasan and Bashir (2003) discuss the internal and external factors to establish the possible determinants of profitability of Islamic institutions. Furthermore, Khan and Bhati (2008) highlight the unprecedented expansion of Islamic banking and finance in contemporary finance world; and Turk Ariss (2010) and Alkassim (2005) analyzes the competitive conditions and profitability of Islamic and conventional banking, a global perspective.

Currently there are approximately 300 Islamic financial organisations in 75 countries around the globe, including banks, mutual funds, mortgage companies and insurance companies. Those organisations offer Islamic financial products which are similar to mainstream products. Such as, deposit, loan, bond (Sukuk), insurance (Takaful), hedging funds, Mutual funds, private equity and assets management, real estate and wealth management, corporate management, treasury, derivatives, swaps, future and forward market, Islamic Stock Exchange and Dow Jones Islamic Index (Turk Ariss, 2010; khan and Bhatti, 2008).

Research problem definition

If the research can provide evidences that Islamic banks are performing better, generating more profit, more competitive and more reliable (in terms of risk management) than conventional banks, a proposal will be offered in the conclusion to amalgamate both banking disciplines (Islamic and mainstream) and to create a new combined-banking approach for financial industries worldwide. Following diagram defines the concept of the proposal more clearly:









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Diagram-1: Concept of the proposal.

Research objectives

The objective of the research will be identifying the possibility of emerging a secure and innovative banking system by merging the Islamic banking disciplines with the conventional banking system. The result of this research would open a new door for worldwide financial industries to enter in free-market zone in banking sector. The conventional banks may benefit from this research by accruing information about Islamic laws and products to build up a more comprehensive Muslims-clientele base around the world; and also by knowing how the Islamic financial system can be a safeguard of any unforeseeable financial meltdowns (e.g. 2007-crisis).

On the other hand, the Islamic banks may benefit from accruing more market shares by expending their business across the world, especially among non-Muslim economies.

Therefore, adopting with the proposed new banking system may end up bringing a win-win situation for both conventional and Islamic banks in general.

Research questions

Questions that will mainly be researched are below:

How competitive the Islamic banks are in contrast of conventional banks, in terms of performance and profitability?

What are the performance and profitability ratio in products that currently both banking system offer?

Will there be any possibility of invention of the new amalgamated-banking system for the society based on both systems' performance and profitability?

Even though, this research may figure out the possibility of creating the new combined banking system, how reliable that will be in terms of financial risk-management perspective?

Research variables

Following variables will be used in regression to investigate performance and profitability of Islamic and conventional banks:

Performance and profitability indicators: Return On Asset (ROA), Return on Equity (ROE), Net Interest Margin (NIM), Total Asset (TA), Total Equity to Total Assets (TE/TA), Total Loans to Total Assets (TL/TA), Deposits to Total Assets, Total Expenses to Total Asset, and Non-Interest Expense to Total Expense. (Turk Ariss, 2010 and Alkassim, 2005)

Influential factors: Performance, profitability, competitive conditions and risk-management.

Research hypotheses

After investigating various literatures in relevant area, the following hypotheses have been measured:

Islamic Shari'a-complaint banking products may offer better facility for all customers in terms of performance and profitability;

Performance and profitability ratio (countries where both banking system exist) of Islamic financial products may be higher than conventional ones;

The degree of risk-management and competitive conditions in Islamic banking may be greater ;

Finally, a new combined-banking system (by amalgamating Islamic disciplines with conventional banking system) may offer a more secure, dynamic and reliable banking system for customers and financial institutions worldwide.

Research methodology

This section will be aiming to discuss in details of research process, which includes research strategy, sampling, tools, data collection and data analysis process. Research methodology will be using to answer all research questions that have already mentioned in relevant section. After conducting a thorough review in various methodologies, this proposal will propose of using deductive approach to accomplish the research rather than inductive approach. The following sections will focus in depth on research design:

Research Strategy

Research strategy is vital to perform sound and effective research to conclude with comprehensive outcomes. This research will be conducted under positivism paradigm due to there is an objective of this research, which is to find out a possible compatibility between the conventional and Islamic financial system to offer a new combined banking system. Also in this research, all collected data will be specific, precise and in a numerical form. A large number of secondary data will be used to investigate the fact; therefore 'secondary analysis' strategy will be used for the research. Turk Ariss (2010) and Alkassim (2005) conducted a similar research using secondary data. Secondary analysis research strategy is very efficient to analyse the large-scale secondary data; which also support deductive research approach (Maylor and Blackmom, 2005).

There are number of advantages of using secondary data for research. Such as, data collection will not be very time consuming which will save more time for data analysis, high-quality data will be available, and it will be possible to analysis data longitudinally. Other hand, some disadvantages may arise, like, difficulty to manage large set of data, data may be biased, or collecting data may be expensive (Maylor and Blackmom, 2005).


Simple random sampling method will be chosen for this research, because every single targeted bank from different countries will have same chance of being selected (Oakshott, 2009). The data between 2000 and 2010 will be collected from fifteen Islamic banks and fifteen conventional banks around the world. Then the collected data will be used to compare performance and profitability of those banks. Turk Ariss (2010) and Alkassim (2005) perform random sampling in their research to examine Islamic banks and conventional banks' competitive conditions and profitability.

Data collection

Data will be collected from BankScope database for this research. After conducting a comprehensive literature review I have obtained that most of the researchers used BankScope database for collecting banking related data.

As mentioned previously, the deductive approach will be used for the research; hence quantitative data collection method will be used to compare conventional and Islamic banks' performance and profitability measurement.

Other hand, the inductive method is normally used to handle relatively small amount of data, thus the qualitative data collection approach will not be suitable for this research; furthermore qualitative method is useful where no pre-populated data is available (Trochim, 2006; Maylor and Blackmom, 2005).

Data analysis

Quantitative data will be analysed to prove all the aforementioned hypotheses. Descriptive statistics will be used to summarize the large set of secondary data in a form of tables, charts and graphs (Lovie. 1986). Moreover, inferential statistics will be used to conduct the tests using 'sampling distribution' concept on random samples to draw the conclusion regarding the target population (Kervin, 1992). Using descriptive statistics, research will obtain the frequency distributions, the central tendency (mean, median and mode) measurement and data dispersion. Afterwards, alike Turk Ariss (2010) and Alkassim (2005) regression model will be used to analyze the data as well as predict an outcome from one or more variables (Collis and Hussey, 2003). Finally, SPSS (Statistical Product and Service Solutions) software will be used to perform statistical analyses for the research.

Ethical issues

"Confidentiality is a promise that you will not be identified or presented in identifiable form, while anonymity is a promise that even the researcher will not be able to tell which responses came from which respondent" (Sapsford and Abbott, 1996, P. 319)

Confidentiality will be the main priority as this research will handle a large amount of sensitive and confidential data. Therefore, Data Protection Act 1998 will be abided in every step while using numerous organisations' data. Any personal contribution in data collection will be anonymous and confidential; informed consent will be assured before involving with any senior management officials to collect data (Trochim, 2006). Finally, University guideline on ethical issues will be strictly followed while accomplishing the research.


Time constraint may become a hindrance in the way conducting vast research to cover wide areas in conventional and Islamic banking. Due to be unable to collect primary data, questions may arise in terms of data quality. In addition, expense and cost for data collection could be another factor of limitation in the research.


To conclude, this proposal has pointed out the reason of conducting the research and has offered a comprehensive background of the topic at the beginning. Problem definition section has described the objectives, questions, variables and hypotheses of the research. Methodology part has indicated the ways of sampling, collecting and analysing the data using various tools to yield the result. Ethical issues section has made clear about the areas that have to be complied in terms of ethical regulations; also limitations section has drawn the attention about the constraints may arise while accomplishing the research. However, if the research can be continued according to this proposal, there is a great chance of being successful in this project.