Engl 341 Report Writing

University of Bahrain Department of English language And Literature ENG 341

The Role of Islamic Banking in the Middle East Region Submitted by: NAVEED KARIM BAKSH

20124656

ASSAD RASHID 20110713

Section: 05 Submitted to: Dr. Yulia Vorobeva

Table of Contents

1. Executive Summary……………………………………....4 2. Introduction ……………………………………………....5 3. Literature review ………………………………………....6 4. Procedures………………………………………………... 9 5. Findings…………………………………………………...1 0 5.1 Questionnaire Findings………10 5.2 Interview Findings…………...25 6. Conclusion………………………………………………... 29 7. Recommendation……………………………………… ….30 8. References………………………………………………... .31 9. Appendix………………………………………………….. 32  A Copy of questionnaire

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Table of figures FIGURE PAGE

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1. Executive Summary In brief, the report sets out to study the Role of Islamic Banking in the Gulf region and how it had influenced the different customers in their selection of the two banking systems i.e. the Islamic and the conventional banking systems. In order to do so we 72 questionnaires were distributed to random people and an interview was conducted. The report concludes about why Islamic banking is the fastest growing banking system and leading the 4 | Page

banking industry in the Middle East region. The report concludes that Islamic Banks have a large number of market shares in the gulf region when compared to other parts of the world. It recommends the customers of conventional banks to give Islamic banks a chance and try to experience their service without thinking that Islamic banks are only for Muslims.

2. Introduction While the Islamic banking initially was developed as a result of the religious prohibition of the payment or receipt of interest to fulfill the needs of Muslims, Islamic banking has now gained universal acceptance. Islamic Banking is now recognized to be one of the fastest growing areas in banking and finance sectors. The first sign of an Islamic banking system apparently appeared 5 | Page

in the early 1970s. The Dubai Islamic Bank (DIB) in the United Arab Emirates was known to be the first Islamic bank followed by the establishment of the International Islamic Development Bank (IDB) in Jeddah, in Saudi Arabia. Islamic Banking is a banking system which is founded on the Principal of Islamic Law (Shariah) and directed by Islamic economics. Two of the basic principles behind Islamic banking are the sharing of profit and loss and the significant prohibition of the collection and payment of interest as the collection of interest is not permitted under the Islamic law. The purpose of this report is to clearly define the importance of Islamic banking in the GCC region and to differentiate between conventional banking and Islamic banking, since the GCC countries have a dual banking system in which Islamic banks operate side by side the conventional banks. In order to better understand the scope of Islamic Banking and to differentiate between the Islamic banking and the conventional banking systems the following research instruments were used: 1. Questionnaire 2. Interview This report is a course requirement for English 341 (Report Writing for Business), and it was requested by Dr. Yulia Vorobeva, English lecturer and submitted on the 27th of December, 2015 by Naveed Karim Baksh and Assad Rashid.

3. Literature Review Islamic banks were initially established to reshuffle the Muslim financial contracts and activities so that they were 6 | Page

complementary to the principles of Shariah (the Islamic Law) and enabled Muslims to conduct it without interest. Zaher and Hassan, (2001) stated that Islamic finance was practiced largely in the Muslim world. As a matter of fact, the expression “Islamic Financial system” began to be visible only in the mid-1980s, where it was not limited to banking only, but covered financial instruments, financial markets, and all types of financial intermediary. The main element which is helping the dramatic growth of Islamic finance in the last couple of years is the rapid spread of the Islamic religion internationally . According to the research made by Hassan and Mervyn (2007) and Chapra (1995), the main goal of Islamic banks is to attain the socio-economic goals of the Islamic Religion like reaching complete employment, a good rate of economic extension, equal distribution of wealth and income, socio-economic justification, easy mobilization of investments and savings while making certain a fair return to all the parties involved. Badreldin (2009) and Zaher and Hassan (2001) also noted that the Islamic financial system brings the most satisfaction to the societies in terms of equity and prosperity as compared to a conventional system which aims to maximize the profits or creating maximum returns on capital. Rasheed Al-Maraj, the governor of Central Bank of Bahrain said to Reuters (2008): "In Islamic banking, there is no black box that needs a genius to unwind it. Many of these conventional products that have been under stress lately are very complex and need special risk management tools. In Islamic banking you will not have this kind of thing. Some of these products would not be sharia accepted."

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Although Islamic Banking is commonly accepted in almost all the countries of GCC and a majority of Islamic Nations of Asia and Africa, it still have some disagreement on certain matters, like Yavar Moini from the Morgan Stanley & Co. said to the Reuters(2008): "Let's take a hypothetical -- central bank boards in every GCC country -- that still doesn't give you the guarantee of universal acceptability unless you have the same scholars sitting on every board, and then the sheer quantity of material that they would need to review and approve would be quite daunting. You would still need sign-offs for products -- it's not the easiest exercise to manage logistically." Statistically as per the Asian Banker’s annual report, the largest Islamic banks of the world by assets are concentrated in only few markets: Iran, Kuwait, Malaysia, Saudi Arabia and the UAE. However in three of the countries, Iran, Pakistan and Sudan, the whole banking system has been transformed into Islamic Banking, and they are considered as the pioneers of full Islamization. However in some countries the banking systems are still being dominated by conventional banking institutions that operate alongside the Islamic banks. Molyneux and Iqbal (2005) estimated that the Islamic banks in the GCC region held about 74% of the assets of Islamic Banking system in 2002. The major aim of this report is to evaluate the extent to which the GCC countries are the global leaders in Islamic banking and finance. Some countries, in particular Malaysia, have done much to encourage Islamic finance through legislation, tax deductions and indirect subsidies, all of which are viewed in the context of its affirmative action scheme to enhance the economic role of the Malaysian Muslims. The Islamic Republic of Iran also introduced a legislation to make its complete banking system shariah 8 | Page

compliant in 1983, a pattern that none of the GCC countries have sought to follow. Even the UK government has pursued to promote London as one of the centres for Islamic finance, largely because it provides as an advantage for the businesses and generates employement for the City by demonstrating to the British Muslim community the choice to use the services of Islamic banks without any restrictions. However more can be done by the GCC countries to promote the Islamic banking system and become sole leaders in Islamic banking and finance sectors.

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4. PROCEDURES A research was carried out to find the importance Islamic banking have in the Gulf region and to find the difference between the two banking systems, the Islamic and the conventional banking systems. For the purpose of this research a questionnaire was distributed to a random sample of 72 customers who are connected to the two banking systems in order to find the influence of the two banking systems on each customer. Also, it was to identify the factors that led them to choose a particular banking system and how much satisfied they were after using the banks services. An interview was conducted with one of the employee of Shariyah Review Bureau to find out about the demand of Islamic Banking in Bahrain and the Gulf region.

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5. Findings 5.1 Questionnaire findings Figure 1.A

What is your Gender?

Male

32%

Female

50; 68%

As shown in Figure above, out of the 71 respondents that answered the questionnaire 68% were males while 32% were females.

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Figure 2.A

What is your age? Under 18

7% 1% 1%

18 - 24 25 - 35 36 - 40 Above 40

90%

As demonstrated in the figure above, the respondents were from different age groups, the age group of majority i.e. 90% of the respondents were in between 18 to 24, and the age group of the second highest percentage of the respondents were from ages 25 to 35 with 7%. And we can also see that the least number of respondents were under 18 and above 40 with 1.4% respondents each. And with none of the respondents being in age group 36-40.

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Figure 3.A

What is your Profession?

1% 5% 5%

Businessman Unemployed Employee Student Other

88%

As illustrated in the above figure, a majority of the respondents were students (about 90% of them). Employees and unemployed respondents were each consisted of 4.2%. A small percentage of the respondents (i.e. 1%) were associated with professions other than the ones mentioned above. While none of the respondents were businessmen.

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Figure 4.A

What is your Educational Qualification?

Primary

3%3% 26%

Secondary Bachelor Master Other

68%

As illustrated in the above graph, we can see that the majority of the respondents were Bachelor’s degree holders (of about 68%). Around 27% of the respondents were having just the Secondary certificate and around 3% of them were either having the master’s degree or were having other qualifications. Whereas none of them having only the primary qualification. This shows that the qualification of respondents is good enough to answer the questionnaire.

Figure 5.A

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Is your Religion Islam?

5% Yes No

95%

As illustrated from the above figure, majority of the respondents i.e.94% were Muslims while the 6% of them were not.

Figure 6.A

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Do you know about Islamic Banking?

8% Yes No

92%

As wen confirm from the graph that around 92% of the respondents have actually heard about Islamic banking while around 6% answered that they have not.

Figure 7.A

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Preference of Bank Type

Islamic Banks Conventional Banks

37% 56%

Type of Bank do not matter!!

7%

As shown in the above figure regarding the type of bank they would prefer, around 56% would choose Islamic banks and 37% of them were not bothered about the type of bank they would choose. While around 7% of them would chose conventional banks.

Figure 8.A

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Knowledge about the Difference in Bank Types?

27%

Yes No

73%

As illustrated in the graph around 73% of the respondents knew

the

difference

between

the

Islamic

banks

and

conventional banks while around 27% of them did not know.

Figure 9.A

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Factor that led to choosing of Islamic Bank? Religious belief

3%

12%

7%

35%

There is no Interest in Islamic Banks Friends or Family Media other

43%

The figure above illustrates the factors that led the respondents to choose Islamic banks. The graph shows that around 59% of the respondents chose Islamic banks because there was no interest related to Islamic banks. Around 47% of the respondents chose Islamic banks due to Islamic related beliefs. While around 10% of the respondents were influenced by friends and families and another 4% of them were influenced by the media. Whereas a 6% of them were influenced by other factors which led them to select an Islamic bank.

Figure 10.A

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When did you start using an Islamic Bank? Recently

15%

One year ago Three years ago

44%

15%

More than three years ago

25%

As shown in the figures above, most of the respondents started using an Islamic bank recently which is about 46% of them. Another 26% of the respondents started using about one year ago. Whereas around 16% of them got associated with an Islamic three years ago and 12% of them before three years ago.

Figure 11.A

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What are the factors that led you to choose a conventional bank?

Reliability of the Bank Fixed interest

29%

33%

Media other

16%

22%

As illustrated from the above graph the most important factor that led the respondents to select a conventional bank was the reliability of the bank which was around 40% of them. The second most important factor that influenced them were other factor such as varieties of investment opportunities, more branch reaches and better financial counseling. Whereas the next most important factors are fixed interest and media with 26% and 19% respectively.

Figure 12.A

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Reasons for not using Islamic Banking?

15%

4% 11%

Perception that Islamic Banking is for Muslims

Lack of understanding and information

Insufficient branch network for Islamic Banks

Lack of Investment opportunity

Other

27%

44%

As shown in the above figure, the most important reason that led the respondents (about 57%) to not opt for Islamic banking is because of the lack of information understanding and information related to Islamic banks. The second most important reason that influenced about 36% them not to select Islamic banking was the lack of sufficient branch network for Islamic banks. About 19% of them thought that lack

of

investment

opportunity

was

the

reason

that

influenced them. The next most important reason that was influential to 12% of them was the perception that Islamic Banking is for Muslims. The rest 2% thought that other factors such as lack of financial counseling, lack of interest rates and higher commission and fees were the main reasons.

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Figure 13.A

Satisfaction in using Islamic Banks? Extremely satisfied

4% 5%

Slightly satisfied

29%

Its fine Slightly dissatisfied Extremely dissatisfied

44% 18%

The above graph shows us the number of current users of Islamic banks and the satisfaction they have towards the bank services. Majority of the respondents (about 44%) feel that the services provided by the Islamic banks are just fine without any exaggerations. However the around 29% of the respondents feel that the services they receive are extremely satisfactory and approximately 18% of them feel that the services are slightly satisfactory. Finally the number of respondents who felt that the services are extremely unsatisfactory are 6% and 4% of them feel they are slightly unsatisfied with the services.

Figure 14.A 23 | P a g e

 Would you recommend Islamic banking to anyone?

11% Yes No

89%

The graph above shows us the number of respondents who feel that there is a need to recommend Islamic banking to people who are less informed. Majority of them (i.e. 89%) feel that they would recommend Islamic banking to others. Whereas around 11% of them do not feel the necessity to recommend Islamic banking.

Figure 15.A

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Do you have any intention of using Islamic Banking in the future?

10%

Yes No

90%

The graph above shows that around 90% of the respondents have the intention to use Islamic banking with 10% of them do not have any intention to use it.

5.2 Interview Findings: An interview was done with Mr. Saif Shauqi who is the business developer of Shariyah Review Bureau a company whose aim is to take care of all Shari’a matters from Shari’a Boards to Certification to Shari’a Audits. 25 | P a g e

Below is what Mr. Saif Shauqi had to answer to our Questions. 1) Can you tell us briefly about the history of Islamic Banking? Islamic banking as a phenomena is relatively new. It started off in 1960s in Egypt, then spread to Pakistan and then to Malaysia in 1980s and then to the gulf after the discovery of oil. But the principles of Islamic finance are not something new, it dates back to the times of Prophet Muhammad where Riba (taking and giving interest) was made prohibited by the Islamic law then. However with the spread of western banking system and ideas in the early 20th century, the Muslim Nations got engulfed with these ideas and then came the more popular internationally accepted conventional banking system into the gulf region. The Muslims having realized the need a halal (pure way of earning) way of banking services, they started a base (platform) where they could do this which then led to the emergence of small credit communities that functioned in a halal way for the Muslims. However these did not last long but were a great foundation and later in 1980s the first Islamic bank was founded in Dubai.

2) How does the Islamic Banking Works? For example in Islamic financial system the properties ownership is being transferred from the bank to the customer that is a trade model is being followed than a pure debtor creditor model so once the bank sells you the amount even they want a profit right so what they do is they will add an additional markup. So now what is the difference from an economic perspective? How does it help the customer? Well the thing is if you want people to pay their loan in conventional banking way the interest amount gets compounded let say the interest is 2% initially but it gets increased if u don’t pay to 3% and then to 4% and as such and there can be a situation where u need to sell off your properties to repay the loan whereas in Islamic financial system if 26 | P a g e

you are not able to repay the amount to the bank, then the bank will not charge you more than the initial amount agreed on between the two, that is nothing less and nothing more because if u pay more than the agreed upon then that will be deemed as interest.

3) How the Islamic Banking is Different from Conventional Banking? In the most simplest sense Islamic banking follows Islamic commercial law and conventional banking does not follow any religious law so naturally Islamic banking are bound by a strict code of ethics in which you cannot invest in any unethical businesses like cigarette companies, pornographic companies, alcohol, arms industry and like that and also not in gambling or interest based firms which are deemed as bad for Muslims. However there are no such restrictions for the conventional banks.

4) How do you see the potential of Islamic Banking in the Gulf region? In 1960s it was just a dream and in 1980s we had the first Islamic bank and today it is a two trillion dollars industry itself so the growth of Islamic banking was huge in the first 35 years and there are many reasons for this. Firstly the oil wealth brought in the gulf had pushed forward the Islamic banking industry. However the greater potential of this system was seen when after the fall of the European economy it opened doors that there can be an alternate system for growth and Islamic banking just provided that because when many conventional banks were closing down Islamic banks were actually still making profit.

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So the potential of Islamic banks is regarded to grow since Islamic banks have not yet completely entered the Muslim communities. For example India which has a huge population of Muslims do not have an Islamic bank.

5) The reasons why people choose Islamic Banking? There are many groups of people who would be interested in doing their businesses in an Islamic financial way and there are those groups who want to have a halal way and the other people who would be interested in Islamic banking is because they have the Islamic bank’s automated teller machines just next to their houses.

6) What role do Islamic Banking play in Gulf Region? It has a very powerful impact in this region because Islamic banking has got a high push due to the oil wealth that was discovered in Middle East. Also the Muslims in the Middle East have got a platform to do their transactions in a halal (that is permissible in Islam) way. However Islamic banking have not yet completely spread in the Middle East. For e.g. Oman one of the nations of Middle East opened their first Islamic bank last year even though Dubai opened their first bank back in 1980s. There is still much room for improvement in this region and Islamic banking as being the alternative for the public is a plus for the economy of this region because Islamic banks have shown better growth than conventional banks.

7) What can you say about impact the economic crisis had on Islamic Banking during? 28 | P a g e

The fall of European economy opened doors that there can be an alternate system for growth and Islamic banking just provided that, because when many conventional banks were closing down the Islamic law were actually still making profits. In a report published by the World Bank in 2010 it said that Islamic banks were the least impacted during the recession period. However it is worth mentioning that Islamic banks are not hundred percent immune to the crisis because the value of the assets of Islamic banks are somewhat linked with their actual values so the Islamic banks will surely have some impact but not in the way that it will get closed down just as how many conventional banks closed down in the world.

8) What kind of Instruments do Islamic Banking provide? There are five most important instruments the Islamic banks provide:  In Islamic banking we have the equity model (known as Musharakha) where the bank actually have a stake in your company which is like venture capitalist.  There is Mudhabarah where the bank does the management of your money in which there is trust relation between the lender and the bank because the bank invests your money in a profitable business and then gives you the returns.  There is Tawarruq which is like a personal loan where the customer gets cash in hand.  There are two other instrument called Salam and Istisna which are used in agricultural sector and for making factories.

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6. Conclusion As seen from the research above we can conclude that the Islamic banking as whole is really influenced the Muslims and not the non-Muslims in the gulf region and it plays a major role in the gulf economies. There are many reasons why banking consumers in the gulf decided to choose Islamic Banking services. Basically, it is because Islamic Banking consumers feel that religious factor had influenced them. The responsibility of being a Muslim had played a major part 30 | P a g e

in their selection of Islamic banks, which also led them to avoid riba(Islamic term for interest) by earning a clean income and to follow the Shariah principles. Despite these many religious factor, there are some moderate Muslims and non-Muslims who are also being identified as the customers of Islamic Banking. The moderate Muslims are those Muslims that are concerned by the time value of their savings. Among the other reasons given by the moderate Muslims and non-Muslims are to avoid the uncertainty by having a fixed rate on their loans and therefore prefer the value of investing in an Islamic Banking. Another reason for a wide percentage of conventional bank users is due to them being more exposed to conventional banking at a young age. However many moderate Muslims and non-Muslims also have recently selected Islamic banking due to it being well known for profit sharing (known as Mudharabah) for which the ratios are told beforehand, which are in favor of the customers. And as for the conventional banks the rates might not be as high for the service but the rates of interest are not fixed. Another reason for the people of gulf to choose Islamic banking is because the branches of Islamic banks are available close by without much distance.

7. RECOMMENDATION

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At the end, this report recommends the customers of conventional banks to give Islamic Banks a chance as well because and think of it as a bank for all and not a bank which is directed to Muslims only. The risk of investing in an Islamic bank is much lower than that of a conventional bank because the customer is considered to be an owner once it invest in these banks. The investment in Islamic banks will surely be a new and great experience for many customers because it comes a lot to offer as returns but with less to offer as risk.

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8. REFERENCE 1. http://uk.reuters.com/article/2008/02/05/specialeventiiislamic-summit-quotes-dc-idUKL0446119020080205 2. Zaher, T.S. and Hassan, M.K., (2001). A Comparative Literature Survey of Islamic Finance and Banking. Financial Markets, Institutions and Instruments [online], 10(4) pp. 156199. 3. Hassan, M.K., Mervyn, K.L. (2007). Islamic Banking: An introduction and Overview. In: Handbook of Islamic Banking, Edward Elgar Publishing Press, UK, pp. 1-17. 4. Badreldin, A.M., (2009). Measuring the Performance of Islamic Banks by Adapting Conventional Ratios. German University of Cairo. Working paper No. 16[online]. Available from: http://mgt.guc.edu.eg/wpapers/016badreldin2009.pdf 5. Molyneux, P. and Iqbal, M., (2005). Thirty Years of Islamic Banking: History, Performance and Prospect. Islamic Economics [online], 19(1) pp. 37-39. Available from: http://islamiccenter.kaau.edu.sa/arabic/Magallah/Pdf/19_1/19 1-BReveiw_11.pdf 6. http://eprints.lse.ac.uk/55281/1/Wilson-2009.pdf

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9.APPENDIX A copy of Questionnaire 1. What is your Gender? o Male o Female 2. What is your Age? o Under 18 o 18 – 24 o 25 – 35 o 36 – 40 o Above 40 3. What is your Profession? o Student o Employee o Businessman o Unemployed o Other 4. What is your educational qualification? o Primary o Secondary o Bachelors o Masters o Other 5. Is your religion Islam? o Yes o No

6. Have you ever heard about Islamic Banking? o Yes 34 | P a g e

o No

7. Which type of banks do you prefer? o Islamic Banks o Conventional Banks o Type of Bank do not matter!!

8. Do you know the difference between Islamic banks and Conventional banks? o Yes o No 9. What are the factors that led you to choose an Islamic Bank? (Answer only if you are currently using an Islamic bank) o Religious belief o There is no Interest in Islamic Banks o Friends or Family o Media o Other

10. o o o o

When did you start using an Islamic Bank? Recently One years ago Three years ago More than three years ago

11. What are the factors that led you to choose a conventional bank?

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(Answer only if you are currently using a conventional bank) o Reliability of the Bank o Fixed interest o Media o Other 12. o o o o o

Reasons for not using Islamic Banking Perception that Islamic Banking is for Muslims Lack of understanding and information Insufficient branch network for Islamic Banks Lack of Investment opportunity Other

13. How satisfied are you with the services provided by the Islamic bank? (Answer only if you are currently using an Islamic bank) o Extremely satisfied o Slightly satisfied o Its fine o Slightly dissatisfied o Extremely dissatisfied 14. Would you recommend Islamic banking to anyone? o Yes o No

15. Do you have any intention of using Islamic Banking in the future? o Yes o No

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