Comparative Analysis between Islamic Banks in the UK and Islamic Banks in Saudi Arabia

Comparative Analysis between Islamic Banks in the UK and Islamic Banks in Saudi Arabia

 

1.0 Title

The working title of the research is initially drafted as: Comparative Analysis between Islamic Banks in the UK and Islamic Banks in Saudi Arabia. The paper presents a proposal to research and explore the differences of Islamic banks operating in the UK and Saudi Arabia. Basically, the Islamic finance system is based on Islamic finance system, Sharia (Islamic law), mandating risk- and profit-sharing, prohibiting interests payments and emphasizing ethical investments for the greater good of the society. In this proposal, the concept and principles of Islamic banking will be briefly discussed as well as how the researcher will go about the study.   

2.0 Background of the Study

The Islamic financial system has a set of rules and laws as its basic framework, governing economic, social, political, and cultural aspects of Islamic communities. Such principles could be summarized as prohibition of interest, risk sharing, money as potential capital, prohibition of speculative behavior, sanctity of contracts and Sharia-approved activities. Initially, the central tenet of the system is riba which literally means ‘an excess’ and interpreted as ‘any unjustifiable increase of capital whether in loans or sales.’ Iqbal (1997) noted that “any positive, fixed, predetermined rate tied to the maturity and the amount of principal is considered riba and is prohibited. The general consensus among Islamic scholars is that riba covers not only usury but also the charging of "interest" as widely practiced.” Since interest is prohibited, suppliers of fund become investors and not creditors, thus sharing business risk in return for shares of the profits. Money becomes actual capital only when it joins hands with other resources to undertake a productive activity; Islam recognizes the time value of money. Moreover, hoarding and transactions that features extreme uncertainties, gambling, and risks are prohibited. Islam upholds contractual obligations and the disclosure of information as a sacred duty and that business activities that do not violate the rules of Sharia qualify for investment.

Iqbal (1997) also outlines the Islamic financial instruments: murabaha, ijara, mudaraba, mushakara and bay' mu'ajjal and bay'salam. The first one is trade with mark-up or cost-plus sale, the most widely used instrument for short-term financing. Leasing, or ijara, designed for financing vehicles, machinery, equipment, and aircraft. Profit sharing agreement or mudaraba is identical to an investment fund in which managers handle a pool of funds with maturity structure ranging from short to medium term and is more suitable for trade activities. Musharaka is classical joint venture where both entrepreneur and investor contribute to the capital of the operation in varying degrees and agree to share the returns. Deferred payment sale and deferred delivery sale are contracts used for conducting credit sales.

In Saudi Arabia, the size of the Islamic finance market and the rate at which it is growing is evident. In fact, of the eleven Saudi banks, three reported to be conducting their operations in Shari΄a-compliant manner. These banks are Al-Rajhi, Al-Jazira and Al-Bilad wherein their loans and advances (or simply investments) are Shari΄a-compliant. Most Saudi banks also said that different types of Shari΄a-compliant facilities comprise their portfolios. For instance, most of Bank Al-Bidad’s facilities are extended as Murabaha instruments while Al-Rajhi's portfolio comprises mainly installment sales and Mutajara. Also, most of the conventional banks make use of instruments in their Shari΄a-compliant portfolios. Murabaha is the most commonly used instrument but there are also conventional banks the utilise Istisna΄a.  Sukuk is not used at all since it has an underlying structure that depends on the type of financing that is used (Cunningham, 2007).

In the UK, on the other hand, Islamic financial products are provided in a number of High Street banks. The very first wholly Shari’a-compliant retail bank in the West is in UK known as the Islamic Bank of Britain. Principal Islamic banking products include commodity murabaha, ijara and murabaha. Islamic banking is recognized as an evidence of the diversity of UK’s financial landscape (FAS, 2009).

3.0 Statement of the Problem

Islamic and traditional banks apply different rules, and the operation of Islamic banks will also greatly depending on which market it resides. I should take note inhere that the UK is a Christian country in general and that Saudi Arabia is Islam. Whether such difference brought about variations in practices and products is not yet known. The following questions will be given answer to:

1)    Under what circumstances does the integration of Islamic banking practices proved to be beneficial for the UK and Saudi Arabian banking systems?

2)    To what extent does the Islamic financial system affects the traditional banking in UK and Saudi Arabia?

3)    Was the Islamic financial system perceived to be the alternative banking system in UK and in Saudi Arabia?

4.0 Objectives of the Study

• Analyse the position that Islamic banking system occupies in UK and Saudi Arabian banking systems
• Explore the implications of the existence of Islamic banking products and practices in both UK and Saudi Arabian banking systems

5.0 Research Plan

The research will be descriptive in nature as it intends to present facts concerning the nature and status of a situation, as it exists at the time of the study and to describe present conditions, events or systems based on the impressions or reactions of the respondents of the research (Creswell, 1994). The descriptive research also concerns the relationships and practices that exist, beliefs and processes that are ongoing, effects that are being felt, or trends that are developing (Best, 1970).

The research will utilise both primary and secondary research. In primary research, the study will survey banks offering Islamic bank products and doing Islamic banking practices. A semi-structured interview questionnaire will be developed and it will be used as the survey tool for the study. It is planned that the questionnaire will have open-ended, probing, hypothetical and reflective questions.

A secondary research will also be conducted in the study. Sources in secondary research will include previous research reports, newspaper, magazine and journal content. Existing findings on journals and existing knowledge on books will be used as secondary research. The interpretation will be conducted which can account as qualitative in nature.

The research will be presented in written form with the addition of data charts which will present the research results. Pie charts and network charts will be needed to illustrate some of the analyzed data. This cannot be confirmed, however, until the research data have been analyzed.

6.0 Reference

Best, J W 1970, Research in Education, 2^nd ed., Prentice Hall, Inc., Englewood Cliffs, New Jersey.

Creswell, J W 1994, Research design: Qualitative and quantitative approaches, Sage, Thousand Oaks, California.

Cunningham, A 2007, ‘How Big is “Islamic Banking?’ Middle East Economic Survey, vol. 41.

Iqbal, A 1997, Islamic Financial Systems, World Bank Publications.

Islamic Banking in the UK, Financial Services Authority (FAS), retrieved on 21 January 2010, from http://www.fsa.gov.uk/pages/About/Media/notes/bn016.shtml.

7.0 Timeframe

TASK

Weeks

1st

2nd

3rd

4th

5th

6th

7th

8th

9th

10th

11th

12th

Read literature

Finalize objectives

Draft literature review

Devise research approach

Review secondary data

Organize survey

Develop survey questions

Conduct survey

Analyze secondary and primary data

Evaluate data

Draft findings chapter

Complete remaining chapters

Submit to tutor and await feedback

Revise draft and format for submission

Print, bind and submit