Introduction In medieval times the merchants of the Islamic world played the Free Essay Example

1. Introduction In medieval times, the merchants of the Islamic world played the role of middlemen that very crucial for trade and business activities. The concept, instrument, and technique of Islamic banking along with the Islamic merchant has been present since a long time, however, it was in the 1980s that the full-fledged Islamic banking system came into existence. Previously all the mercantile activities were in the reference of “interest-free” regime. In the year 2050, the Muslim population is projected to be above 2.

6 billion, this means that every fourth person in the world would be Muslim and aspire to discover the Islamic sharia and the possible economic system associated within where it is prohibited to take interest (Riba). The most influential economic sectors are banks, they can affect the growth of the country severely. The most prominent determinant that severely effects banks is the global crisis, global crisis effects business, corporations worldwide. In this research, we are attempting to comparatively analyse the conventional banking system versus Islamic banking system in terms of their operations as well as the attempt of both types of banks to overcome the consequences of global crises (2008).

The study will identify the practices and principal of Islamic banking and its concept of credit default risk elimination. Islamic banking natures entrepreneurs by developing a mutual relationship of financial support and care and sharing of risk. The selection of investment avenue of Islamic banking is subject to the shariah law’s prohibition; hence it’s expected from Islamic bans to follow ethical code and restrictive more strictly.

The research will provide an assessment and examination of the financial performance of conventional banks and Islamic bank. 1.1 Islamic banking vs conventional banking Both the Islamic banks and the conventional banks work to deliver the financial product to the customers including deposit and lending, however, there is some aspect that differentiates these two banking systems. in conventional banking sell money at a price higher than the face value or rent out, because conventional banks consider money as a not only a store of value and a medium of exchange but also a commodity. Whereas Islamic banking considers money as only a medium of exchange and store value rather than a commodity, therefore it doesn’t gain return like conventional banking. Islamic banking generates revenue by the fees charged from the services provided and through the trading of goods, conventional banking generates profit by the interest rates that are charged on capital on time value basis. 1.2. Aims and objectives To Assess the liquidity management placed in both banking structures. To examine the performance of high street banks vs Islamic banks. To examine the affected of the financial crisis on Islamic banks and conventional banks were? To examine how banks performance of both banks differentiate in calibre?2. Literature Review Many studies have been conducted in the context of the implemented system, the structure and the comparison of operations carried out in conventional bank and Islamic banks (Abduh, and Azmi Omar, 2012.). In a study conduct by Oubdi and Elouali, that was primarily focused to evaluate the method of financing in both types of banks, it was discovered that Islamic bank operating in different countries rely less on PLS (equity-like) financing and more on mark-up (debt-like) financing except for Iran, that was found to have noteworthy PLS elements to new financing flows (Oubdi and Elouali, 2016). The study also exposed that Murabaha financing is used more frequently by a larger bank in comparison to a smaller bank (Abdul-Majid, et.al, 2010). A study, ‘Comparative advantages of Islamic banking and finance’, stated that to implement Islamic banking, comparative advantage theory and state’s sponsorship can be used (Hanif, 2014). It also highlighted the need for legislating Islamic finance laws that are required to and to impose the settlement on the parties concerned so that they contract and restructure the present financial structure (Ahmad and Saif, 2010). In the research titled Islamic Banking: A Performance Analysis,’ the author argued that the basis for Islamic banking is the interest-free transaction which is being violated by fixing profit percentages that are treated similarly like interests (Hassan, 2018). The study concluded that there should be some variable rates set by the Islamic bank so that the economic hardship that could arise from financial transactions (i.e. changing economic conditions) isn’t met by the borrower or the depositors (Johnes, et.al, 2014). 2.1 Liquid management of Islamic bank vs commercial banks The Islamic banking system is based on the principle of sharing the losses and profits, hence the mechanics at which the Islamic bank operates are on the basis inventions carried out directly in various operations in which the bank provides finance or participation (Ibrahim, and Rizvi, 2018). Because of these inventions, the Islamic banks are required to manage the commercial bank situations to the participatory banks that have the mission to promote investment (Islamic Banking Proposals, 2017). Due to this alteration in role and nature, new procedures for management are created in the banking business, particularly in liquidity management (Ariss, 2010). This creates challenges for the Islamic bank as liquidity is very important for the smooth functioning of this institution. The goal, therefore, is to manage the imbalance between the cash inflows and outflows (Al-Tamimi and Hussein, 2010). The liquidity management in Islamic banking is quite difficult in comparison to conventional banking, particularly in short term, as it is not possible for them to refinance through the means of conventional banking because of the sharia compliance (Parashar, 2010). Therefore, it’s required to establish an Islamic money market and strength through sharia compatible monetary instruments, to allow Islamic banking to manage their short-term cash flow more flexible (Walliman, 2017). A few of the Islamic finance pioneering countries (Malaysia, Bahrain, Indonesia, UAE, Sudan, etc.) have developed these Sharia instruments along with adequate structure and the essential regulatory framework to strengthen the industry of Islamic financing (Zeitun, 2012). Though, Silverman stated that there is about 40% more cash retention in an Islamic bank in comparison to conventional banks (Silverman, 2016). In 2009 a report was issued that concluded that Islamic banks are required to create substantial liquidity penalizes and buffers because of Islamic money market absence. A comparative study was conducted from 2007-2009 of 12 Islamic and conventional banks in Pakistan, the study concluded that the management of liquidity risk is better in the conventional bank to compare to Islamic banks (Ahmad and Saif, 2010).2.2 Financial Performance of Islamic Banking Vs Commercial Banking Previously studies have been carried out to investigate the Islamic bank performance either during a specific period or to compare its performance with a conventional bank. In 2004 a comparative study was carried to examine the financial performance of interest-based conventional banks and interest-free Islamic banks in Bahrain, the comparative analysis was made to evaluate the bank’s risk and credit risk, liquidity, and profitability during the post-Gulf war period (1992-2001) (Abduh, and Azmi Omar, 2012). The results indicated that there were no noteworthy differences in terms of profitability and liquidity between the Islamic banks and conventional banks, though the credit performance displayed a significant difference. The Islamic banking principles are based on carrying out transactions in the absence of interest (riba), whereas the non-Islamic banking system is a debtor-creditor relationship based, between the bank on one hand and the borrower on the other and between the depositor on one hand and the bank on the other (Hanif, 2014). According to research conducted by Johnes, to estimate the performance of banks, the results of which concluded that Islamic banks are doing far better than non-Islamic banks (Johnes, et.al, 2014). The research also found that the risk involves in the Islamic bank is less than that of conventional banks. However, these results are different than the findings of, he states that in the area of profit maximization, operation efficient and investor management the Islamic banks are performing poorly (Ibrahim, and Rizvi, 2018). The research by Al-Tamimi and Hussein indicates that there isn’t any significant difference between the financial performance of both types of banks (Al-Tamimi and Hussein, 2010). Whereas, Parashar found that conventional banks have a higher rate of profitability in comparison to an Islamic bank, though the liquidity of Islamic bank is much higher than the conventional banks (Parashar, 2010). These findings were supported by the result of a study conducted by who also states that Islamic bank is more liquid than a non-Islamic bank. Though, Hassan argued that due to the limited scope of investment because the investment can be made in only those projects that are approved by the Sharia’s Broad, therefore in Islamic bank the profitability performance is less than the conventional banks (Hassan, 2018). The Islamic banks, However, have more cash on hand due to limited investment, that makes them more liquid in assets. The credit risk in the non-Islamic bank is higher than the Islamic banks, due to the fact that Islamic banks are based on the principle of profit and loss sharing, whereas non-Islamic are interests based and when the banks face the loss of assets and loans, it is not shared and met by the risk in credit (Ibrahim, and Rizvi, 2018). Abdul-Majid stated that Islamic banks are less exposed to credit risk in comparison to conventional banks (Abdul-Majid, et.al, 2010).3. Research Methodology INCREASE METHODOLOGY3.1 Research Design The research is designed in a way that will support the comparison of the financial performance of conventional banks with Islamic banks and the effect of the financial crisis of 2008 on both banks. The research will be based on the case study of a non-interest based Islamic bank the Al Rajhi bank and an interest-based conventional bank Barclay, to compare the banking system of both banks.3.2 Data Collection The primary data will be gathered by conducted interviews from the employees of the banks and in collaboration with the managers and hr-department of the banks. The interviews would be carried out on the phone rather than face to face, to minimize the time and cost consumed, also direct interviews may lead to bias the secondary data will be gathered from case studies, research papers, reliable material available online, magazine, articles and the bank’s financial reports, income statement and balance sheets.3.3 Analytical techniques The following research techniques are used in this study. A combination of qualitative and quantitative methods is used. To compare the performance of Islamic and conventional banks comparative analysis techniques are used. In the research, an inductive and deductive approach will be used in this research with the interpretivism philosophy as this field of research needs expertise primary data.3.3 Period of study 3.4 Research limitations Because of the small size used in this research (i.e. two banks only one conventional and one Islamic), there is some limitation present in the research. This raises the question of research’s validity, had we considered including more banks in the research the validity of the research could have possibly increased. However, the reliability of the research is evident, as it investigates two giant and well-reputed banks ( Isalmic and conventional banking, 2018). Another challenging factor in the research is the study of the 2008 financial crisis, it would have been easier to differentiate between the result and overall view of the banks easily if I had not chosen to study the impact of the financial crisis of 2008.4.Ethical considerations Prior to planning the research, I will make sure to abide by the following ethical considerations. 1. The participants of research will not be subjected to harm in any ways whatsoever (for instance deception or the unclarity impact of outcomes) (Bourkhis, et.al, 2013).2. It would be a priority to respect the research participants dignity. 3. Prior to the study, full consent from the participants will be obtained. 4. It would be ensured that the research participants privacy is protected. 5. It would be ensured that the confidentiality of the research data is of adequate level (Zeitun, 2012). 6. The anonymity of research participants (individual and organization) would be ensured. 7. The research would avoid any exaggerated claims about the research’s aims and objectives. 8. Acknowledgment would be given to any forms, possible conflict of interest and sources of funding.9. The communication related to research would be transparent and honest.10. The research would avoid any kind of misleading information and biased depiction of primary data outcomes (Hanif, 2014).11. It would be ensured that the participation of respondents in research is voluntarily and they will have the full rights of withdrawal at any stage from the study. 12. The respondents would participate on an informed consent basis (Al-Tamimi and Hussein, 2010). Inform consent principals require the researcher to provide sufficient information and assurance regarding taking part, to allow the respondents fully comprehend the participation implications and to reach a decision that is fully informed, considered and freely given.13. During the formulation of the Questionnaire/Interview/Focus group questions, it would be ensured that would any use of discriminatory, offensive, or another unacceptable language is avoided.14. Work of various other authors when used in any part of the dissertation would be acknowledged, the Harvard/APA/Vancouver referencing system would be used as directed by the Dissertation Handbook.15. Throughout the research, the highest level of objectivity would be maintained in analyses and discussion.16. The Data Protection Act (1998) would be adherence.