A Comparison between Islamic and Non-Islamic Banks and Companies in Terms - Research Paper Example

A Comparison between Islamic and Non-Islamic Banks and Companies in Terms Introduction For the past two decades, the Gulf Cooperation Council has been seen as a region under rapid economic growth, demographic change and also social changes. The world attention has really focused on Gulf Cooperation Council economies for the last decade, not only as exporters of petroleum oil and gas, but also as an investment destinations with major infrastructure projects.union among member states. On this context, in order carter for customers’ needs to banking of their currency ,banking system has been seen as major business to this region. Two types of banks therefore exists in the region, that is the Islamic banks and the conventional banks. The key difference of the two banks is that, The Islamic Banking is based on Sharia foundation. And therefore, all its transaction, business approach, investment focus, product feature, responsibility and many more are derived from the Shariah law, this lead to the significant difference in many part of its operations with as that of the conventional banks.Furthermore,the foundation of Islamic bank is based on the Islamic faith and tends to stay just within the within the limits of this Islamic Laws or the Shariah to be specific in all of its operations and decisions. The Arabic word Shariah has means; the way to the source of life Comparison of the conventional banks Being the first National bank in Qatar, The Qatar national bank was the first bank to launch a financial services subsidiary. The bank then launched the launch of QNB Financial Services in the year 2011. Through this project, the bank has offered a range of financial services to both the domestic and international institutional investors. As it continues to grow, the QNB is determined to place itself as a leading financial institution that is able to use its assets in making positive difference throughout its market ,the bank therefore seems to be the pace setter for the other Banks like the Commercial Bank of Qatar GCC Economy and Qatar Economy The financial market of Qatar is considered small and hence relies on its regional dimension. The GCC investments contributes on the Qatar Stock Exchange estimated at 62.5 billion ($17 billion) Qatari riyal .Generally the Qatar economy depends on its neighbors when it comes to trade, more specifically Saudi Arabia, in consideration to export and import and also marketing of Qatar products. The Qatar economy really depends on its Gas. The Qatar gas is the worlds largest liquefied natural gas (LNG) company. It produces annually and supplies the globe with over 42 million metric tons of LNG from across its four ventures, thatis the Qatar gas 1, 2, 3, and Qatar gas 4. According to Statistics Authority of Qatar, the oil and gas economic sector was responsible for 57.8% of Qatars Gross Domestic Product in 2012. This huge Growth was driven by the gas sector, which contributes of up to 42% of total GDP in 2012, According to statistics, The GCC is an oil-based region taking the largest proven crude oil reserves worldwide (486.8 billion barrels), this represents about 35.7% of the world’s total oil reserves. The GCC tops as the largest producer and as well exporter of petroleum .the region also plays p a leading role in the world in general and OPEC to be specific. Financial sector in Qatar The banking sector of Qatari managed to escape the direct impact caused by the global subprime fallout. A summary of this came out clearly on data that Qatar financial sector was the best performing of the Gulf Cooperation Council markets during the last quarter of 2008 and that majority its banks posted substantial profits for 2008. In spite of this, the sector also faces issues of liquidity, declining customer confidence on them, not forgetting forced reluctance of the bank to lend. trying to strengthen the banks’ financial positions, The main Financial body of Qatar, that is the Qatar Investment Authority (QIA) announced that it was willing to take a ten to twenty percent-stake in any interested local listed banks as a way of capital injection in early 2009.Due to some reasons , this percentage hike though was later reduced to five percent stakes and an additional five percent at the end of 2009.The Qatari government also announced theplan to buy the investment portfolio of the banks hoping that this would encourage them to continue lending in order to expand the economy. The Qatar Central Bank’s (QCB’s) also compounded the lending restrictions. With the high level of integration between theeconomy of Qatar and the Gulf region, as well as the worldwide, there was an inevitable slowdown in business and banking activity. With all this in consideration, Qatar’s banking sector has been having a good growth and has relatively fared well. Some consideration are such as the strife experienced . Islamic finance The Islamic banks, such as the Qatar International Islamic Bank (QIIB) , Qatar Islamic Bank (QIB), and newcomer Al Masraf Al Rayyan, conventional banks have entered the sharia-compliant sector and are considering viewing an Islamic subsidiary as a virtual necessity as an order to maintain market standing. The Islamic banks are currently taking the lion’s share of sharia-compliant business;they are doing this though the conventional banks have outdone them to take a greater share of market activity. In the first three quarters of 2008 both Islamic banks and Islamic subsidiaries did remarkablejob and this made them realize an overall increase in financing activity by 70.6% compared to the same period in the year 2007.unfavourable market conditions have contributed to a marked slowdown of Islamic bond. Overall, setbacks to further growth of the banks though remains, these includefactors like lack of qualified staff to meet the growing demand for sharia-compliant banking services. To enable the Islamic banks to compete with the conventional banking sector and expand its customer base, Islamic banks will have to invest in more suitable human resources than the conventional banks. Islamic Banking versus Conventional Banking in GCC Countries Since GCC countries own several sources of crude oil, they tend to be having accumulated huge amount of foreign currencies. These countries have been known as major crude oil exporters and wealthy countries worldwide. Due to this factor, Islamic banking seems an important feature of the financial sectors in these countries. Shariahprinciples which prohibit interest payment is a sole law put in place to guide Islamic banking .these banks use profit-and-loss sharing (PLS) strategy which usually do not guarantee a pre-determined profit to all depositors, these banks too offer some fee-based services. Contrary to this, conventional banks, that is both the commercial and investment banks tend to earn profits through the implementation of interest on deposits of which they offer a small interest rate, and also loans to which they charge a higher interest rate. The Dubai Islamic Bank being the first Islamic bank which came in existence at around 1975 had only at that time offered the most fundamental contracts like safekeeping accounts, sale and PLS contracts. Currently, a lot of Islamic banks offer credit cards and allow their clients to have overdraft facility with account the fact that this was considered completely unlawful a some few past years. Moreover, Islamic banks have struggled and have been investing on significant resources to help improve their services .these include Internetimplementation, mobile phone bankingand telephone banking. Interestingly, Islamic banks have gone a step further In some advanced countries like the UAE throughintroduction of special privileges for especially women clients following conventional practices in place.(Dubai Islamic Bank website). Furthermore, the traditional values of Islamic finance have led to an increased appeal to Western investors who had experienced disappointment with the banking practices of conventional banks during the start of the global financial crisis. Hence Islamic banks are therefore not only a feature of traditional Muslim regions. Currently, there are a number of Islamic financial institutions spread across over seventy countries of the world with their services being accepted and more appealing in these countries. This has led to increased globalization associated with growing attraction of Islamic finance worldwide. Lot of Islamic banks efforts to open up their services in several nations has led to direct competition between them and the conventional banks. In respect to the growth, efficiency and competitive environment of the financial sector are important for steady economic integration and development of GCC countries, it is also of importance to assess and compare the efficiency of Islamic banking and conventional banking in all the six GCC member states in the gulf region. Islamic and non-Islamic Insurance companies In regard to the parties to the contract and the ownership of premiums, in Conventional Insurance, the Insurance Contract is usually a contract between the Insured and The Insurance Company as the Insurer on its own behalf and the Premiums which is paid by the Insured belong to the Company, which in turn has the authority to use the money in whatever way it desires. On the other hand, in Islamic insurance, the two parties bound to the contract are the Insured and The Insurance Company in its capacity as a representative of the Insured. The Insurance company in this type of Insurance makes contracts with the Insured’s and has the obligation to manage Insurance operations and Insurance money in The Cooperative Insurance Fund in a legitimate manner through the use the basis of an agency for fixed fees.  With respect to their goal and aim ,In Conventional Insurance, The Main Goal of The Insurance Company is the achievement of a maximized profit. a secondary aim here is to achieve security and this come in consequence to achieving profit. Contrary to this, in Islamic Insurance Main Goal is to achieve security bythe means of cooperation among the parties Insured in order to restore the results of risks which may befall on the donation basis . They got the motive to minimize or remove the damage which befalls to the insured when the insured disaster occurs. Therefore, the Insured who suffers any loss gets a contribution from the rest of the Insured as compensation. The profit will come in consequence to security. Considering the nature of the contract, in Conventional Insurance contracts are basicallycompensation contracts, while for Islamic Insurance, contracts are seen as a donation contracts. ConventionalInsurance main content is the usuryand ignorance, while Islamic Insurance is basically the avoidance of them. With time, Ignorance and usury will vanish b since Islamicinsurance contracts are donation contracts. The growth of Islamic banks compared to non-Islamic banks The Islamic banking existed in the start of the 1970s. it is evident that Early development was slow and lacked steady growth until in 1973 when the oil boom existed. A number of Islamic countries, more in the Persian Gulf region like Bahrain, Saudi Arabia, Kuwait and many more discovered a large amount of rich oil wells in their country lands. The oil boom in 1973 created a large segment of wealthy citizens within each of the named country, with excess savings existing waiting to be invested into different ventures. For the few Islamic banks that had opened up in the 1970s in both the Gulf region and in the Middle East reportedsupernormal high profits, but still they were not able to meet the high demand from the then existing Muslim customers. Conservatively, Islamic banking has been in growth since the 1970s. At first,the banks were concentrated in two markets, that isMalaysia in South East Asia and Bahrain in the Middle East (Imam and Kpodar 6). Thetwo countries named formed the major Islamic banking hubs of the world and have retained their image up to date. These two countries have too managed to retain big Islamic investments coming in from all over the world. For the past decade, it is evident that Islamic banking started growing more rapidly with double-digit rates; with a 35%average estimated increase per . Islamic banks worldwide have expanded in size of assets and locations. This banking grew from a niche market with the main focus on Muslims in the Middle East into a global market targeting Muslim minorities in other countries and also non-Muslim customers from all over the world. Generally, the Islamic banking sector has been expanding much more rapidly compared to the conventional-banking sector, this has been the case due to the large number of Muslims worldwide switching from conventional banks to Islamic banks. More of Interestis that a number of non-Muslim customers started switching to Islamic banks for various petty reasons like ethicalreasons. Though currently a local Islamic bank in Beirut has got more than almost thirty percent of its customers being Christians. The growth of Islamic banking over the past years was attributed by a number of factors highlighted especially in the study in an International Monetary Fund (IMF) Working Paper that was titled Islamic Banking: How Has it Diffused?This studyreally talked critically on the effect of different factors and events thatgeared up the growth of Islamic banks over the past three decades. The highlighted factors in this paper included; interest rates, income per capita, size of Islamic population, economic integration with the Middle East, and financial system development. with the Middle East Economic integration is also a major factor that induced the growth of Islamic banking worldwide. Several Western companies had at one time deal with Islamic banks when they were trading with their Muslim trading partners who wouldn’t under several circumstances deal with conventional banks. infrastructuredevelopment in certain countries is also an important factor for the growth of Islamic banking. Islamic banking is expected to continue growing at the same pace over the next decade. The growth Islamic and non-Islamic Insurance companies The Islamic insurance, also referred to as Takaful, is estimated to be currently representing a very small portion of the global insurance markets, it is therefore of no doubt thatseveralstakeholders in both the insurance and reinsurance industry know very little of it. Despite of this, there are a number of significant opportunities for growth in Takaful products as states with majority of Islamic populations are continuing to expand their existence in the global economy. Worldwide, Europe and North America leads in Islamic populations, and several members of these are in better state of achieving economic success. It was for a long time believed by Islamic scholars that traditional insurance was immoral since ‘Gharar’, an Arabic term to mean‘uncertainty’, was inherent in insurance commodities and the devout Muslims were highly prohibited from purchasing such insurance. This was due to the scholars’ concern that insurance companies took advantage of policyholder and making profits from such uncertainty. All in all,The first Islamic insurance company, the Muslims formed the this company; the Insurance Company of Sudan, got formed in 1979 in Sudan, from then, it too quite some time until 1985 that Takaful was sprouted as an acceptable alternate form of insurance by the Islamic Fiqh Academy. Takaful has its foundation inSharia’s, code of Islamic religious law based on the Quran. Normally the Firms offering Takaful insurance have got a number of common features with mutual or cooperative insurance companies, where policyholders have a stake in surplus. Just as the conventional insurance company, the success of a Takaful operation is too tied directly to the investments made by the Takaful operator, since it is inevitable that the company will incur losses, and more likely profitable investments will be crucial for the vitality of the fund. Contrary to this, Takaful operators are not allowed to invest in any securities that is interest yielding and as well as investing in any unethical or immoral business, usually ventures where alcohol or gambling are involved. A Comparison between Islamic and Non-Islamic banks in different dimensions A number of economic concepts and techniques have been applied in early Islamic banking, this includes concepts like bills of exchange, cheque, promissory notes, trusts,transactional accounts, loaning, ledgersand many more In Conventional Financing, lenders lend to borrowers to make a profit from the interest charged on the amount taken as the principal a. Normally For property loans, most of the borrowers pay an interest on the outstanding principal amount. Payment isusually made over a set tenure by use of installments. The loan contract for Conventional Financing is known as a Loan Facility Agreement. Looking at the Islamic Financing, interest-based transactions (riba) tends to be avoided, and instead ,the concept of buying something on the behalf of the borrowers behalf, and in turn getting to sell it back to the borrower at profit tis introduced. a profit rate is defined in the contract instead of interest,. Like Conventional Financing, profit rates can be either fixed, or based on a floating rate For Islamic banks, interest-bearing deposits are not permitted by the rules and principles of Shari’ah, the banks typically raise deposits in the form of profit-sharing investment accounts. These accounts are unlike the case in conventional deposits which is not merely by virtue of the sharing the profit nature of the returns they offer, but also due to the fact that the contact between the depositors and the bank is normally not a debt contract . The depositors are required to accept negative returns or losses in this kind of bank. The conventional banks characteristic has led to serious regulatory problems in jurisdictions where the bank deposits by requirement according to legal definition to be ‘capital certain. To add on this, the fact that the profit-sharing investment account holders forms part of equity investor without the governance rights of either the creditors or the shareholders has raised a major problem of supervision Generally, non-Islamic banks have changing interests which keeps on fluctuating ( sometimes increases sometimes decreases). This is not the case in Islamic bank. The latter doesn’t have an interest but it seems to take a constant charge in banks. For example ,one should pay a price not an interest from your salary but the constant charge is decreased. Let’s say you have a bank that costs maybe 30 dollars a month it will take from your account 30 dollars. It will never change. It would therefore be advisable for my case here to invest and deal with the Islamic banks sue to their perceived benefits as shown I this abstract Calculated return on assets for both Islamic and conventional banks constant Islamic conventional coefficient t-static Co-efficient t-static -01.153 -1.27 8.36 0.77 LI 0.312 1.02 -0.165 -0.93 EQTA 0.954 1.87 0.079 3.18 LONTA 0.0916 1.46 2.888 2.15 NIETA -2.027 -0.36 -1.202 -1.54 CSTETA 53.9788 16.1 2.80 -2.36 References CIA World Fact Book - Qatars Economy http://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Qatar-POVERTY-AND-WEALTH.html "Doing Business in Qatar 2013".World Bank.Retrieved 2012-10-21. "Export Partners of Qatar". CIA World Factbook. 2012. Retrieved 2013-07-22. "Import Partners of Qatar".CIA World Fact book. 2012. Retrieved 2013-07-22. "Sovereigns rating list". Standard & Poors.Retrieved 26 May 2011. Rogers, Simon; Sedghi, Ami (15 April 2011). "How Fitch, Moodys and S&P rate each countrys credit rating". The Guardian.Retrieved 28 May 2011. Crowley, Joseph, 2008, “Credit growth in the Middle East, North Africa, and Central Asia Region,” IMF Working Paper WP/08/184, (Washington: International Monetary Fund). Grigorian, D., and V. Manole, 2005, “A Cross-Country Nonparametric Analysis of Bahrain’s Banking System”, IMF Working Paper 05/117, (Washington: International Monetary Fund). Delgado, Fernando, and A. Mansur, 2008, Stock market Developments in the Countries of the Gulf Cooperation Council, Finance and Capital Markets Series, (Washington: International Monetary Fund). International Monetary Fund). Read More