The Structural Reform of the International Financial Systems through the Development of Islamic Finance - Research Proposal Example

THE STRUCTURAL REFORM OF THE INTERNATIONAL FINANCIAL SYSTEMS THROUGH THE DEVELOPMENT OF ISLAMIC FINANCE, CASE STUDY: QATAR ISLAMIC FINANCIAL SYSTEMS The Structural Reform of the International Financial Systems through the Development of Islamic Finance. Case-study; Qatar Islamic Financial Systems Mrs. Mona Abdellatif Omer Hassan MPHIL/PhD in International Relations May 2010 Research Title: THE STRUCTURAL REFORM OF THE INTERNATIONAL FINANCIAL SYSTEMS THROUGH THE DEVELOPMENT OF ISLAMIC FINANCE, CASE STUDY: QATAR ISLAMIC FINANCIAL SYSTEMS General Research Topic and its Relativity to International Relations This topic originally stems from the assumption that communication channels are established between International Financial Decision-Makers and Islamic Religion Scholars, in order to convince both parties about the benefits their coalition would bring to the global economy. This sensitive topic is mainly perceived as a religious order. In fact it can only be communicated on a global basis through high levels of diplomacy and flexibility, eliminating all misperceptions of its benefits to the whole of man-kind. This diplomacy would create a global dialogue and acceptance of the ethics and morality of Islamic Finance as a global financial guideline, bearing in mind the hegemony and political economy that challenges the process. It can only be implemented through identifying communication channels, advocacy strategies and sustainable networking techniques that would facilitate the revolution and birth of a new global financial order that no longer targets a specific faith or group. Abstract This research proposal is based on a genuine attempt of the researcher to pursue a study that would open channels of communication between global financial decision makers and Islamic Religion Scholars, in order to develop a global financial system that would bring benefit to the global economy. The study wishes to highlight on the moral ethical benefits and the robust long-term sustainable structure of Islamic Finance, its’ developmental role and how it can be developed. Research Question: How would the International Community with the assistance of the Islamic scholars develop an Islamic Financial system that would benefit the global economy and not just a specific religious group? Introduction: The Islamic model of Financing has been a major theme of discussion as an alternate to the current global financial system, which just saw its gigantic collapse in the past few years. With the financial models on which the global economy is working today, more questions are being raised on their credibility. A study by M. U. Chopra, 2009, argues that the recent global financial crisis was due to the lack of sustainable financial systems. It was a vicious cycle that started from excessive lending, leading to high leverage and ultimately ending on the crisis; this model fed on itself and brought down big brands through a steep decline in asset prices and ultimately the economic meltdown. The model is likely to continue if the fundamentals of the system are not altered. ‘As long as there continues to be problems in the regulatory system in the world of finance, it is possible that we will experience another financial crisis’; interpreted Mr. Valdis Zalter President of Latvia during his attendance at the World Economic Forum in Qatar/Doha - May/2010. The economic professions have been un-aware of the long-build up to the current world crisis and have significantly under-estimated its’ dimensions once it has started to unfold, (David Colander 2009) continued that this state of affairs makes clear the need for major reorientation of focus in research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models. The ethical code and the regulations are the foundational structures of Islamic finance and therefore this would call for the reorientation of research economists’ professions to under-take research that develops Islamic finance. The major problem with Islamic Finance is that it is being perceived as a financial system designed for people of specific faith and religion. This has limited the scope of Islamic finance and its development to researchers believing in Islamic faith and therefore not much has been done in this area. The global financial system has proven to be no more than a myth; it is established on an illusion based accelerated wealth building. This need for alteration in the core financial system, change and then uplift has brought into focus the Islamic Financing model in the spotlight, and rightly so. Islamic Financing has strong foundations to support its structure; based on fair-trade with a natural monitoring system which is the need for today’s global economy. According to Rosman, 2008, there are fine positive linkages between risk management and Islamic banks. Andrew Walter in his book on Governing Finance spoke about hegemony and the International monetary order. This brought up questions and political debates; on how and where should diplomacy operate in order to convince global financial decision-makers that Islamic finance has the ethical code, regulatory foundation and the long-run sustainability strategy, thus it needs to be developed in order to be embraced in a global context. Statement of Problem: “The lack of global acceptance and adoption of Islamic Financial systems due to the assumption of its’ low profitability and suitability for people of specific faith” The misguided assumption of low profitability is the reason why Islamic Banking is not very popular amongst the masses. Profit seeking economies who aren’t guided properly regarding the fundamentals of the Islamic system believe it to be less risky and eventually low on profitability. The Quran in verses 2:278, 279 says, “O ye who believe! Fear God, and give up what remains of your demand for usury, if ye are indeed believers. If ye do it not, Take notice of war from God and His Apostle: But if ye turn back, ye shall have your capital sums: Deal not unjustly, and ye shall not be dealt with unjustly”. On another occasion, The Quran in verse 2:275 says, “God has permitted for you trade and prohibited interest (Riba)”. The researcher interprets the economic crisis as the war from God. Money should be used in such a productive way that it generates greater benefits for the society as a whole. The increase in legitimate trade will increase employment for the labor market, balance out the community discrepancies, generate fairer trade; most important of all it will help create a sustainable economic model that will benefit the community in the longer term (Zamir, 2010). In a study that was conducted by (M. Ghazali, 2008), it was revealed that the determinants of Islamic banks profitability bear resemblance to those used in the conventional banks. The main determinants of profits in Islamic banks are capital strength and efficiency factors; the research study also found out that there is a positive relationship between the determinants of profits and the macro-economic variable such as GDP Growth and Inflation. Research Objectives: To establish grounds for communicating the benefits of Islamic Finance, its’ development and adoption a global basis. To assist in re-orienting the efforts of economic researchers towards the development of Islamic Financial systems as a new global financial order for the benefit of all. To identify advocacy strategies supporting the new financial global order and to specify who the decision maker groups are and how to communicate to them. Decision-maker groups e.g. World Bank, IMF and Islamic Religion Scholars etc. The research aims to categorize and delineate the robust long-term Advantages of Islamic Banking and Financial Systems, in terms of profitability, labor market development, employment generation and creating tangible development programs in the community which will help to reduce poverty, narrowing the gap between the population strata. The research will also aim to highlight the ways Islamic Banking will be able to generate greater sustainable profits in comparison to conventional banking systems. Furthermore, the research aims to provide concrete evidence regarding the facilitation of the Islamic Financial System for the growth and stability of the economy with the help of the case study. Literature Review: Islamic Banking and Financial Systems: The basic theme for researches that have been conducted was focusing on the determinants of profitability in the Islamic Banking systems. R. Rosman, 2008, has brought forward the promising proposition of a positive linkage between risk management and the profitability of the Islamic Financial systems. The researches indicate that a proper risk management framework that is guiding the Islamic model has been instrumental in providing better profitability in certain cases as well. According to the study conducted by M. Bashir and K. Hassan in 2000, in a controlled macro-economic environment, financial system and taxation, the results have indicated that higher capital and loan-to-asset ratio lead to higher profitability. In a controlled environment, with everything remaining equal, regression analysis shows the implicit and explicit taxes affect the bank performance measures negatively while favorable macroeconomic conditions have a positive impact on performance measures. Furthermore, S. Haroon in 2004 conducted a study on the empirical evidence of the profitability of Islamic Banking and Finance, finding out that all three sources of funds for Islamic Banking and Finance bear positive relationship with bottom line profitability. The more deposits are placed in a bank, the more income is received; making the size of the capital of the Islamic Bank as a major determinant of its profitability. The findings of M Ghazali’s (2008) research tell us that many of the tools used in the conventional banking systems bear resemblance to those of the Islamic banking systems. Capital strength and efficiency. To further back the positive linkage between the profitability and Islamic Banking, P. Imam and Kpodar in 2010, have pointed out that Islamic Banks are found to complement, rather than supplement, the conventional banking systems. The abundant research linking profitability to the Islamic Banking systems leaves a gap of research regarding the long term benefits of the Islamic Financial system as a mean to sustainability and stability of profits, creating greater opportunities for social development and tangible productivity benefitting the society and the global economy. There is also a major gap of in regards to communicating and adopting this financial guideline on a global basis. This research aims to prove that Islamic banking not only provides higher profits but also prove to be beneficial for the society as every organization has a long term perspective and role in community development in order to ensure its’ existence. Qatar Banking and Financial Systems: Qatar, a country ranked the 2nd highest income per capita in the world. It is expecting GDP growth of 12.1% by the end of 2010 creating an economic surplus of $2.67bn. Despite the fact that it is the exports 14% of the world total and is 3rd largest supplier in the world, a study by T. Pognosyan & Hesse, 2009, has revealed oil price shocks have in-direct affects on bank profitability; this shattered arguments that oil export is a major economical growth reason for the country. The slight effect on the country’s economy due to the global economic crisis and its consistent economic stability for the past 10 years, boasting of an Islamic financial system, makes it a perfect case study for understanding the long-term impact of Islamic banking systems on sustainability, stability and value creation for the society. Hypothesis: 1. Communication can be established between the Global Financial Decision-Makers and Islamic Religious scholars. 2. Benefits from the development of Islamic Financial systems can be communicated to both above mentioned parties to establish common grounds and mutual interests. 3. The Islamic Banking and Financial model helps the economic systems prevailing by providing sustainable financial systems AS WELL AS through development of labor markets through legitimate trade and investment in assets. 4. A society’s welfare will feed back into the economic system in the form of a cycle, having a direct relationship with the economic system. 5. The nature of Islamic banking and financial systems refines fragile unsustainable products within the conventional banking systems; whereas the Islamic financial system has a natural internal monitoring system and can alter itself according to the different economic and financial systems. 6. The Islamic financial systems are more sustainable, profitable and durable in comparison to the conventional banking and financial systems. Significance of Research: 1. The research results will provide immaculate yet probable solutions to the economic crisis that has recently hit the global economy. 2. The research is a pioneer attempt to communicate the benefits of the development of Islamic Finance and its’ application on a global basis. 3. The research will open global communication channels that will create global homogeneity and call for creative revolutionary thinking and research in order to establish a new global financial order. 4. The research will open global financial homogeneity and in turn facilitate investments in Islamic countries such as Qatar and Saudi Arabia etc. 5. The research aims to contribute to the reforms towards a sustainable financial system world-wide. 6. The research will further augment the acceptance of the Islamic financial system through increased understanding of the system and how it proves to be a developmental tool for the society/community. 7. The research will highlight the higher profitability of the Islamic Banking and Financial Systems in comparison to the conventional banking systems. Case Study: The research will be based on the case study of “Qatar Islamic Financial Systems and Banking”. The research aims to highlight the numerous advantages of Islamic financial systems through this practically implemented example of Qatar, a country which has had an era of economic stability over the past decade and an increasing economic surplus of an expected $2.67bn in 2010 with Islamic Financial System working in the country. Criteria for Selection of Case: 1. Qatar, being a developing country, has achieved economic stability with an Islamic Financial system supporting its economy. The country’s economic system has been merely affected by the global economic meltdown. Hence, the country’s case serves as the best example to identify the means through which Islamic mode of financing has helped the economy stay neutral to the global economy issues and serve as a financial immune system. 2. Qatar’s capital Doha hosted the World Economic Forum during 30-31 May 2010; the Forum has been a global initiative to draft proposals for the redesign of a new global financial structure. In this regards Qatar’s Prime Minister Sheikh Hamad Bin Jassim Bin Jabr Al Thani has announced during his meeting with Qatari Businessmen that there exists a financial surplus within the Qatari banks and within the current Qatari economic expansions and growth the products being offered by Islamic banks are just not enough. Therefore the Prime Minister has called for innovation and research which is the foundation of this research. 3. To serve as a lesson for the developed countries, increasing their understanding of the Islamic Financial system and how it helps developing countries, gaining positive insights that may help their financial systems. 4. Economic feasibility for the researcher; the researcher is originally from (MENA region) Middle East and North Africa Region. Arabic is the researchers’ mother tongue. These ties may also help the researcher gain assistance from the Islamic Religion Scholars and decision makers in the Islamic financial system currently at place in Qatar. Methodology: 1. Literature Review: a thorough literature review will be conducted, on relevant topics, discussing the work done in the area and highlighting the limitations of the literature. 2. Conducting an Experiment: Experimentation would be done on the sample (Product/Service provided by Qatari Islamic banking system), outlining the ways through which the banking system is similar to the conventional banking system. 3. Interviews: Key decision makers such as Islamic Religion Scholars will be interviewed regarding the importance of Islamic banking towards the economic stability, the barriers to application and feasibility of its’ development etc. Meeting with influential people such as economists will be conducted, in order to find ways to create a better understanding of Islamic Finance, its’ benefits and its’ development. This, in addition to finding ways in order to communicate this initiative on a global basis by identifying key global financial decision makers and how to influence their decisions. 4. Using Formulae for Interpretation: When ever needed in order to proof profitability and sustainability of Islamic Financial Systems. Time Frame: Year 1: Extensive Literature Review, coupled with diplomacy training and study at the International Relations department LSE. In addition to this the researcher will review the research proposal in case any realistic amendments and additions need to be made in order to make the research more feasible. Year 2: interviews with Islamic figures to enhance the understanding of the system, outlining barriers and limitations relating to the interpretation of Islamic Finance. Finalizing the research proposal and the researcher must have established links for communication with the decision maker. Year 3: Conducting an Experiment: Meeting with the Decision makers of the Islamic Financial System in Qatar together with the Islamic Religion Scholars, while drafting the ground for research and related documentation. Field visits to targeted decision makers will also be conducted, while experimenting on the sample. Finalizing the draft from outcomes of the experimentation will also be done, outlining various recommendations. Year 4: The researcher must have established communication grounds between all decision makers and worked on the feasibility of the new orientation strategy e.g. establishing a communication network and advocacy strategies etc. Finalization of research thesis and dissertation will be done, completing any outstanding tasks if left. References Book Taylor, J. (2006). Economics. Cengage Learning Iqbal, Z., Mirakhor, A., Krichenne, N., Askari, H. (2010). The stability of Islamic Finance: Creating a resilient financial environment for a secure future. John Wiley and Sons Sole. J. (2007). Introduction Islamic Banks into conventional Banking systems. International Monetary Fund Website Chapra, M. (2008). The Global Financial Crisis: Some suggestions for reform of the global financial architecture in the light of Islamic finance. Retrieved May 26, 2010, from http://www.scribd.com/doc/29417966/The-Global-Financial-Crisis Rosman, R. (2008). Risk management and performances of Islamic Banks: A proposed conceptual framework. Tun Abdul Razzaq University. Retrieved May 28, 2010, from http://www.cluteinstitute-onlinejournals.com/Programs/Rothenburg_2008/Article%20294.pdf Hesse, H., Poghosyan, T. (2009) Oil prices and Bank profitability: Evidence from the major oil exporting countries in the middle- east and North Africa. Retrieved May 28, 2010, from http://www.imf.org/external/pubs/ft/wp/2009/wp09220.pdf Bashir, M., Hassan, K. (2000) Determinants of Islamic Banking Profitability. Retrieved May 28, 2010, from http://www.nzibo.com/IB2/Determinants.pdf Haron, S. (2004) Determinants of Islamic Banking Profitability. Retrieved May 20, 2010 from http://www.klbs.com.my/Pdf/Determinants%20of%20Islamic%20Bank%20Profitability.pdf Read More