Research Reflection Report - Essay Example

id number: Research reflection report Response Marks Research methods & processes As the research progressed, the research methodology was selected based on the aim and objectives of the research. Among various research approaches, I selected qualitative research approach as it provided a base for systematic assessment of the subject using numerical data and statistical tools. Through qualitative research method, I attempted to establish a causal relationship between the identified variables and tried to reason the effectiveness of Islamic Finance. The research method specifically focused on determining impact of Islamic financial system in mitigating financial crisis. For the purpose of research, I have selected six banks, three from traditional banking sectors based in the United Kingdom (UK) and three from Islamic banking sector (Hennink, Hutter and Bailey, 2010; Wolters, 2013). I have selected performance of the banks from two different periods, that is, the pre-financial crisis era between 2005 and 2007 and post-financial crisis era between 2008 and 2012. The reason behind selection of these two periods is that it justifies the earlier studies by a number of authors that has been mentioned in the literature review. To analyze and compare the performance of the banks I have calculated financial ratios so that financial performance of the banks can be compared. The main purpose of conducting ratio analysis was to analyse the capital adequacy and profitability of the banks in context of different countries. Financial ratios were considered appropriate because these are standard measures and can be compared easily. Furthermore, to examine the position of Islamic banks with respect to that of the UK, hypothesis was tested using T-test. In the hypothesis testing, performance of Islamic banks was better that that of conventional banks was considered as the null hypothesis (Alexander, 2001). Sampling is an important part of any realistic research and there is a number of sampling methods that can be implemented in a research. However in my paper, I have implemented purposive sampling so that within a convenient sample size, appropriate research can be conducted. Purposive sampling is important from the context of this research because under this approach, the samples are selected based on certain specific characteristics that represent the population. Since the analysis was conducted based on financial data of banks, I did not conduct any primary research. Instead, the numerical figures were collected from annual reports of banks and information regarding the literature review was gathered from various books, journals, academic databases and web sources. Under data analysis, ratio analysis was conducted based on various components of the financial statements of the banks. Primarily, I used four important ratios to analyse and compare performance of the conventional and Islamic banks. These ratios included return on equity, return on asset, net income growth and bank capital to asset ratio. Furthermore, for conducting trend analysis of financial performance of the banks, I have make use of descriptive statistics. Under descriptive study, mean and standard deviation was calculated and the analysis was depicted through graphical representations. Lastly, independent samples t-test was conducted to examine significance of Islamic and conventional banks using means of the independent samples. The significance was determined on the basis of confidence interval of 0.05, where difference of mean less than 0.05 was considered insignificant. For conducting statistical testing of data, SPSS was used in the paper. Alongside, I used Ms Excel for assembling the financial data. Literature and sources The aim of my paper was to study the ways through which Islamic finance can mitigate the chances of occurrence of financial crisis. For this purpose, I had to study both the financial systems to compare and determine ways to mitigate financial crisis. In the literature two different principles have been contrasted and compared to understand their difference and where conventional banking went wrong. The conventional banks work on the principle of ‘money creates money’ while the Islamic banks are based on Sariah principles. The Sariah principles were led by Quran and it focuses on effective integration of financial resources for the purpose of social development. The principles of Sariah primarily prohibit a firm from investing in assets that bear high interest rate and these banks generally operate in interest free regions. Another important aspect of the Sariah law is that it allows banks to operate on a profit and loss sharing principle. Therefore, neither borrowers nor lenders are involved in excessive spending because the risk and responsibilities are equally distributed. The other important aspect of the Sariah law is that it prohibits the financial institution from earning as well as paying interest on a sum. On the other hand, the conventional banks operate primarily on direct lending and borrowing of fund. Prior to financial crisis, the banks were involved in heavy lending against subprime mortgages in anticipation of earning higher profits due to heavy interest rates on subprime loans. During this period, none of these banks considered the extent to which it was exposing itself to default risk. This tendency was observed worldwide excluding the Islamic countries. Furthermore, the banks leveraged its own resources as well as borrowed resources to back the lending process. In addition, the banks tried to hedge the risk using credit default swaps which they sold to various investors. During analysis it was revealed that conventional banks operated with the sole purpose of earning profit as a result they exposed themselves to various economic vulnerabilities. These loopholes were covered in Islamic financial institutions because they were guided by certain principles and ethics. During the literature review, a number of secondary sources were referred where numerous authors advocated the implementation of Islamic principles and heavily criticised the activities of conventional banking sector for inducing global credit crunch. It was proposed by many authors that risk level at Islamic banks was comparatively less because of interest free investments (Damodaran, 2012). Authors such as Wolter (2013) and Bakar and Alhabshi (2014) explained that global slowdown in context of western banks, created greater opportunity for Islamic banks as operations of these banks were hardly affected by the crisis. Salah (2013) asserted that economic slowdown had an impact on Middle East countries because oil export was heavily affected by drop in value of foreign currency. On the other hand, authors such as Nissanke (2009) advocated that the financial crisis affected emerging economies significantly. Walton (2011) added that the Islamic financial system was protected from the crisis due to avoidance of instruments that carried high rate of interest. Malik (2010) exclaimed in this context that the downfall of western banks has resulted in increasing growth of Islamic banks in the non-Muslim countries. Your Knowledge The financial crisis of 2008 probably created one of the greatest depressions in the financial market and drew attention of economists and strategists from all over the world. Though I read about the situation in newspaper and financial articles as it happened but as I undertook the research, I learned more about the crisis and the various factors that contributed towards the same. My research subject, however, was not limited to the financial crisis as a number of studies have been conducted on the same. Therefore, I extended the scope of my research and tried to recognise the role that Islamic finance can play in mitigating impact of financial crisis as well as help in avoid the same as a whole. I had an interesting learning session during the execution of the research paper and I believe this knowledge will be highly useful in shaping my career in the long run. The financial crisis, as I understood, was a result of uncontrolled lending by banks for subprime mortgages and selling the same in the form of derivatives to various investors. It also came into my attention that unscrupulous growth of credit-default swaps and unrealistic ratings by credit rating firms played significant role in the financial crisis. I further learned that these practices were prohibited in the Islamic finance because the Sariah principles do not allow firms to exploits investors for personal gain and profit. Prior to the financial crisis, Islamic finance was not exactly considered as a part of international financial system and was treated as a conservative system. However, post crisis scenario highlighted that Islamic financial system survived the meltdown because of maintaining certain ethics in their practices. The data collection and analysis activities were informative as well as this was my first time to conduct a realistic research and work with real time data. I learned to work with SPSS as well as the way to work out a hypothesis. Additionally, the research paper provided me the opportunity to use my knowledge of financial ratios and financial statements in practical usage through data analysis. Your learning During my MBA program, everything that I learned in classroom as well as while undertaking this research paper can be broadly classified under three categories: theoretical learning in classroom, practical learning from the research paper and overall learning by implementing my knowledge in this dissertation. Theoretical learning The main purpose of my enrolment in the MBA program was to acquire business and financial skills that are necessary for my career development in an enterprise. During my classroom studies, I gained basis knowledge on statistics, economics, marketing, strategy and leadership. Apart from this foundation education, I learned in detail about stock markets, global economy, financial derivatives such as futures and options and their functions, investment banking, corporate finance, market volatility, risk management and bankruptcy as a part of my specialisation. The concepts I learned as a part of my specialisation was very helpful while pursuing my research. Practical learning When I studied about risk management, bankruptcy, financial innovation as a part of my specialisation in finance, the subjects intrigued me and acted as my motivation to select financial crisis and Islamic finance as the subject of my major project. It was because of this research paper that I was able to have a better understanding of the basic concepts as the 2008 crisis acted as a relevant example. This made the research easier and gave me the opportunity to go through various studies and articles that have been published earlier by noted economists and experts in this field. The project is particularly important because it presents a clear overview of the international financial market. Learning from the project As I reviewed various literatures, it caught my attention that one contrasting difference between conventional banking and Islamic finance affected the entire financial system. I also recognised some implications of behaviour finance in the financial crisis. The reason for mentioning behavioural finance is that during the financial crisis investors were more influenced by their emotion. They did not evaluate rationally the claims of banks and credit rating agencies regarding the derivatives in terms of their origin and performance. In this context, I noticed an interesting factor about Islamic finance that they put community interest about that of the firm as oppose to conventional financial institutions. Critical thinking and analysis During review of literary work of different authors for the purpose of the research, it was astounding to notice it was the basic principles of Sariah that protected the Islamic banks from the financial crisis. The most surprising fact about these principles was that these principles primarily aim at helping individuals and place community interest above personal profit motives. On the other hand, conventional banks, which function on the principle of ‘money creates money’ suffered major downfall because they created complex products for earning more and more profit yet got trapped in the same. During the study, it was ascertained that the policies of the conventional banks were short-sighted and they leveraged those assets heavily that could only generate short term returns. From my perspective, globalisation was also a catalysing factor in the global economic meltdown. Globalisation brought together different economic in a common market and increased their interdependency. It only went unnoticed by the policy makers that the global union of economies, keeping aside benefits, also enhanced vulnerability among the economies. Islamic countries were less affected because they avoided these vulnerabilities through the principle of profit and loss. Conventional banks continued lending because high interest on subprime loans could be charged and they did not account for the default risk. The default risk is the possibility of the borrowers’ inability to pay back the loans. The financial crisis was the consequence of housing bubble that initiated in the United States affected the global real estate industry. There was not a single sector that was unaffected by the crisis, it caused rise in unemployment, fall in value of currencies, fall in flow of foreign investment as well as drop in price of commodities such as Oil, metal and others. It was ascertained that financial institutions should have exercised control on their lending practices as well as carried out background check on borrowers. In addition, utilisation of derivatives to gain from the mortgages was unlawful and unethical on the part of these organisations. In my opinion, identification and clear description of various components of financial crisis is very important so that such incidents can be avoided in the near future. Barriers met In this research, significant issues were faced due to lack of sufficient resources and time. In absence of sufficient sources, I had to select small sample that would appropriately represent the total banks that are operating in the UK. In addition, many banks did not provide sufficient information for the periods that have been considered in the paper. In context of performance of the bank, I faced problem while selecting an appropriate measure that would reflect the actual problem in the banking sector. In absence of sufficient measures, the only choice was to select financial ratios. The research data were gathered from only the published financial reports which do not provide all the information. Additionally, the research was primarily centred in the UK, hence it cannot be claimed that the data represent the global banking sector. In my opinion, the research paper would have more effective if the banks represented different countries worldwide. Another problem that was faced during the research was validity and representativeness of the sample. Both kind of banks were selected from the UK and Islamic banks are at their nascent stage of development hence cannot possibly represent the Islamic financial system. The research is dependent on pre-published literatures and published annual reports; hence, there was no scope for primary research. However, I believe that the research would have generated better outcome if I was able conduct primary research and evaluate opinions of higher authorities in banks. It was observed that Islamic financial organisations provided limited information about their activities and they are still emerging in the UK. Time was one of the major constraints which further affected the research process. A questionnaire survey would have proved very useful but I did not have sufficient time for the same. During the data analysis, I worked for the first time at SPSS so the initially it was a little difficult. Furthermore, hypothesis testing using t-test was comparatively difficult and time consuming. Data compilation and analysis consumed a great amount of time because of large quantity of data. Overall, it can be suggested that the research process would have been more hassle free if data and sources were available in sufficient quantity and the quality of the research would have been better if it was not limited to the UK economy. Professional development The research was very helpful in developing my professional skills as well as my academic knowledge regarding the financial sector. The research helped me in developing a clear understanding about various financial products such as futures and swaps and financial activities such as risk management, lending, hedging and so on and so forth. I further understood from the research the relation between financial crisis and housing bubble in the United States and Europe. My academic knowledge regarding derivatives and other components of capital market got enhance as through this project I was able to relate different topics. It was during this study that I understood the true implication of behavioural finance and the reason behind contradiction of efficient market hypothesis. I studied various peer reviewed articles and journals for this research which have been written very proficiently, which further had a positive impact on my writing abilities. The literature review helped me understand the way the conventional banks utilised credit default swaps to sell the mortgages to investors. Earlier, I had comparatively less knowledge about the Islamic financial sector but during this research, I undertook in depth study of this topic and was able to distinguish between conventional and Islamic financial sector. Apart from academic knowledge, the research helped me in developing a number of skills such as time management, task management, planning and organising activities and analysis techniques. It was because of this project, I got the opportunity to learn SPSS. Moreover, earlier I had studied about hypothesis testing but during this project I had the chance of applying hypothesis testing, which was another learning experience as theoretical and practical knowledge are quite different. Additionally, real time data analysis and comparison using financial ratios was a very interesting encounter as well. Objectives The research paper was aimed at understanding the role of Islamic financial system in preventing financial crisis. The reasons of financial crisis caught my notice and intrigued me in conducting some research on the same. It also surprised me that Islamic banks were comparatively less affected especially those located away from western countries. My objectives were not only to understand the Islamic banks and its relation with prevention of financial crisis but also to study the functionality of the same. The reason being the Islamic banks do not function in a manner that is similar to conventional banks. These banks have their own mechanism for operating, which further acted as a cushion to the financial meltdown. As I studied and researched about these banks, it came to my notice that unlike conventional financial institutions as well as other investment banks, Islamic finance does not approve practices such as risky lending and investment in derivatives. Post financial crisis of 2008, many economists and academicians heavily criticised products of financial innovation and reckless lending facilities by banks for the economic meltdown. Islamic finance is quite unique in its practices and it strictly avoids practices such as resale of debts, debt creation through borrowing and profit sharing between lender and borrowers. I would not say that Islamic financial techniques are flawless, but I do advocate for the fact that these techniques are comparatively safe in context of long-term sustainability. Post financial crisis, when various banks in the UK were undertaking measures to cope with the liquidity crunch, Islamic banks were enjoying high capital build up and moderate profit level. As I studied and review various literatures as a part of this dissertation, various components came in front as a contributor in the crisis but these factors alone were not strong enough unless integrated to cause the depression. It was also observed that prior to the depression in financial market, the earnings of the investment firms in the United States and UK were increasing exponentially while Islamic banks had comparatively meagre share in the total profit of global financial market. Apart from literature review, I conducted hypothesis testing using t-test for testing validity of the information available in the literature. It was observed that the outcome of my analysis supported the fact that Islamic banks were better performer post financial crisis. Additionally, another conclusion that I drew from the findings is that conventional banks relied heavily on short term profits and leveraged their assets heavily resulting to their downfall. After the data analysis and ascertaining outcomes from the findings, I can strongly propose that the purpose of this research was fulfilled in this dissertation (Anderson, Burnham and Thompson, 2000). Findings and outcomes In this research paper, the findings and outcomes were the most significant part as it reflected my sincerity in conducting the research and ability to achieve the expected outcome. After data analysis, it was ascertained that the efficiency of the Islamic banks declined significantly from the pre-crisis period. An interesting fact was uncovered in the findings that the performance of Islamic banks that operated in the UK declined but that of the Qatar Islamic bank was hardly affected by the financial crisis. In the Islamic banks it was found that net operating profit and return on asset declined post crisis. In context of conventional bank, it was ascertained that the worst suffering company was HSBC, as Barclay and Lloyds had positive mean of bank asset to equity. My findings supported that performance of Islamic banks was comparatively better as these banks maintained relatively low level of leveraging assets with respect to the proportion of equity. In the findings it was also revealed that the primary reason of financial crisis in the banks of western countries was due to non compliance with capital adequacy requirements according to BASEL I and II norms. Bank’s inability to comply with BASEL norms resulted in severe liquidity crunch and erosion of lending abilities. The t-test analysis further supported the null hypothesis and it was determined that post financial crisis years observed growth in profit and operations in the Islamic banks compared to conventional banks. The finding of my research supported outcome of various other studies conducted by different authors. Additionally, the research outcome supported claims of authors such as Damondaran (2012), who suggested that while net income reflects the equity cash flow, actual cash flow is reflected by the operating income of a firm. The hypothesis testing also brought it to my notice that the primary reason of growth in Islamic banks even after economic slowdown was that these banks were continuously reinvesting the returns they earned of capitals. It is noteworthy in this context that prime reason of sinking of commercial banks was their heavy reliance on profits earned through short term investment. Additionally, it was ascertained through the research that excessive dependence of conventional banks on asset based lending was the biggest mistake of the organisations. For regaining a stable position in the banking industry, it is essential for the commercial banks to avoid excessive credit creation and risky lending activities. The research findings were a great help in understanding the functioning of the Islamic banks and the role they can play in the international financial sector. It was observed that integration of Islamic banking in the financial industry will speed up the recovering cycle for the banking industry as well as promote less risky business activities. Reference list Alexander, C., 2001. Market models: a guide to financial data analysis. New Jersey: John Wiley & Sons. Anderson, D. R., Burnham, K. P. and Thompson, W. L., 2000. Null hypothesis testing: problems, prevalence, and an alternative. The journal of wildlife management, pp. 912-923. Bakar, M. D. and Alhabshi, S. M., 2014. An introduction to Islamic finance. CIMA, pp. 1-21. Damodaran, A., 2012. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. New York: John Wiley and Sons. Hennink, M., Hutter, I. and Bailey, A., 2010. Qualitative research methods. London: Sage. Malik, M. R., 2010. The Potential And Challenges Of Introducing Islamic Financial Services In The Non-Muslim Countries. International Centre for Education In Islamic Finance, pp. 1-26. Nissanke, M., 2009. The global financial crisis and the developing world: transmission channels and fall-outs for industrial development. Research and Statistics Branch Working Paper, 6, pp. 1-50. Salah, I., 2013. Islamic finance in the current financial crisis. Berkeley Journal of Middle Eastern & Islamic Law, 2(5), pp. 1-23. Walton, M., 2011. Can a financial crisis occur under the rules of Islamic finance? University at Albany, pp. 1-31. Wolters, A., 2013. Islamic finance in the states of central Asia: strategies, institutions, first experiences. Forschungspapiere Research Papers, pp. 1-32. Read More