Loans in the Islamic Banking System - Research Paper Example

Loans in the Islamic Banking System Table of Contents Abstract 3 Chapter 1 – Introduction 1.1 Background 4 1.2 Research Problem 6 1.3 Aims and Objectives 6 1.4 Research Methodology 7 Chapter 2 – Theoretical Background 2.1 Islamic banking – characteristics 7 2.2 Loans in the Islamic banking system – characteristics and performance 9 2.3 Advantages and weaknesses of loans in Islamic finance - comparison with loans provided by the Western banks 11 2.4 Global financial crisis and loans provided by the Islamic banks 13 Chapter 3 – Research Methodology 3.1 Research Methodology overview 14 3.2 Case studies analysis 16 3.2.1 RHB Banking Group 16 3.2.2 Al Baraka Banking Group 17 3.2.3 Al Rajhi Bank 18 3.3 Empirical Research 20 3.3.1 Participants 20 3.3.2 Questionnaire 20 3.3.3 Presentation and analysis of findings 21 Chapter 4 – Conclusion 4.1 Conclusion 22 4.2 Recommendations 23 A. References 24 B. Appendix 28 Abstract The potential of firms to face the challenges of the global market depends on their ability to align their strategies with existing market trends; moreover, the organizational principles and ethics have a key role in the achievement of corporate goals and objectives. Under these terms, firms with different operational and ethical standards are likely to present differences in their ability to respond to the consumer demands, a phenomenon which is clearer in markets, which are characterized by strong social and cultural ethics. Islamic financial institutions are indicative examples of the above rule. The rapid growth of these institutions in the global market has proved another fact: firms that are not based on common corporate and social ethics may be more well protected in case of strong market pressures – a fact that was made clear after the appearance of recession in 2008 which revealed the weakness of Western financial institutions to handle the crisis as effectively as their rivals based on the principles of the Islamic finance. Current paper focuses on a particular activity of Islamic banks: the provision of loans. In current market conditions, the financing of firms and individuals is particularly crucial for ensuring the stabilization of local economies. The examination of the forms and the terms of financing provided by the Islamic banks has proved that the ability of these institutions to respond to the relevant market needs is higher compared to the Conventional (Western) banks. This differentiation verifies the level of growth of Islamic banks since their entrance in the global market; it can be also used in order to verify that alternative solutions are available in regard to the financing needs in markets worldwide. Chapter 1 – Introduction 1.1 Background The development of Islamic banking in the international market has been primarily related to the need for supporting the local needs of individuals and firms that were interested in keeping their funds under the control of the Sharia law – on which Islamic banking is based. However, through the years, it was made clear that Islamic banking could be expanded in order to meet the demands of individuals and firms that had related their activities to the Western Financial institutions. The position of Islamic banks in markets worldwide indicates the above phenomenon. In accordance with Khan (2010) the actual financial status of Islamic banks worldwide is quite impressive; more specifically, the above researcher notes that ‘Islamic Banks hold well over US $700 billion in assets and are growing at over 15% p.a.’ (Khan 2010, 805). On the other hand, the expansion in the global market influenced the traditional operational methodologies and principles of Islamic banks; one of the key characteristics of the above institutions has been the strict control of the level of financing provided to individuals and organizations. After entering the global market, Islamic banks could not keep following the same – strict – policy in regard to the financing provided to the public (individuals and organizations) since such strategy would keep the customers away. For this reason, gradually, the traditional financing schemes used by the Islamic banks were alternated; Islamic banks introduced methods of financing similar to those available in Western banks. Current study focuses on the examination of a particular financing scheme provided by Islamic banks: loans. The various aspects of these loans – including their forms and the criteria for their provision – are examined aiming to show the relationship of the specific financing tool with the similar schemes of the Western banks. The research on the literature published in the specific field revealed a series of important facts: a) the forms of loans which are currently available in Islamic banks are similar to those available in the Western banks (Chong et al., 2009, Shubber et al., 2008, Endut et al. 2008, see also the Theoretical Background section below), b) the terms of the provision of these banks are more favourable for consumers (including organizations); it is for this reason that the level of loans provided by the Islamic banks is continuously increased in markets worldwide, c) there are banks which they have just recently introduced Islamic banking schemes, under the pressure of the market needs (for instance the RHB Banking Group, case study analysis section), d) the loans provided by the Islamic banks have a key role in the stabilization of the international market – which has been characterized by the weakness of the financial institutions to respond to the financing needs of their customers as a result of the global recession; through the research developed by Ariss (2010) it has been proved that ‘Islamic banks allocate a greater share of their assets to financing activities compared to conventional banks, and they are also better capitalized’ (Ariss 2010, 101); the above research has been developed across 13 countries and lasted for 6 years (200-2006); therefore, its results are extremely important in order to understand the potential of Islamic banks to respond to the financing needs of the public globally, e) the increase of loans provided by the Islamic banks has not led to the alteration of the ethics on which these financial products are based – referring to the Sharia law; therefore, the protection of customers/ borrowers has been kept at high level, at least compared to the Western banks which have been proved less able to face the market pressures – mostly because they have been too exposed to risky financial products, such as the sub-prime loans which have been the main cause of the current financial crisis. In other words, the global crisis did not affect negatively the Islamic banks; rather it highlighted the advantages of these institutions’ traditional strategies – especially of their refusal to be engaged in extremely risky financial products – in opposition to their Western rivals. The above fact is highlighted in a report published by USA Today (2010); in the above report it is made clear that ‘from 2007 through 2009, Islamic banks' assets grew an average of twice as fast as conventional banks' assets in major Muslim markets’ (USA Today, 2010). The specific phenomenon is also adequately explained through the literature presented below but also the findings of the case study analysis and the empirical research conducted for this study. 1.2 Research Problem The development of financing worldwide currently faces significant delays mostly because of the global recession. The loans provided by the Islamic Banks can be considered as a valuable alternative for individuals and enterprises in order to respond to their financial needs. The potentials of this mode of financing to be expanded seem to be significant however this is a fact being depended on the market response and the potentials of the Islamic Banks to align their strategies with the changing economic conditions. 1.3 Aims and Objectives The aims and objectives of this study could be described as follows: a) to identify the key forms of loans available in the context of the Islamic banking system, b) to evaluate the performance of loans provided by the Islamic Financial Institutions; suggestions are also made for the potential increase of the performance of the specific financial products, c) to compare these loans with the loans provided by the Western Banks, d) to locate the advantages and disadvantages of loans in the Islamic Banking System, e) to identify the effects of the global financial crisis on the rate of financing by Islamic Banks and f) to identify and analyze the role that Islamic banking can have in the limitation of the effects of recession. 1.4 Research Methodology Three different modes of research methodology have been used in this study: a) the review of the literature published on the issues under discussion, b) the review of the case studies related to the study’s subject – case studies analysis/ qualitative research and c) the quantitative research which has been conducted through a questionnaire; the questionnaire has been sent to employees of five major Islamic banks in London and in Paris; the Internet has been chosen as the tool for distributing the questionnaire to the potential participants. Details on the research methods used in this study are provided in the third Chapter of this study where the practical implications of the research are also discussed. Chapter 2 – Theoretical Background 2.1 Islamic banking - characteristics One of the most important characteristics of Islamic banking is the lack of interest (Riba) in the transactions developed between the Islamic financial institutions and their customers; actually, Riba is prohibited even for the deposits of Islamic banks, a rule that leads to the lack of obligation of Islamic banks to provide to their depositors a return for their funds (Saeed 1996, 99). The above problem is effectively addressed through the Profit-and-Losss Sharing scheme (PLS), which is alternatively used in Islamic banking. However, in practice, the above rule has become partially inactive mostly because of the introduction of deposit schemes, which have similar elements with the deposit options available in Conventional banking. The above fact has been proved through the research developed by Chong et al. (2009) in Islamic banks across Malaysia. It has been proved that the application of the PLS scheme is not strict and that schemes similar to the Western banks are likely to be used. For this reason, Chong et al. (2009, 125) suggests that the existing rules of Islamic banking should be alternated becoming similar with those used in the Conventional banking system. Shubber et al. (2008) use a similar approach when trying to explain the role of PLS in the Islamic banking. The above researchers studied ‘the published accounts of four major Islamic banks and developed a survey’ (Shubber et al. 2008, 10) aiming to identify the level at which PLS is used in Islamic banks within the modern market. The above research led to the following finding: PLS is not actually used in Islamic banks – at least, not in its traditional form. More specifically, it was revealed that ‘for Islamic banks, deposit accounts were not a liability, as these fell within the definition of “profit-and-loss sharing” instruments’ (Shubber et al 2008, 10). However, even under these terms, still the view of the public towards the principles of Islamic banking has not been affected; instead, it seems that the specific banking system is considered by the public as a framework of valuable principles which should be applied by all Islamic banks – a fact revealed through the research made by Dusuki (2008) who used a survey for identifying the current views of the people on Islamic banking – the above survey was developed in Malaysia and involves a sample of 1500 participants. In accordance with Khan (2010) the value of the Islamic banking cannot be estimated by referring to its interest-free concept but, mostly, by emphasizing on the moral values and ethics on which this banking system is based; it is further explained that these values and principles do not exist in the Conventional banking (Khan 2010, 805). Regarding the financial strength of Islamic banks to provide loans of various types, Hassan et al. (2007) note that Islamic banks are more capable to provide financing – compared to conventional banks – and this advantage is based on the principles of Islamic banking which do not allow the access to toxic financial assets (Hassan et al. 2007, 101). 2.2 Loans in the Islamic banking system – characteristics and performance In the context of the Islamic banking system loans are not based on the same criteria as in Western banking. Of course, similarities exist in regard to the needs served by loans in the Islamic banking system and those provided by the Western banks. The role and the value of loans in Islamic banking can be understood only after studying the principles and the characteristics of Islamic finance – as presented in the previous section. It should be also noted that despite the common regulatory framework in which all Islamic bank have to operate, it is possible that differences exist in the types and the terms of loans provided by Islamic banks worldwide. This issue is highlighted in the study of Hassan et al. (2007) where it is noted that the ‘regulatory requirements in different jurisdictions’ (Hassan et al., 2007, p.156) are likely to affect the types of loans available in Islamic banks internationally. In Islamic banking the types of loans available are specific: ‘a) educational loans, b) gold loans – for securing gold, and c) surety loans, which are loans against personal security of two signatories’ (Iqbal et al., 2002, p.176). Additional arrangements are available to those who are interested in borrowing money for purchasing certain products – referring to the case of Ijara, a contract similar to leasing, and Murabaha which offers the chance to buy certain products through the Islamic bank – as a mediator; more specifically, through this scheme, the Bank buys the products and then sells them to its customer; the latter does not have to pay interest – of any kind (Islamic Bank of Britain, contracts, 2011). In any case, customers of Islamic banks are adequately protected in case they will fail to meet the terms of their financing scheme; in market conditions like the current ones, the customers of Islamic banks can ask for ‘an interest-free loan (qard hassan in Arabic), which enable them to continue their payments during the recession’ (Wilson, 2009). It should be noted that the benefits of the loans provided in the context of the Islamic banking system are not equally accessible to people worldwide. In a relevant report (HilalPlaza, 2011) reference is made to the Muslims living in Western countries and who are interested for a loan; it is noted that those Muslims enjoy the same benefits – regarding the specific financial products – as the Muslims living in Muslim nations (HilalPlaza, 2011). Moreover, it is made clear that there are certain Islamic banks which have established branches (see Table 1 below); it is also explained that loans which are based on the Islamic banking system are available through Western banks which have introduced the particular banking system in regard to certain of their products/ services (HilalPlaza, 2011). Islamic institutions that offer loans based on the principles of Islamic banking Loans available Lariba (California, USA) Home loans, Car loans, Business loans, Trade Loans, Equipment Loans, Loans for home construction Guidance Financial (Virginia, USA) Home loans Ijara Loans (US East coast - with offices throughout the US) Home loans, Commercial Real Estate loans, Business loans Devon Bank (Illinois, USA) Home loans, Construction loans, Business loans University Islamic Financial Corporation (Michigan, USA) Home loans Table 1 – Islamic institutions in Western countries (source: HilalPlaza, 2011) 2.3 Advantages and weaknesses of loans in Islamic finance – comparison with loans provided by the Western banks As noted above, Islamic banking system is based on the principles of Sharia law. The application of these principles within Islamic banks has to be monitored closely. Appropriate Committees have been established focusing on the above activity – referring not only to Muslim nations but also to Western countries where branches of Islamic banks exist. In the case of Islamic banks operating within Muslim nations the following phenomenon can be identified: the activities of Islamic banks can be controlled not just by the Committees and the Institutions monitoring the application of the Sharia law but also by the State. This issue is highlighted in the study of Makiyan (2003) where reference is made to the case of Islamic banks operating in Iran. It is noted that in the above country the intervention of the government in the operations of the Islamic banks has influenced the rate of loans available to the public; indeed, it has been proved that since 1984 the level of funds provided as loans to the public has been increased and this increase has been the result of the extensive government intervention in the activities of Islamic banks (Makiyan 2003, 62). Moreover, it has been proved that the government intervention has been a more important factor than the country’s economic environment when the criteria for access of the public to the loans were set. The above phenomenon can be also identified in Western countries – regarding the loans provided by the Western banks. In that case also, governments are likely to set the criteria – directly or indirectly – for the level of financing provided by the banks to their customers. From this point of view, the management of loans in Islamic banks is similar with that of the Conventional banks. In accordance with Schoon (2009, 67) ‘in Islamic loans the transaction is based around an asset on which the bank has some form of ownership during the transaction’, a practice which is not used in conventional personal loans. On the other hand, Endut et al. (2008) state that there are no particular differences in the financing products provided by the Islamic banks compared to those available in the Conventional banks; it is noted that their main difference can be identified in the use by the Islamic banks of the concept of Bai’ Bithaman Ajil (BBA) for defining the interest related to these banks’ financing schemes (Endut et al. 2008, 111); another issue emphasized by the above researchers is the fact that in the interest applied on mortgages provided by the Islamic banks is generally fixed (Endut et al. 2008, 111). Furthermore, Bacha (2008) notes that the risks related to the interest owned on financing provided by the Islamic banks are similar with those existed in the financing products available in Conventional banks (Bacha 2008, 210). The similarities between the loans provided by Islamic banks compared to those provided by the Conventional banks should not be considered as a criterion for establishing a closer correlation between these financial institutions. In fact, through the research developed by Olson et al. (2008) it was revealed that Islamic banks have different operational characteristics compared to those of Western banks; these differences were extended above ‘the risk sharing and the prohibition of interest principles that characterize the Islamic banking system’ (Olson et al. 2008, 45); it should be noted that the accuracy of the above assumption has been estimated to a percentage of 92% - non-linear classification techniques were used (Olson et al. 2008, 45). 2.4 Global financial crisis and loans provided by the Islamic banks The current recession has negatively affected the potential of financial institutions worldwide in regard to the financing provided by them to the public; however, it seems that Islamic banks have managed to face the recession without particularly affected, a fact which is highlighted in the literature and which is also proved through the case study analysis and the empirical research conducted for this study. In a relevant report of the London School of Economics and Political Science (LSE), in 2009, it is noted that ‘the Islamic banks have been less adversely affected than the major international banks by the 2008-9 crisis, making them more attractive to investors’ (AME Info, 2009). It is also explained that the strength of the Islamic banks against the crisis can be possibly explained by the fact that these banks tend to be based on their deposits and avoid borrowing by the markets (AME Info, 2009). Moreover, the presence of the Islamic banking in Western countries is not quite high. In a report of Bloomberg (2010) it is noted that ‘the U.K. Islamic mortgage market amounts to 500 million pounds, 0.3 percent of total home loans’ (Bloomberg, 2010). It is further noted that, despite their practice not to borrow from the markets, Islamic banks have been negatively affected by the crisis because they are not adequately supported by the state (Bloomberg, 2010). On the other hand, it seems that Islamic banks are still able to offer to their customers the financing required for their needs; this view is based on a report published in 2009 by Gulf News where it is noted that ‘combined assets of world's 100 top Islamic banks increased 66 per cent last year’ (Gulf News, 2009). The above fact is verified in a report published by the USA News (Politics, 2008). In the relevant report, Natalie Schoon, head of product development in BLME (Bank of London and the Middle East) notes that in Islamic banks ‘there are no toxic assets’ (USA News, Politics, 2008); she also notes that ‘one of the advantages that the Islamic sector has as a whole is that there is still liquidity’ (USA News, Politics, 2008). A similar assumption can be made by referring to a statement of Kamal Farooqui – chairman in Minority Commission, New Delhi (General Council for Islamic banks, 2010). In accordance with Mr. Farooqui ‘in Islamic banking system, investments are safe and people make reasonable profits’ (General Council for Islamic banks, 2010). In a report published by The Nation (2009) it is also noted that the ability of Islamic banks to face the recession is explained by their practice to avoid investing ‘on toxic assets and on wholesale funds’ (The Nation, 2009). Chapter 3 – Research Methodology 3.1 Research Methodology overview The research developed for this study can be categorized as follows: the literature review – as presented above – is used in order to show the views of academic researchers on the issues under discussion; the literature review offers a series of assumptions which have been tested using appropriate methods of academic research. In this context, the literature has been valuable for identifying the most important aspects of this study’s subject. However, the range of issues discussed in the literature – in regard to the subject of this study – is not wide. Moreover, the explanations provided through the literature to the issues examined in this study are mostly based on relevant theories – they do not reflect the forms and the advantages/ disadvantages of these products (loans) in practice. For this reason, it has been necessary for additional research methods to be employed in this study. These research methods are divided into the following categories: a) the qualitative research, which has the form of the case studies analysis; in the context of the case studies analysis the loans provided by three major Islamic banks are presented and compared aiming to address the issues discussed in this study; b) the quantitative research, through a survey conducted among the employees of five major Islamic banks in London and Paris: a) the Islamic Bank of Britain, b) the Ahli United Bank, c) the United National Bank, d) the Europe Arab Bank and e) the Bank Sepah. The survey on which the empirical research developed for this study is based is analytically described in section 3.3 below. The views of participants on a series of critical issues have been identified and are critically discussed at the level that they help to answer the questions set in the context of this study. The findings of the research methods described above are critically discussed using also the literature published on the specific field – as appropriate. Graphics have been used for presenting the findings of the research developed for this study in order to understand easier the correlation and the implications of the findings but also their alignment with the views published in the relevant literature – as presented in the previous section. One of the major challenges of current study has been the identification of the current performance of Islamic loans – either as general tools of funding and as alternatives of the loans provided through the Western banks. In any case, the use of different research methods for addressing this study’s issues ensures the credibility – meaning also the relevance – of the findings and the validity of the assumptions developed. At the next level, this means that adequate explanations are given on the study’s problems while any potential issue that would need further examination is identified and highlighted. 3.2 Case studies analysis 3.2.1 RHB Banking Group RHB Banking Group is based in Malaysia, thus its products can respond to the local needs; the expansion of the firm in the international market has started by the establishment of branches in Hong Kong and Singapore. The types of loans available in the specific bank are clearly mentioned in its home page – where the other forms of financing available to the bank’s customers are also analytically described (see also Table 2 below). The bank’s loans cover common customers’ needs such as: the purchase of home, the purchase of car; however, a personal – loan scheme is also available; this scheme can be used for covering needs which are not clearly stated in the bank’s plan on loans – as presented in its website. Additionally, there are loans available to those who are interested in buying property in auctions or in buying property for commercial purposes. However, it should be noted that not all of these products are aligned with the principles of the Islamic banking. At this point, it should be noted that the firm was granted its license to offer Islamic banking services in 2005; since then, its services and products have been gradually alternated meeting the requirements of the Sharia law. Currently, the only financing scheme aligned with the principles of the Islamic banking is the ‘Personal Financing – I’ which can respond to a wide range of customers’ needs – since there are particular restrictions in its provision apart from the level of the customer’s/ potential borrower’s annual income (RHB Banking, Islamic Banking, 2011). However, in accordance with the organization’s statement in regard to the development of its Islamic banking department, it is expected that all loans provided by the particular bank will be gradually aligned with the principles of the Islamic banking (RHB Banking, Islamic banking, 2011). 3.2.2 Al Baraka Banking Group Al Baraka Banking Group operates in about 12 countries worldwide, including Africa, the Gulf region and the Mesopotamia countries, for instance, Syria and Lebanon. The firm emphasizes on the financing of individuals having incorporated a series of financial products/ loans, which can respond to the various needs of its customers (Table 2 below). In fact, the range of personal loans provided by the specific firm can be characterized as the most high – compared to other Islamic banks: loans are provided to customers in regard to a variety of needs: apart from the loans provided for the purchase of home and car (loans available in most Islamic banks) there are loans for covering medical, educational and tourism needs; there are even loans for covering the expenses of the Wedding day (Al Baraka Banking Group, corporate website, 2011). On the other hand, there are no loans available for investment purposes, i.e. for buying financial products, a scheme available only in the RHB Banking Group – among the Islamic banks included in the specific section of the paper. In the Corporate Social Responsibility statement of the firm (including in the Social Responsibility page of its website) it is made clear that the bank follows the Sharia law regarding the avoidance of interest on its products/ services. The policies followed by the branch of the firm in Egypt have been reviewed – in order to identify the types of loans commonly available in the firm’s branches worldwide. The types of loans provided by the branch of the firm in Egypt – as these loans are described above – indicate the practices of the bank in the particular sector. The number of the potential beneficiaries of these schemes – as explained in the page describing each one of the loans available to the public – is another advantage of this bank’s financing strategy. 3.2.3 Al Rajhi Bank The specific bank has categorized its financing schemes to two major categories: Personal Financing and Commercial Financing. In the context of the first category, the following types of loans are available to the public: Personal loans (for covering a series of needs, no specific limitations are set), Home loans and Car loans. As for the second category, this refers to the loans provided for covering business needs (Business Loans) or various commerce-related activities (trade loans, contract loans, working capital loans. Moreover, an additional financing scheme is provided to those who aim to develop specific business projects – referring to activities of corporations, i.e. Project financing-i for Corporations (AlRajhi Bank, corporate website, Personal & Corporate Banking, Commercial Financing, 2011). Islamic Institution/ Types of loans available RHB Banking Group Al Baraka Banking Group (branch in Egypt) Al Rajhi Bank Home Loans (v) v v Commercial Property Financing (v) v v (including options for contract financing and trade financing) Personal Loans v (entitled as Personal Financing –i) v (wide range of personal financing options, including the financing of tourism services, educational services, medical services and Wedding Day). v Car Loans (v) v v Loans for buying investment units a. ASB Financing b. Share margin Financing a. (v b. v)* - - * not still aligned with the principles of the Islamic banking Table 2 – Comparison of the loans available from the three Islamic Institutions examined in the context of the case studies analysis The data presented above prove the similarities among the specific financial institutions. An important detail can be also identified: the Islamic banking related financing schemes provided by the Islamic banks (Al Baraka Banking Group and Al Rajhi Bank) are of higher range compared to those available in the Western bank which has adopted Islamic banking financial products (RHB Banking Group). The above fact reveals the inability of Western banks to effectively incorporate the principles of Islamic banking – even in regard to certain of their products/ services. 3.3 Empirical Research As noted above, the empirical research developed for this study is based on a survey conducted among the employees of five major Islamic financial institutions in London and in Paris: a) the Islamic Bank of Britain, b) the Ahli United Bank, London, c) the United National Bank, London, d) the Europe Arab Bank, Paris and e) the Bank Sepah. The characteristics and the findings of the survey are presented in the sections that follow. In general, it can be stated that the survey highly supports current study offering critical explanations on the practical aspects of the issues under discussion. No particular limitations have been identified in regard to the survey apart from the potential influence of participants by their relationship with their organization. All participants were aware of the issues discussed in this study and in this way they have been able to offer adequate explanations regarding the problems set through the questionnaire. 3.3.1 Participants The participants are employees in five major financial institutions – as explained above. No criterion of age/ gender or job position has been set for deciding on the employees who would be asked to participate in the survey. The questionnaire has been sent to 85 employees in total; 57 of them returned the questionnaire completed. There has been no request for the personal details of the participants; they have been asked however to mention the organizational department in which they work – in order to help evaluate their answers to the issues under discussion. 3.3.2 Questionnaire The questionnaire includes 10 questions, each one of which is followed by a series of suggested answers. The participants have been asked to choose the answer that most reflects their view on the issues discussed. The questionnaire has been sent through the e-mail; the researcher has set a limit of 7 days for the return of the completed questionnaire. The questionnaire is included in the Appendix section of this paper. 3.3.3 Presentation and analysis of findings The views of the participants in regard to the performance of their organizations in the financing/ loans sector are rather contradictory; most of them (38%) characterize the financing provided by their organization to the public as average - there is a high percentage (36%) who considers the level of financing provided by these organizations to the public as high. However, when they have been asked for the overall performance of their organization in the financing sector, most of the participants (52%) note that their organization perform extremely well in the specific field. It should be noted that the lack of interest (Riba) is considered by the participants to be the main reason for the public’s interest on the financing schemes provided by the Islamic banks. It should be also noted that a percentage of 56% consider that customers understand the terms of Islamic banking – even if the remaining percentage of 44% is rather high. As also proved in the literature, the recession did not affect the ability of Islamic banks in providing financing (76%). On the other hand, the repayment of the Islamic loans seems to face delays – about 43% of the borrowers have not been able to pay the installments regularly, a problem which is may related to the fact that the period of repayment is rather short, an issue highlighted by 37% of the participants – also a common complaint of the customers (as stated by 42% of the employees). Chapter 4 – Conclusion 4.1 Conclusion Through the literature review and the research developed for this study the following issues have been revealed: At the first level it seems that the performance of Islamic banks has not been negatively affected by the crisis; instead, these institutions keep on providing to their customers the financing required for covering their needs. Moreover, it has been made clear that the performance of Islamic banks in the field of financing is high – compared to the relevant activities of the Conventional banks. However, still, the information provided to the customers of the Islamic banks in regard to their financing potentials is not adequate – an issue revealed through the survey. At the next level, one of the key obstacles for the development of the Islamic financing schemes seems to be their terms for approval – as noted by the employees/ participants in the survey. Of course, certain standards should be set – taking into consideration the fact that about 43% of the customers of these banks (referring to the banks chosen for the survey) cannot manage to pay their installments on time. Despite the recession and the increased competition, Islamic banks have managed to become stronger from the Conventional banks in terms of liquidity – therefore in providing financing to individuals and organizations. The support of multilateral institutions – like the Islamic Development Bank which provides financing necessary for the development of important governmental projects (Van Greuning et al 2008, 203) – has been quite important, along with the principles of Islamic banking, for the expansion of the Islamic banking system worldwide. The superiority of Islamic banks towards their Western rivals can be mainly identified in their capital adequacy (Ahmad 2010, 86), which is high under the influence of the Islamic banking rules which promote the cooperation between the banks and their depositors and prohibit the involvement in risky financial assets. As noted by Venardos (2010) the reason for the increased protection of Islamic banks towards the recession is the fact that these institutions are mainly ‘driven by trade and production’ (Venardos 2010, 2). 4.2 Recommendations In accordance with the issues discussed above, a series of changes are suggested in order for the financing schemes of the Islamic banks to become more attractive to the public: a) increase of the governmental support towards the Islamic banks – referring especially to the branches of these banks operating in the Western countries, b) improvement of the quality of the information provided to the public in regard to the financing schemes available in Islamic banks, c) introduction of training schemes for the employees of these banks – or improvement of the existing training projects – in order for them to become aware of all these products’ characteristics and needs, d) review of the existing range of the Islamic financing schemes available to the public – an issue which is mostly highlighted in the survey and e) restructuring of the financing contracts – referring to the terms of repayment – in order for them to become more flexible and more attractive to the public. 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Institutions participated in the empirical research/ survey Bank Sepah, Paris, 2011, available at [Last accessed on 6/1/2011] The Islamic Bank of Britain, 2011, available at [Last accessed on 6/1/2011] The Ahli United Bank, London, 2011, available at [Last accessed on 6/1/2011] The United National Bank, London, 2011, available at [Last accessed on 6/1/2011] The Europe Arab Bank, Paris, 2011, available at [Last accessed on 6/1/2011] B. Case studies analysis Al Baraka Banking Group, 2011, available at and [Last accessed on 7/1/2011] Al Rajhi Bank, 2011, available at [Last accessed on 7/1/2011] RHB Banking Group 2011, available at [Last accessed on 7/1/2011] C. General online sources AME Info, 2009, Financial crisis presents opportunity for Islamic banks, available at http://www.ameinfo.com/198425.html [Last accessed on 5/1/2011] Bloomberg, 2010, U.K. Shariah Banks Hampered by Recession, Lack of Support: Islamic Finance, available at http://www.bloomberg.com/news/2010-07-21/u-k-shariah-banks-hampered-by-recession-lack-of-support-islamic-finance.html [Last accessed on 5/1/2011] Norhana Endut and Toh Geok Hua (2008) Household debt in Malaysia. BIS Papers No 46, pp.108-116, available at http://www.bis.org/publ/bppdf/bispap46l.pdf [Last accessed on 5/1/2011] General Council for Islamic banks, 2010, Islamic Banking System is Remedy for Recession, available at http://www.cibafi.org/newscenter/english/Details.aspx?Id=2614&Cat=4&RetId=98 [Last accessed on 5/1/2011] Grose, T., 2008, The Rise of Islamic Banking in a Time of Economic Crisis, available at http://www.usnews.com/news/world/articles/2008/12/10/the-rise-of-islamic-banking-in-a-time-of-economic-crisis.html?PageNr=2&s_cid=related-links:TOP [Last accessed on 5/1/2011] Gulf News, 2009, Top 100 Islamic banks defy recession woes as combined assets grow 66%, available at http://gulfnews.com/business/banking/top-100-islamic-banks-defy-recession-woes-as-combined-assets-grow-66-1.537284 [Last accessed on 5/1/2011] HilalPlaza (2011) Islamic Banks, Islamic Loans and other loans for Muslims, available at http://www.hilalplaza.com/islamic-finance/islamic-loans.html [Last accessed on 8/1/2011] Islamic Bank of Britain (2011) Contracts, available at http://www.islamic-bank.com/glossary/ [Last accessed on 8/1/2011] The Nation, 2009, Islamic banks less affected in global recession, available at http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/Business/10-Feb-2009/Islamic-banks-less-affected-in-global-recession [Last accessed on 5/1/2011] USA Today, 2010, Islamic banks grow as recession impact muted, available at http://www.usatoday.com/money/industries/banking/2010-10-19-islamicbank19_ST_N.htm [Last accessed on 5/1/2011] Wilson, R., 2009, Why Islamic Banking Is Successful? Islamic Banks Are Unscathed Despite of Financial Crisis, available at http://www.islamonline.net/servlet/Satellite?c=Article_C&pagename=Zone-English-Muslim_Affairs%2FMAELayout&cid=1230650190574 [Last accessed on 5/1/2011] B. Appendix - Questionnaire 1. Which is the level of financing provided by your bank to the public? a. High (36%) b. Average (38%) c. Low (26%) 2. Is the repayment of the loans regular? a. Yes (57%) b. No (43%) 3. Which is the type of loan most preferred by the customers? a. Home loans (44%) b. Personal loans (38%) c. Other (18%) 4. Do the customers understand all terms of Islamic financing schemes? a. Yes (56%) b. No (44%) 5. Which do you consider as the major obstacle for the development of Islamic financing? a. Lack of adequate information (27%) b. Lack of experience of employees (28%) c. No major obstacle of such kind exists (45%) 6. Which is the most common complaint of the customers? a. Low range of loans (58%) b. Short period of repayment (42%) 7. How you could characterize the performance of your organization in financing? a. High (52%)b. Satisfactory (31%) c. Rather low (17%) 8. Which do you consider to be the major advantage of the financing schemes of your organization compared to those provided by the Conventional banks? a. The lack of interest b. The support provided to the customer 9. Did the recession affect your organization’s ability to provide financing? a. Yes (24%) b. No (76%) 10. Which part of your organization’s financing scheme it should be changed? a. Terms of provision of loans – become stricter (21%) b. Terms of provision of loans – become easier accessible (28%) c. The period of repayment – become longer (37%) d. The range of products – to be increased (14%) Read More