Islamic Banking and the Society: An Analysis of the Emirates Islamic Bank - Example

ISLAMIC BANKING AND THE SOCIETY - AN ANALYSIS OF THE EMIRATES ISLAMIC BANK Table of contents Executive Summary.......................................................3 Introduction...................................................................4 Background of the EIB..................................................4 Annual Reports of the EIB.............................................7 Challenge of Conventional Banking..............................9 Recommendations.........................................................10 Conclusion.....................................................................10 References......................................................................11 Executive Summary This paper examines the role of Sharia banking in contemporary society. To this end, the paper examines the practices and processes of Emirates Islamic Bank (EIB). The research indicates that the main difference between Islamic banks and other banks is that Islamic bank forbids interests the Western way and supports social justice. The research identifies that there is a growing preference for Islamic and Sharia-compliant banking. And EIB has increased its profitability over the past years. The bank has enhanced its capability and profitability indices. There is a major threat that is presented by other entities in the banking industry that do not carry out Islamic banking. However, for sharia-compliant banks like EIB to survive, they need to focus and position themselves as specialized banks. Introduction Islamic banking is gaining popularity around the world. Muslims are required to adhere to some important functions and rules that relate to how to save and how to use money (Kettell, 2011). Muslims are also directed by the teachings and traditions of the Faith about how to invest and how to expect interest as it grows on an individuals investments (Ahmed, 2012). These are defined in the Quran and the traditions that existed after the Prophet and Founder of Islam. These practices and processes have been consolidated into the principles of Islamic banking which is now in vogue throughout the Arab world and beyond (Hassan and Lewis, 2007). Observant and pious Muslims tend to demand banking services that are in sync with the fundamental teachings and practices of Islam. This paper analyzes the principles of Islamic banking and how it is carried out in the Arab world. To this end, the paper critiques general trends in Islamic banking and how it is implemented by a selected Islamic bank. The chosen Islamic bank for this study is the Emirates Islamic bank which has its headquarters in Dubai, UAE. The United Arab Emirates has a population of about 4 million inhabitants (Globie, 2012). The country relies mainly on the export of crude oil and the utilization of its geostrategic location which helps the country to play a central role in the re-export industry by way of linking the developed world with the developing world (Oxford Business Group, 2011). The Emirate Islamic Bank (EIB) plays a central role in the economy and this paper analyzes the evolutional process of the bank and evaluates its financial operational position. Background of the EIB The Emirates NBD bank was formed in October 2007 through a merger between the Emirates Bank International (EBI) and the National Bank of Dubai (NBD) (Emirates NBD, 2013). The consolidation created a strong and major entity that had important and strategic significance in regional and global corporate, retail, private, Islamic and investment banking (Emirates NBD, 2013). This institution also played a major role in consolidating Dubais position as the center of Islamic trade and commerce and a vital destination for trade and commerce in the Middle East and North Africa (MENA) region. The group has a history that goes back 50 yeats and they have had major successes and improvements based on their history and their affairs as a major national and international entity. Emirates Islamic Banking (EIB) is a subsidiary of the Emirates NBD Group and it was formed by the conversion of the Middle East Bank into an Islamic banking entity. As part of the broader scope, the Middle East Bank was also owned by the Emirates NBD group. Mission The mission of the Emirates Islamic Bank is : "providing innovative & high standard financial products & services governed by Islamic Sharia provision to enrich the society." (Emirates Islamic, 2013). This mission drives EIB to focus on the needs of customers and gets them to innovate and modify products and services to meet the needs and expectations of customers. Vision The vision of the Emirates Islamic Bank is: "To be a leading Islamic financial services institution with a core platform in retail banking and a strong commercial banking franchise." (Emirates Islamic, 2013). This vision involves a quest for continuous improvement and an enhancement of the processes and systems of the bank. This is meant to enable the bank to become a local and regional leader. The vision is focused on Personal and Commercial Banking and these are meant to be the fundamental area of focus of the bank. Islamic banking is based on modern Islamic banking concepts that goes back to over 1,400 years during the earliest years of Islam. The method of banking is based on risk-sharing and instead of putting all the pressure on the borrower, Islamic banking advocates for a system whereby the three parties to a loan is shared logically. This is because Islamic banking excludes financing based on predetermined interests. Rather, Islamic banking is a system whereby the depositor, bank and borrower share all the risks and rewards in a loan that is given out. This prevents a system whereby all the financial stress is placed upon the borrower alone. This involves the prohibition of Ribba. Emirates Islamic Bank is committed to the ideals of Islam and it seeks to use its competencies to help redistribute wealth in the UAE and promote social justice through the teachings of Islam. This implies that ordinary members of the society can invest their extra income in the EIB and through this investment, the bank can get enough money to fund other investors. These investors will take the loan and will not be pressured as it appears in the Western banking systems where borrowers need to presente a fixed level of interest. Rather, the interest to be paid back on EIBs loans are based on the earnings that will be made. This way, entrepreneurs can make money and also be able to stay above the poverty line. Additionally, members of the society who invest in these institutions will end up with a lot of money that they can gain as interest for their investments. And although it appears that there will be no fixed amounts for interest, there could be various possibilities and scenarios which could appear to be favorable. Another aspect of an Islamic bank like EIB is the fact that it is involved in Zakat, which is a form of charitable system that is ran according to the principles of Islamic law. The Zakat system involves giving charity to the poor and helping to maintain some degree of social justice in an Islamic society. By law, Islamic banks are required to set aside a percentage of their income for charity to enable them to work out things. In the year 2013, the Emirates Islamic Bank was in support of the Ramadan celebrations throughout the UAE (Emirates Zakat, 2013). As part of this, EIB partnered with numerous organizations in the UAE to promote activities and charitable campaigns during Ramadan. This involved engaging in various socially-relevant activities and this sought to improve the lives of people in the society. EIB set up a Zakat Fund Ramadan Campaign and this was to create a system through which there could be the coordination of affairs for Muslims throughout the month and also help to improve the lives of people throughout the year. The process sought to provide funding for young Muslims who sought to memorize and understand the Holy Quran and also promote the fundamental values and teachings of Islam to all peopole in the Emirates. The process is one of the many activities and programs that the UAE sought to bring together to enable the country to provide a proper and acceptable means and system through which Islamic values and Islamic processes are put in place to enable people to learn and do things relevant to the religion. This involved various funds and various processes that are supported by the teachings of Islam and also given as a means to help to improve the lives and activities of people throughout the Arab world and different parts of the world. Annual Reports of the EIB The financial statements of EIB indicates that there is a major rise in demand for Islamic banking services. This is because the EIB and other banks in the industry have made various campaigns that have presented Islamic banking as a central and important aspect of the lives of all Muslims. Thus, with more and more people seeing the importance to tie their religious practices with actual banking systems that brings results based on Islamic laws, there was an overall increase in the number of people who wanted to use Islamic banking services. There was therefore a general increase in the demand for the Islamic banking products and services that EIB made available to members of the public. As more and more people increase their demand and expectations for Islamic banking, the interest for this form of banking has exceeded the normal investor-bank relationships. Rather, the government and other regulators have become increasingly interested in the activities of banks like EIB and this has enabled them to work with these entities to achieve results and also provide high quality Sharia-compliant services to customers in the UAE and beyond. In 2012, the EIB had over 48 branches and over 100 ATM machines around the UAE and beyond. It was the sixth largest bank in the period and it had prospects to grow and overtake some of the major banks in the economy. There was a 15% increase in total income by the bank. This indicates that the banks income base is growing steadily and will soon become a major entity and force in the banking industry. Operating income rose by 61% from 2011 to 2012 levels. This implies that more and more people were willing to provide various services and make contributions to the different funds of the EIB. There was a proposed reserve transfer of AED16.2 million. This was subjected to Zakat based deductions. The Zakat calculation was fixed at the sharepool multiplied by 2.5775%. This provided the amount of Zakat to be paid for every single share. Musharaka is an agreement between a bank and customer to contribute a certain percentage to a certain investment enterprise (Al-Suwaidi, 1994). This is meant to enable the bank to help some socially-beneficial enterprises or enterprises that they believe will help to further the cause of the community or the nation. In 2012, AED245.149 million was set aside for this purpose. And this was in contrast with the AED200 million that was made available in 2011. This implies a clear increase of AED45.149 million over the one-year period. Mudaraba is investment into certain funds for an agreed percentage of profits and this is a form of loan that excludes ribba or illegally acquired interests which is forbidden by the principles of Islam (Saeed, 1996). In 2012, the mudaraba that was paid was AED83.805 million. This was above the previous years figure of AED73,460 million. This indicates that the bank was giving more money to help in promoting businesses and enhancing profits. Wakala is a certain amount provided to an agent who invests according to specific conditions and retains a certain fee. However, this fee could be cut down in cases of negligence or the violation of certain elements and aspects of the agreement. This is done to enable trusted agencies to provide a linkage between a Sharia-compliant bank and the crevices of a local community in order to enable them to deal with issues and matters in the most appropriate and best ways. EIB gave away AED2,193.085 million in 2012 as opposed to n AED1,746.843 million in 2011. Ijarah is a situation where a group leases an asset to a customer for a specific period against certain rent installation. This is technically a form of hire purchase in which the lessee will be able t purchase the asset at the end of the period. In 2012, AED8,874,102 million was set aside for this. However, in 2011, AED5,941,482 million was set aside for this purpose and this yielded significantly more in 2012 than in 2011. Istisnaa is an agreement between a group and a customer where the group develops and sells a property according to agreed specifications. This is also meant to ease the plight of people who seek to establish themselves. In 2012 AED1,319,978 million was set aside for this whilst in 2011, AED1,087,428 million was set aside for this purpose. Through this the bank was able to help a lot of people in the society. Challenge of Conventional Banking Most banks like EIB have competition from conventional Western-based banks. This is because traditionally, in the modification of the United Arab Emirates and other nations, the European colonialists presented their kinds of banking which played a role in the creation and formulation of the foundation of banking in these countries. These western banks were set up on the basis of traditional interest-bearing systems based on the Graeco-Roman model of banking where usury was permitted and carried out at a regular basis. Hence, Islamic banking appears to be a new phenomenon in many nations and communities around the world. In the Arab world, many people are however building the desire to bank with Islamic banks like the EIB. This include many Muslims who are increasingly becoming more religious and prone to the use of Islamic banks. Thus, banks like EIB is growing in stature and in financial position. On the other hand, many Western-based banking entities are modifying their systems to provide Islamic banking. Traditionally foreign banks like HSBC and other Western-oriented banks are modifying their services to include Islamic banking practices that allows them to compete with banks like the EIB on the markets. Therefore the EIB is somewhat constrained. In expanding to other nations and communities, banks like the EIB are faced with the challenge of proving that they are capable and specialized. This is done through various arrangements and processes that are meant to provide some degree of assurance to consumers in different parts of the world. Moreover, regulators have certain rules and regulations that are imposed upon Sharia-compliant banks like EIB. This include rules on banking and rules on Zakat. These are different from that of other non-Sharia entities. Although some people are advocating for these rules to be relaxed, they seem to be necessary to differentiate the various institutions and banking entities. Recommendations In order to compete and provide a significant service to the Islamic world, a bank like EIB needs to focus and present itself as a traditionally Islamic bank or entity. Through this, they will be seen as a specialized Islamic bank and they can gain the trust of customers. They must advertise their capabilities and competency and provide various services to help consumers to attain their goals and ends. Conclusion Sharia compliant banks are entities that provide banking services according to the fundamental principles and rules of Islam. This include banks that carry out affairs based on Islamic rules and practices that can be traced to the founder of Islam. EIB is a specialized entity that provides banking services according to Sharia rules. Their main difference is that they do not pursue the process of taking interests from customers the conventional ways. Rather, they use various tools and techniques in Islamic teachings that are meant to promote a healthy and a wealthy society in which social justice is central and paramount. Generally, the EIB is growing as a bank. This is because more and more people are becoming aware of the importance of Islamic banking as a means for completeness in the practice of Islam. Therefore the vast majority of them are using these services. EIB like other banks are faced with a threat of conventional Western banks. The best means of survival and expansion into foreign lands is through focusing and positioning themselves as a specialist Islamic entity. References Ahmed, A. M. E. T. (2012) Islamic Banking: How to Manage Risk and Improve Profitability Hoboken, NJ: John Wiley and Sons. Al-Suwaidi, A. (1994) Finance of International Trade in the Gulf Lieden: BRILL Emirates Islamic (2013) Vision and Mission [Online] Available at: http://www.emiratesislamicbank.ae/en/aboutUs/VisionAndMission.cfm Retrieved: March 13, 2014. Emirates NBD (2013) About Emirates NBD [Online] Available at : http://www.emiratesnbd.com/en/aboutEmiratesNBD Retrievd: March 13, 2014. Emirates Zakat (2013) Emirates Islamic Bank Supports Key Social Activities During the Holy Month of Ramadan [Online] Available at: http://www.emiratesislamicbank.ae/en/latestnews/2013/august/news04082013.cfm Retrieved: MArch 13, 2014. Globie, E. (2012) Only in UAE if you Dare: Living in Harmony New York: Strategic Book Publishing. Hassan, K. and Lewis, M. (2007) Handbook of Islamic Banking Surrey: Edward Elgar Publishing Kettell, B. (2011) Introduction to Islamic Banking and Finance Hoboken, NJ: John Wiley and Sons. Oxford Business Group (2011) The Report: Abu Dhabi Oxford: OBG. Saeed, A. (1996) Islamic Banking and Interest Lieden: BRILL Read More