The Manner through Which Banking Activity Is Controlled in the Islamic Law - Thesis Proposal Example

The thesis thereby looks to explain the manner in which the Islamic law was governed and the manner through which the financial activity are controlled in the Islamic law. This brings forward to a notion that different religion provides different laws and the religion of an economy governs and decides the rules pertaining to the financial field. The Islamic banking has developed over a period of time boom in the internal and external trades in the dawn of Islam led to the creation of Islamic financial tools such as deposits, money transfer, bill of exchange, etc. which has helped to deal with the requirements of the modern world. Islamic banks and conventional banks have similarity as masref refers to the place where money is exchanged and is in use since ages like the conentional banks in modern times. The origin of Islamic finance dated back to the dawn of Islam 1400 years ago where the banking activities matched the activities carried out in modern banks. The reason for this was that Muslims contributed to large extent to the development of the banking practices which was built on strong legislative and judicial system. The Islamic civilization began to decline from end of the 12th century and was known as Usur-Al-Inhitat or ‘the Ages of Decline’. This was the period which led towards the growth and development of Islamic banks and made the banks function as the traditional banks. This led to a creation of Islamic banks which believed in interest-free banking as an idea, the emergence and establishment of Islamic banks and the spread of Islamic banks. This phase witnessed a boom in the number of Islamic banks around the world. Also, many conventional banks established Islamic windows even some of the conventional banks converted to Islamic banking. This made development in the Islamic banking arena as each Islamic financial institution established its own shariah supervisory board so that control was better and banks were able to perform their functions deligently.This helped the retail banking assets is grown by an average of 42 per cent since 1992 and helped in the development of Islamic banking rules which has helped the banks to develop and work as modern professional banks. Islam is mainly characterised by three groups: faith and belief (aqidah), ethics and morality (akhlaq), and practices and activities (shariah). This defines the Islamic law as they follow the principle of Shariah which means “the way that directs man’s life to the right path”. Shariah has further been derived from quran and Sunnah which are the primary sources of shariah law. Quran is considered as the primary source which has contribued towards the Islamic law and also has contribution from the Sunnah, ijmaand qiyas. The secondary sources which have contributed towards the Islamic law constitutes of Ijtihad, Istihsan, Istishab, Maslahah Mursalah, Sadd Al-Dharai and Urf. These findings from the various sources have been supported by the various schools of thoughts that interpret religious material in three major areas: belief, religious practice and shariah (law). This law has thereby helped to draft a contract law which states that that “everything is permissible except what is prohibited” and includes family law, criminal law and commercial law, and part of muamalat determines which contracts are permissible and which are prohibited in the context of shariah. This helps to identify the fact that the basic component of an Islamic Contract law consist of concent, capacity, subject matter, purpose, and consideration. The manner in which the relgion has drafted the contract law has ensured that it has all the components of a contract and ensures legal binding. There are several ways to categories contracts and the common methodology applied in the commercial filed is to define contracts of exchange, contracts of investment, contracts of charity, contracts of security, and other forms of contracts which have been looked after in the Islamic contract law thereby ensuring justice and equality for all. The Islamic law also provides valuable information pertaining to contract of investment and includes Musharakah (partnership), Mudarabah (Silent Partnership). In a similar way the Islamic contract law has provided valuable guidelines for contract of security, contract of charity and other form of contract. An interesting fact is that the Islamic Contract law is consistent with the other professional bodies and look to emulate all the valuable information a person is looking for. This makes the Islamic law follow the philosophy that god is the true owner of the world's wealth and He submitted it to human beings, which is the vicegerency of man theory. Therefore, the objectives of Islamic banks differ from those of the conventional banks as it evolves around the prosperity of society. Islam allows various freedoms to its followers but restricts riba, gharar and miyser, which are the key prohibitions in the Islamic financial system. This practice of lending money on fixed interest was also known in Arabia before Islam in which it been referred to as riba al-jahiliya and is prohibited in Islam. Riba has further been divided into riba al-nasiah (related to defer payment) and riba al-fadl (related to exchange of commodities). The prohibition of riba appeared in four revelations in the quran due to which the Islam law prohibits it. Many commentators of quran argued that the word riba in this verse does not refer to usury per se, but the word riba in this verse means a gift offered by someone to a person with hope that he will be given back more than what he gave but since it is prohibitied by Quran the law seems to follow it. The quran did not define or gave explanation about riba in contrary to hadiths. The above hadiths which prohibited riba al-bya identified only six commodities which are gold, silver, white, salt, date and pearly, so the prohibition is limited to it. This has been backed by the fact that all monotheistic religions (Islam, Christianity and Judaism) condemned and prohibited usury. Gharar in Arabic literature means risk or hazard. Also, it means fraud, deception, delusiveness, peril, uncertainty, and fallaciousness which are prohibited under the Islamic law. Mayisr is derived from the Arabic word "Yusr" which means "ease of obtaining something of value without earning it" has also been condemed in the Islamic banking. Islamic banks seek to achieve balance between individual interests and the interests of society via set of goals which been drawn from the Islamic economic thought. Thus, unlike conventional banks which its objectives derived from the capitalistic profit-maximization philosophy Islamic banks aim to establish a just, fair and balanced society. The Islamic banks perform and work on a similar model followed by conventional banks and depend on shareholders’ capital, deposits from depositors and funds invested by investors. In addition, both offer non-credit operations services which considered a source of funds. The sources of funds for Islamic banks are almost like that of conventional banks and rely upon internal and external financing. The internal source of funds comprises of -up capital, reserves and retained profits. This source does not differ in terms of its importance and purpose of it than in the conventional banks. The external source of financing are similar to the one followed by conventional banks and mostly comprises of deposits made by people in the banks. The general rule is that Islamic banks receive deposits on the basis of a loan not on the basis of wadiah. This because Islamic bank can use these deposits and benefit from the return on it, but in case of loses the bank is obligated to return these deposits to the depositors. Islamic banks offer non-credit services to its clients in exchange of a commission, which provides extra income to the bank. These services adhere to Islamic principle and the most important services in that been offered by Islamic banks are letter of credit, documentary credits, Collecting and Discounting Commercial Papers, Currency Exchange, Credit cards, and hawalah. Islamic banks which operate in accordance with the provisions of Islamic law mobilize its funds in different ways compared to conventional banks. The uses of funds in Islamic banks are Cash Assets, Restricted investments accounts, Direct Investment, and Indirect Investment. This helps to determine the supervision of Islamic banks which is done by government but also by shariah board or shariah committee as the later makes sure that Islamic banks operation adheres to Islamic principles. Thus, the Islamic banking laws looks towards abiding by the rules of the Islamic law while conducting its routine functions. The manner in which the Islamic banking has developed and looked towards working as most conventional banks has helped to spread its network and wings. Asia-Pacific region established itself as a strong hold for Islamic finance as the industry is growing in fast rhythm in many parts of this region. This is growth is been supported by the large Muslim population in the region, which 62.1 percent of the population are Muslims. Also, the non-Muslim nations or countries with some Muslim population in the continent are engaging in Islamic finance such in the case of Australia and Singapore. The Islamic financial industry in Asia is growing in fast rhythm. This growth fueled by economical development, increasing population and the investments from the Middle East countries. This section will cast a light on the development of the Islamic banking industry in Asia. Africa also provides a promising growth opportunity for Islamic banking due to the sharp increase in population witnessed by the continent. Islamic finance is developing in Europe rapidly and many European financial intuitions perceive it as profitable opportunity to create new business. This trend continued all over Europe as fully fledged Islamic banks or branches of established Islamic banks emerged in different countries in mainland Europe. The Islamic financial market concentrated mainly in the GCC countries (Gulf Cooperation Council, consist of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates) which account for 35.6 %of the total shariah compliant assets. Thus, the entire world is presenting bright opportuities for the Islamic banking institutions and is mainly due to the growth in Muslim population, ability to match the conventional banks, diversification into different sectors and the ability to control financia risk. The manner in which the Islamic banks were working resulted in more conventional banks around the world and especially in the Islamic and the Arabic countries are converting to Islamic banking. The different conference like the "The Conversion to Islamic Financial Services" in 2005 highlighted the growth towards increase demand on Islamic financial solutions. Also, the Union of Arab Banks annual report which published in 2006 (cited in Al-Atyat 2007) revealed that the increasing trend of the establishment of Islamic banks and the conversion of conventional banks to Islamic banks are among the most important developments in the Arabic banking sector. The motives which made banks look towards this option are profitability seen in Islamic banks, the repentance of sin as it's against the Islamic law to deal in riba, political reasons in countries like Bangladesh were the prime reasons which led towards the transformation. Some of the banks which can be seen to be following the Islamic trends are Banque Misr in Egypt, Sharjah Islamic Bank in UAE, National Commercial Bank in Saudi Arabia, Kuwait international bank in Kuwait and Meezan Bank in Pakistan are some examples in this direction. The conversions for different banks have been different as some banks have fully converted themselves and some partially. Banks adopted different approach while convertine as banks looked towards converting the entire banking system, converting the entire bank to Islamic bank, transferring conventional branches to Islamic branches, setting up Islamic windows inside the conventional branches or departments, establishment of new and independent Islamic branches, approach of offering Islamic products, conversion through the establishment of a new Islamic bank by conventional banks and similar other approach. The banks faced problems relating to shareholding pattern, account holders and other liability accounts of the bank, bank loan book, and unfunded business activities of the bank which had to be dealt with so that the conversion was gradual. The conversion has helped banks to perform better as seen from the growth in assets, proper management of loan and deposit, and proper management of equity. This has been aided by the manner the different banks were able to deal with the changing environment which has helped the converted banks to flourish. Profits have been one of the prime reasons which have made conventional banks convert and follow the Islamic banking law. It has ben identified that bank’s profitability falls into two categories, i.e. internal and external factors. The internal determinants of profitability can be sorted in two classes, namely financial statement variables and non-financial statement variables. On the other hand, the external variables are the variables that are beyond the control of the bank's management, but reflect the economical and financial structure factors along with the legal environment effects on the bank's profitability.Banks following the Islamic law has been able to generate profits due to sound capital adequacy demonstrated to be an important factor in explaining the performance of banks. The banks have been able to manage proper liquidity and assets which has helped banks to ensure proper capital adequalcy and develop their business on the premise of strong growth rates. The external variables has also played their part though, these factors are outside the control of the bank the action of the banks’ management. The banks have been able to deal with the oil crisis, the economic fuctuations, proper taxation policies, and look towards developing different insurance schemes so that they are able to mobilize the funds of depositors towards the growth of business profitability. The banks have also been able to capitalize on the stock market capitalization which has affected banks profitability positively. Overall, the data pertaining to both conventional and Islamic banks demonstrate similar results and shows the manner in which the Islamic banks have been able to ensure higher profitability by using the factors to their advantage. A comparison of the performance of conventional bank with Islamic banks shows that Islamic banks have been able to match with the changes that conventional banks have dealt with. The performance studies related to Islamic banks still on it is infant stages. However, this been changed lately as some empirical studies had been conducted on Islamic banks performance. Nevertheless, these studies still limited on its number and the findings are inconclusive. A comparison of different Islamic banks with conventional banks shows differences in mean cost, revenue, and profit efficiency. Even the research conducted in the direction where 576 conventional banks and 110 Islamic banks from 54 countries were researched showed a match in perormance highlighting that the Islamic banks were able to match the performance of the conventional banks. Six ratios will be used to compare the performance of conventional and Islamic banks and it is been categorized in three group which are cost efficiency, revenue efficiency and profit efficiency were used which highlighted similar results. The mean cost-efficiency ratios for big banks were lower than conventional banks, and big banks were more profit efficient in comparison to small banks. Nevertheless, small banks are more revenue efficient and in comparison to the conventional banks th performance was sounder highlighting better management policies and execting the roles in a manner that delivered the best results for the conventional banks. Thus, despite very little data on the comparison of performance between conventional bank and Islamic banks it was highlighted that Islamic banks has performed better and with the manner they have revolved the performance is bound to improve in the future. Read More