Islamic Finance Structure and Services in Afghanistan, Saudi Arabia and Yemen - Term Paper Example

Introduction

Syndicated finance can be defined as financing in the form of agreement that takes place involving financial institutions and bank. The sole issue is to strike a deal of extending the sum of capital financing to the interested borrower (Mutalip, 2009). Based on the conventional syndicated finance, the financial institutions through the Islamic syndicated funding have the opportunity to select the lead bank that can seal the deal with approved coordination that involves documentation Andrew, H. (2012. To understand the Islamic syndicated financing better, examining the concept deeper will enlighten one concerning conventional equivalent. More than one bank ensures borrowers get the loans by way of distribution as per the guidelines of the traditional syndicated financing.

Structures of all Islamic finance are subjected to use; one of the conventional structure is the Murabahah (Tawarruq). Other than the use of this structure in the Islamic syndicated market, this structure was recently declared impermissible by the international council of Fight Academy. It came as a result of the existing conflicts based on the objectives of Shariah. An argument came up involving Shariah and tawarruq on the grounds of the central conflict. Based on the report carried out, the documents only disrupt the mechanism of lending and interest. The organized Tawarruq concerning the structure is majorly designed to clock within the prohibition and diverting all intentions of participants hence contradicting Shariah objectives. The resolutions passed could not shy away from market players from stand firm and embrace Murabahah (Tawarruq) about Murabahah (Tawarruq) for Islamic syndicated finance. Thus the principles of the Islamic allow the market participants to access opportunities and also enhance innovativeness based on the Islamic syndicated finance products which are fascinating.

Literature Review

History of the topic

Historical Development of Islamic banks

Islamic banks can be traced back 1400 years ago. Around 600AD, there was some forms of transactions which were very similar to the transactions of the modern banking system. For example, investors such as Al-Zubair bin Al-Awam collected deposits from people and later put those deposits in his investment projects. In the early Islamic empires, between 4th and 10th century AD, there were banks referred to as the “sarraffeen”.

The first forms of credit papers were the “suftaja” and “hawala” which were written obligations. In the early 19th century, western banking was introduced in the Islamic countries Al‐Salem, F. H. (2009). A good example is the bank of Egypt which was opened in Egypt in 1856 though it was later closed in 1911. In 1898, Constantine Salvagos and Ralph Suarez opened the national bank of Egypt which operates up-to-date. In the early 1900s, the interest-free-banking was introduced. In 1963, there was introduction of local savings banks which were the first interest free banks in Islamic countries. The banks later merged with national banks in 1967 for political reasons.

In 1971, there was establishment of Nasser Social Bank in Egypt through a presidential decree. The bank was independent of the regulations subjected to other banks. In 1974, the first international development bank (IDB) was established as the first international bank for the Islamic society. The operations of the bank began in 1977. In 1970s and 1980s, many Islamic banks which are still operational today were established. An example of this banks is the Faisal Islamic Bank of Egypt opened in 1977. Also, in 1977, there was establishment of the International Union of Islamic Banks which was later recognized in July 1999 as the general council of Islamic banks and financial institutions (CIBAFI). By the end of 2012, it had 114 members. The above institutions and banks are the foundations of the modern Islamic Banking.

The role of Islamic Finance

Islamic finance assesses the position of the economy. The Islamic Finance plays different roles as described below.

One of their roles is providing financial inclusion to the community. This is an easier way to make products and services required by businesses and individual affordable. Services such as payments, transactions, savings, credits, and insurance are conducted in a steady flow.

They take part in the improvement of infrastructure. Islamic law has emerged sharia policies such as Sukuk to support both domestic and foreign investors. It gives an effective relationship between the issuers, sovereigns, and corporations which facilitates a variety of investors, hence getting constant capital required by any infrastructure project.

Enhancing financial stability. To enhance bank financial stability, library method is employed to review the present papers and survey the extant literature on subjects.

Principles of Islamic finance

Islamic finance provides shared prosperity, which helps equalization of all people. Due to high numbers of unemployment, Sharia implements law and policies that are favorable in maintaining high investment rates which generate labor skills in the modern dynamic workforce.

The other principle is the prohibition of interest both riba and materiality. The act of giving or charging interest is highly discouraged. All businesses should be processed with transparency, accuracy, and disclosure of all information needed to show the evidence that no party takes advantage of the other party. In addition to that engagement in immoral businesses such as manufacturing alcohol and arms is strictly prohibited. Returns should be linked to risks.

Summary of what other scholars have done in the field

A wide range of scholars has explored the field of Islamic finance structure. Some scholars have identified the history of Islamic finance structure and products and services as having originated in different phases. The first stage is during the 19th century where traditional Islamic societies were competing with the western domination. Many Muslim intellectuals had discovered the need for reforms that would change their general vision of finance structures. The second phase was at the end of the 19th century. At the time the utopian Islamic society had characteristics that did not embrace materialistically oriented capitalism. Socialism was prevalent during the phase. In the third stage, there arose Islamic economics, and it was in the early 70s. The development of Islamic finance happened during the third stage. Islamic finance structures were directed to those individuals who wanted to be per the religion (Shaikh et al., 2017).

Other scholars have focused on the principles of Islamic finance system citing the Quran as the derivative of the rules followed by Islamic financial structures. Riba (Interest), ghara (risk) and Mayser (gambling) are the three issues that are forbidden by Islamic finance laws. However, many other proposals have been accepted to be used as products and services by financial structures. Other scholars have focused on the penetration of Islamic finance structures in the Middle East. Research has concluded that in many countries there is only one Islamic financial structure though their performance has been viable although not much profitable. Other studies have focused on the essential features of Islamic finance structure by providing how they compare to traditional western finance structures. As such, a lot of scholarly effort has been made on the debate on riba (Interest) which was forbidden in Islamic finance. Such restriction has led to fear of Muslims in taking mortgages, carrying out balances on credit cards or investing in any fixed income securities. While the banning of interest is rooted in Islam religion, the international association of Islam banks provides a rationale for the ban on interests. In that case, some legal issues accompany the prohibition whereby Islamic financial institutions cannot earn excessive profits from a client. The financial structure must return a portion of the benefits to the client in such a scenario (Sheikh et al., 2017).

Other scholars have investigated Islamic finance objectives and to what extent they are different from conventional finance systems. From the research, studies have shown that Islamic finance objectives are similar to those of conventional analysis, but the only difference is in the procedure of working.

What makes the research different from what other people have done or written on the topic?

The research on the Islamic finance structures, product and services in Afghanistan Mauritania, Saudi Arabia, and Yemen is different from what has been done in previous studies. It emphasizes the history of the Islamic finance in precisely in the four countries. Most previous researchers have not concentrated on finding out the history of finance structures in individual counties especially in the Middle East. Notably, the progress made by Islamic finance structure can be proved through the utilization of data drawn from countries that have adopted the finance structure in their banking sector. The writing of this work will also be different, as it will point out on the various Islamic financial structures present in the four distinctive countries namely Afghanistan, Mauritania, Yemen, and Saudi Arabia. Firms in the IBFI will also be provided, something that has not been done by previous researchers. These include commercial banks, pension schemes, and investment companies.

Financial structure key players

One of the financial structures is commercial banks. Commercial banks are the avenues where an interbank transfer is done. In the Islamic money market, commercial banks in the region sell and buy the Islamic money market such as Mudarabah interbank investment (MII), Islamic Cheque Cleaning System (ICCS) and negotiable Islamic Certificates of Deposit (NICD). Some of the licensed commercial banks in the Saudi Market include the National Commercial Bank, the Saudi British Bank, Saudi Investment Bank, Alinma Bank, Banque Saudi Fransi and Riyad Bank (Muhammad et al., 2016).

Islamic banks products and services can be divided into three main categories as described below:

1 Profit and loss sharing models (Mudarabah and Musharaka. The user of the finance and the bank share the profit based on partnership contract

2 Asset-backed financing commodity is transferred to another commodity including Ijara, Murabaha, salaam, and Istisna

3 Modes based on the contracts of security and safety Where the banks offer depositors safety for their money and include Wakala and wadiah

Businesses are also critical players in the market as they are big beneficiaries of high liquidity instruments in the money market. Companies can invest their surplus cash in these money markets. The type of companies that can take a hand in the financial market includes multinational companies, companies in the manufacturing and processing sector, and entrepreneurs. Investment companies are also on the list of essential players of Islamic financial structures. Investment companies are the architects of various securities in the market, and they maintain the liquid nature of the instruments used in the markets. They include investment banks, security exchanges

Pension funds are also present in money markets. The government strengthens pension schemes so that they can earn importance in the financial structure. Pension funds can be invested in the financial structure since they outpour in large quantities (Jaffer, S. (2009). For instance, the Public Investment Fund of Saudi Arabia is sovereign and therefore has the power to invest funds to earn benefits. In fact, the PIF has a portfolio made up of approximately 200 investments, of which around 20 are listed on Tadawul, the Saudi Stock Exchange.

The government is a player that cannot be surpassed in the Islamic money market. It provides the environment under which all other instruments are traded in the money market. Hence, it is a prerequisite that a government should offer a favorable environment for various instruments to be traded in the money market. For instance, the Saudi financial market is increasing performing an essential function in financial intermediation to create channels between lenders and investors hence creating a favorable avenue for the conduct of business (Muhammad et al., 2016).

The table below shows a list of the Islamic Banks and Financial Institutions that could be found in any of the four countries in our topic.

The other financial institution is depository institutions (Banks). They receive deposits from people and other institutions (Ahmed, A. 2017). They utilize this deposits in their investment projects. They include commercial banks, savings associations, loan associations, credit unions, and mutual saving banks.

Savings and loans associations

Their role is to encourage savings by people. Their funding is obtained through savings deposits. They include the Federation of Islamic Medical Associations which is a global association.

Credit unions. These are Islamic lending unions. The Islamic credit union of Canada is a good example of these unions (Kamso, N. (2013). They are organized around a specific group of people, union members, employees of a certain organization among others. They obtain their funds through shares and consumer loans.

Insurance companies; Life insurance companies, and fire and casualty insurance companies. They ensure their policyholders against loss from fire and theft accidents. Their funds are received through premiums and Islamic bonds such as Sukuk.

Mutual savings banks

A good example is the Dow Jones Islamic Funds provided by the northern American Islamic Fund (NAIT). They give their shareholders an opportunity to pull their resources together. This helps in lowering the transaction cost.

Islamic Finance company

The company was established in 2006. It is located in the United Arab Emirates. They offer financial services and products that adhere to the Islamic sharia laws. A group of shareholders forms them. They provide loans to their shareholders.

All the above are just but among the many Islamic financial institutions. They offer products such as the Mudaraba products, Musharaka products, sale and lease contracts, asset-based securities (SUKUK; an alternative to bonds), among others.

Products and Services

As discussed earlier Islamic banks products and services can be divided into three main categories as described below:

1 Profit and loss sharing models (Mudarabah and Musharaka. The user of the finance and the bank share the profit based on partnership contract

2 Asset-backed financing commodity is transferred to another commodity including Ijara, Murabaha, salaam, and Istisna

3 Modes based on the contracts of security and safety Where the banks offer depositors safety for their money and include Wakala and wadiah

The products and services offered by specific institutions

commercial banks

Commercial banks in the region sell and buy in the Islamic money market products such as Mudarabah interbank investment (MII), Islamic Cheque Cleaning System (ICCS) and negotiable Islamic Certificates of Deposit (NICD). Commercial banks also offer mudaraba and musharaka products.

savings associations

They offer housing financing credit and other loans. They also offer the service of collecting deposits from people. They use the deposits in their own investment projects.

Mutual savings banks

They offer banking and insurance services. They also offer Islamic financing products such as investment loans. Another product offered is mortgage such as the Manzil house purchases.

Insurance companies

The products they offer include life assurance products such as the QIIC’s takaful insurance products. They also ensure their policyholders against loss from fire and theft accidents. Their funds are received through premiums and Islamic bonds such as Sukuk. They also offer protection against life’s uncertainties and perils. They relieve people the burden of life. Other types of insurance offered include motor, marine and balsam medical insurance.

Islamic Banks

No.

Name

Ownership

1

Affin Islamic Bank Berhad

L

2

Al Rajhi Banking & Investment Corporation (Malaysia) Berhad

F

3

Alliance Islamic Bank Berhad

L

4

AmBank Islamic Berhad

L

5

Asian Finance Bank Berhad

F

6

Bank Islam Malaysia Berhad

L

7

Bank Muamalat Malaysia Berhad

L

8

CIMB Islamic Bank Berhad

L

9

HSBC Amanah Malaysia Berhad

F

10

Hong Leong Islamic Bank Berhad

L

11

Kuwait Finance House (Malaysia) Berhad

F

12

Maybank Islamic Berhad

L

13

OCBC Al-Amin Bank Berhad

F

14

Public Islamic Bank Berhad

L

15

RHB Islamic Bank Berhad

L

16

Standard Chartered Saadiq Berhad

F

Collection of data

The following section provides tables that show the collection of data concerning the Islamic financial structures and product and services in Afghanistan, Saudi Arabia, and Yemen found in the Middle East and Mauritania, which is found in North Africa. Table 1.1 shows Islamic Banks and financial institutions and their financial assets in 2016. The table provides the findings that can help to ascertain whether Islamic finance is a catalyst of growth since the emergence of the Islamic financial structures in the early 1970s.

Table 1.1 Islamic Banks and financial institutions and their financial assets in 2016

Table 1.2 Financial services of Islamic banks in Afghanistan

Bank

Islamic banking asset( million USD)

Sukuk outstanding (USD)

Islamicfunds asset (million USD)

Takaful contribution( USD per year)

Total

Maiwand Bank

19203

345,203

3478

865728

.

New Kabul Bank

21243

265,387

5478

765567

.

Burj Bank

23605

456,789

6598

273667

.

Bank e Millie

16204

234,654

9856

847678

.

Ghazanfar Bank

12786

300,106

1975

981273

.

Bank Alfalah

20202.5 million US dollars

305,211

9856

987674

.

Azizi Bank

5687

987127

Table 1.3 Financial services of Islamic banks in Saudi Arabia

Bank

Islamic banking asset

Sukuk outstanding

Islamicfunds asset

Takaful contribution

Total

Islamic Development Bank

16785.5

26644

3654

52687

.

National Commercial Bank

26534.4

32677

37267

98267

.

Bank Al-Jezeera

27361,3

4473

2762

471867

.

ICIEC

3346.7

3446

25636

567155

.

Table 1.4 Financial services of Islamic banks in Yemen

Bank

Islamic banking asset

Sukuk outstanding

Islamic funds asset

Takafu3346,7l contribution

Total

Tadamon International Islamic Bank

6527.5

6712

23543

23657

567678

Saba Islamic Bank

2162.8

32178

3683

18746

.763253

Islamic Bank of Yemen

4378.3

36344

2356

98752

562367

Table 1.5 Financial services of Islamic banks in Mauritania

Bank

Islamic banking asset

(million USD)

Sukuk outstanding

Islamic funds asset

Takaful contribution

Total

BMCI Mauritanie

7262.5

76132

35623

9877

.

Islamic Bank of Mauritania

2761.3

36417

236723

5787

985769

Albaraka Islamic Bank

3246.6

46476

3652

I477

987493

Banque Al Wava Mauritanienne Islamique

1654.4

74678

2365

8765

481289

From the information in the tables 1,1 through 1.5, we can conclude that Islamic financial institutions play a very critical role in business. Their presence is inevitable for there to be economic efficiency in the Islamic countries. The Islamic banks occupy a very large share of not only the economy of their respective countries but also the global economy. They are crucial in determination of money supply in the economy. It is, therefore, evident that Islamic banks are a catalyst to economic development.

Data Analysis

An analysis of the financial assets and financial institutions shows that countries from Asian and the Middle East have highly integrated the concept of Islamic institutions. Part of sub-Sahara Africa follows at quite a distance point. The results could be interpreted that countries from where Islamic finance structure was developed have embraced the idea if Islamic finance. It could also mean that countries in the Middle East such as Afghanistan, Saudi Arabia, and Yemen have more Islamic fund assets, Suku outstanding, Islamic fund assets and Takaful contributions due to the opened market where they transact with a range of businesses from various parts of the world (Ahmed, A. 2017). Moreover, countries in the Middle East such as Yemen and Saudi Arabia have vast oil deposits, which translate into investment as compared to countries like Mauritania. However, the fact that the region near Afghanistan has lower total number assets could be associated with the high political temperature in the area where in Syria there is war and in North Korea there are superiority struggles with the launching of nuclear weapons. Due to an unfavorable climate of the political setting, investors may shy away from to invest and conduct business in an area where there are high risks of undergoing losses. In the case of Mauritania and other African states where the Takaful contributions are low, it may be construed that the region has weak economies that have not realized the need to have pension schemes to protect the future of its countrymen. Furthermore, it is a sign that Islamic financial structure has not been in those countries for a long time. Notably, when businesses expand in other countries, they cannot be quick to do full operations until they are sure of their customer base and the support of other stakeholders such as investors and the government.

Table 1.2 entails analysis of Islamic banks in Afghanistan. Based on the Islamic banking assets, burji bank is the strongest in the market. Maiwand bank has the least assets. However, it is worth noting that despite of Maiwand bank having the least asset, it has a strong share in the market. This implies that the Islamic banks are dominant in the Afghanistan economy. Also, the Islamic funds’ assets also indicate the strengths of the banks in the economy. From this we can conclude that the banks play a very critical role in driving the Afghanistan economy.

Table (1.3) is an analysis of the Islamic banks in Saudi Arabia. ICIEC bank with a total asset of 3346.7 million dollars dominate the market. The other banks have almost the same power in the market. National commercial bank has the highest Islamic bank asset. This asserts that most of the residents of Saudi Arabia are Muslims given that this is a national bank. The national bank also has the highest takafur contribution.

Table 1.4 analyses the financial position of Islamic banks in Yemen. The bank with the highest asset ratio is Tadamon Islamic bank.Saba Islamic bank has the least Islamic banking asset. Islamic bank of Yemen has the highest Sukuk outstanding. The implication of this is that the dominace of the banks in the country is even. The banks have varying market powers depending on their area of locality. This that the Yemen economy is primarily driven by Islamic banks.

In table 1.5, the financial position of Islamic banks has been analyzed. The strongest bank in this country based on the Islamic banking assets is the BMCI Mautitanie with an asset base of 7262.5 million US dollars as at 2016. The bank also has the highest Sukuk outstanding and takafur contribution which shows that it is the most dominant bank in the economy. The banks, on average have a very high dominance in the supply of money in the country which shows that they are part of the driving powers of the economy in this country.

About the Islamic finance structure and products and services, which are used in the operations of Islamic banking, Saudi Arabia leads the list, followed by Afghanistan, Yemen and finally Mauritania (Ahmed, A. 2017). All the countries are Islamic financial states. However, the wealth in those countries determines the number of products and services the bank in those regions can operate. Countries with high petroleum and oil deposits are more likely to have expanded products and services to serve a wide range of business activities (Muhammad et al., 2016).

In table 1.4 about personal borrowing in Islamic financial and banking structures, countries whose gross domestic product is favorable are highly supportive of the population of that country to get loans that can be used for individual economic growth. For instance, a wide range of individuals in Saudi Arabia is in a position to borrow capital from Islamic financial structure even though the people know that the banks in the country do not heed to issues of garnering interests. The other three states, Mauritania, Yemen, and Afghanistan, have lower borrowing rates in their Islamic finance structures. Despite that these countries heed the interest policy; people are still reluctant to use such opportunities that will lead to profit sharing between them and the financial structures

Conclusion

Islamic financial structures, product, and services have been on the rise with more expansion of these institutions into African countries which have regard for the Islamic faith. Their initiation in the early 1960s is a significant milestone in moving away from the conventional methods of banking. Moreover, it is a way of comparing favorably with European financial institutions through the control of the World Bank Ahmed, A. (2010). The Islamic economic structures are on a right course due to their secure connection with the principles of Islam faith hence reducing the rate at which financial institutions manipulate citizens. Borrowing of capital from Islamic financial structures should be highly encouraged so that countries can develop and record a high gross domestic product. Moreover, there is a need for Islamic financial structures to expand their products and services to match the needs of the society in which the institutions have been established. Moreover, the Middle East must ensure political stability in the region to allow Islamic financial structures to thrive.