Is Islamic Financing Better for Real Estate Financing than the Conventional Financing - Essay Example

Eklavya Pujari Hamad 10 April Research Proposal Is Islamic financing better for Real E financing than the Conventional Financing? Introduction The emphasis of ‘Islamic finance’ is not on efficiency and fair pricing but on contract mechanics and certification of Islamicity by Sharia Supervisory Boards. (Mahmoud A El-Gamal, 2006) The main argument surrounding the Islamic finance is the interest free banking as ‘riba’ (interest of usury) is strictly prohibited according to the principles of Islam or Quran.(Angelo M. Venardos, 2005) It is further reported that at a time when education, health and housing services are suffering from the financial stress in many countries, an embarrassing bias in resource towards the banking sector is encouraged by the interest based monetary system. (Tarek El Diwany, 2003) While conventional banking is more of a profit oriented business seeking interest on the finance provided to the consumer, being part of the capitalistic interest based financial system, etc. (Kabir Hassan and Mervyn Lewis, 2007) Islamic banking activities are mostly clustered around three parts of the world; Middle East, South Asia and Southeast Asia. It is further reported that Islamic banking system provides services in the real estate sector in many Muslim countries and banks have started special windows to attract petrodollars from the Muslim people. It is further reported there is high scope for investing Islamic financing in real estate market in Singapore, Malaysia, Saudi Arabia, Pakistan, Bahrain and other Muslim nations as it offers more ethical and efficient alternatives as compared to the interest based conventional banking system.(M. Mansoor Khan and M. Ishaq Bhatti, 2008) Since the Islamic financing has strong foothold in many of the Muslim countries and provides services in various fields, it is believed that Islamic finance is better than the conventional financing system with regard to the financing in real estate sector as it provides more customer oriented services unlike the conventional banking where profit is the first objective of the organization. Hence the present study is proposed into the research of Islamic financing system and conventional financing system, and which is the best suited in the area of real estate financing to the public. Review of Literature Zamir Iqbal et al (2009) mentioned that the conventional financing system which is based on debt financing has taken a set back after the recent credit crisis that started with the initial collapse of the sub prime real estate market in the United States in 2007. Islamic banking and finance represents the worldwide phenomenon that is taking place in Malaysia, Indonesia, the United States, the United Kingdom, the Arabian Peninsula, the Indian subcontinent, and west and east Africa. (Anthony Hearle Johns and Nelly Lahoud, 2005) It is further reported that Malaysia is still been recognized as the pioneer and the market leader of Islamic finance on an international scale. Islamic finance represents approximately US$ 822 billion of banking assets and accounts for an estimated 0.5% of worldwide assets. (Global Islamic Finance Research Team) The increasing number of ethically based business organizations and individuals are dealing with Islamic financial institutions and it is estimated that the Islamic financing industry will reach to US$4 trillion by 2010. .(M. Mansoor Khan and M. Ishaq Bhatti, 2008) Islamic financial instruments are based on the principles which exclude riba, not possess uncertainty (gharar), and not have gambling like features (maysir) and therefore due to prohibition of interest, Islamic banks or traditional banks with windows for Islamic products cannot have fixed interest debt instruments. (Anjum Siddiqui, 2008) Graeme Newell and Karen Sieracki (2010) states that basing on the principles of Shariah law, there are number of methods of financing real estate investment that are permitted and are fully compatible like Murabaha, Musharakah, Sukuk, Gharar, Ijarah and Mudarabah and all finance methods need to be certified by a panel of experts under Shariah Board, where the members interpret the Islamic law with the finance. The International Association of Islamic Banks requires every financial institution that offers Islamic financial services to have board of Islamic law scholars who are directly elected by the shareholders so that they can review the proposal for validation. (Ali Adnan Ibrahim, 2007) There are numerable differences between Islamic finance and conventional finance which mainly revolves around the interest based finances offered to the people. Islamic banking makes arrangement for the investment funds for assetless, poor but physically fit people, observing the legitimate and illegitimate criteria fixed by the sharia in the case of investment and production, implement investment plans on mudaraba and musharakah to stimulate the income of people below poverty line, etc. (Kabir Hassan and Mervyn Lewis, 2007) On the international arena, the Islamic investments in European property continue to grow reaching $2.5 billion in 2005 as compared to $2 billion in 2004. Further it is reported that the Islamic Development Board has played an important role in the creation of multi-billion dollar market that had enabled the economic development of Islamic ummah and shariah rules are widely accepted in the wider market. (Islamic Mortgages) In yet another report, it is stated that Islamic mortgage market is worth £164 million and is growing at a rate of 68.1% per annum since 2000 in comparison to the total mortgage growth rate at 16.2%. (UK Islamic Mortgage 2005) The mainstay of any business is providing new financing and it was expected that Islamic banks would provide finance to customers similar to the services offered by the conventional banks. As the Islamic financing prohibits the interest, the need to ensure that investment be undertaken on the basis on permitted activities and the requirement to benefit society through collection of zakat overseen by the special religious body. The interest is replaced by PLS system, profit and loss sharing for interest as method for resource allocation. (Kabir Hassan and Mervyn Lewis, 2007) However it has difficult for the Islamic banks to compete with the conventional banks as there are numerous legal and tax restrictions as many Islamic real estate financing through diminishing Musharakah technique leads to a double taxation with conveyance duty on the acquisition of the real estate. (Peter Vayanos and Dr. Phillip Wackerbeck, 2008) Purpose of Research It is learnt from the review of above literature that Islamic finance rejects the rules of conventional banking like interest and does not offer any facilities based on interest. However, the interest is replaced by PLS system to allocate the resources to the customers. But not many studies are existent particularly highlighting the issue of comparing the better services provided by Islamic and conventional financial institutions. The present study is based on the following objectives – To evaluate the principles and patterns of Islamic financing towards real estate market To compare the services offered by the Islamic banks and conventional banks in the area of real estate market To assess and evaluate the services in order to determine as to whether Islamic banks are better financing alternatives other than conventional banking method. The study will help to understand the role and responsibilities of Islamic banks pertaining to the services offered in realty market. It will also be helpful to ascertain the mode of profit and income generation for the Islamic banks as they oppose the traditional method of financing on interest. Further the study will help the researcher to arrive at a possible conclusion pertaining to the hypothetical statement if the Islamic banks are better for real estate financing as compared to conventional banking method. Research Methodology Research refers to search of knowledge and can be termed as a scientific and systematic research for pertinent information on a specific topic. It is an academic activity and comprises defining and redefining problems, formulating hypotheses or suggested solutions, collecting, organizing and evaluating data, making deductions and reaching conclusions which need to be testified so that it fits in the process to formulate hypothesis. (Dr. C.R. Kothari, 2008; Ranjit Kumar, 2005; Wayne Goddard and Stuart Melville, 2004) Selection and formulation of proper research scheme is very important and essential for the successful accomplishment of the research. The research design usually involves selection of appropriate methods or techniques to solve the particular problem under investigation. If the design is not correct, then the study may be criticized the similar ground and the study may lose its importance. (Dr. J.A. Khan, 2008; Brenda Laurel, 2003; Catherine Hakim, 2000; D.A. De Vaus, 2001, Y.K. Singh, 2007) Further the design function is virtually invisible when a researcher carries out a project singlehanded and unfunded, developing and revising the initial plan. Additionally there is substantial difference between the theoretical and policy research. The theoretical research primarily deals with casual processes and explanations whereas policy research is ultimately concerned with knowledge for action. (Catherine Hakim, 2000) Research techniques applied entirely in nature are used primarily for professional consolidation, understanding, development and advancement.(Ranjit Kumar, 2005) It is assumed to adopt qualitative as well as quantitative method of research for the present study. As qualitative research is multi-method in focus which involves an interpretive, naturalistic approach to its subject matter and involves use and collection of various empirical evidence for the research. (Robert Murray Thomas, 2003) In view of the complexity associated with the research study in Islamic financing and its comparison with conventional financing in order to evaluate and assess the importance in real estate financing, exploratory research is used as it deals with analyses of data and explores the possibility of obtaining as many relationships as possible between different variables like interests, debt, market structure; without knowing their end applications which provides basis for general findings. Further literature analysis will be undertaken involving collection of literatures in the selected area of research. (R. Panneerselvan, 2004). Additionally the researcher intends to integrate quantitative method of research in the present by way of using numbers and statistical values through careful sampling strategies and experimental designs which are aimed at producing generalizable results (Robert Murray Thomas, 2003 and John W. Creswell, 2003) The researcher, apart from exploratory research, will be using descriptive research as to find the details regarding the state of affairs as it exists in present and further analytical research method will also be utilized so as to use the facts and information already available pertaining to the research topic. The research is basically concerned with an organization and therefore a hint for fundamental research is applied to the study. (Dr. C.R. Kothari, 2008) But the major part of the present research study is expected to use the qualitative methodology, descriptive and exploratory research so as to formulate the hypothesis pertaining to the present topic by evaluating and assessing the existing data available in the literature and other databases. Various literatures in the field of research topic already available will be reviewed and documented categorically to evaluate the statement. Further the statistical data will be collected from the online databases pertaining to real estate market and financing, Islamic financing benefits in real estate financing, conventional banking benefits and further the data will be compiled and analyzed in MS Excel format and presented in tabular and graphical formats so as to formulate the hypothetical statement and arrive at appropriate conclusion fitting in the hypotheses. Conclusion The Islamic finance is developing at a rapid pace since its establishment three decades ago from one bank in 1975 to more than 300 banks in more than 75 countries. The financial products are aimed at investor who complies with the provisions of the Islamic Sharia Law and forbids giving or receiving money on interest (Mohammed El Qorchi, 2005) which is totally opposite to the conventional method of banking where profit is the main objective of their business. In view of the increasing financial institutions in the Islamic nations and private institutions also opening up the Islamic window to attract more Muslim customers in Muslim nations, it is believed that Islamic financing is better for real estate financing as compared to conventional financing. Therefore the present study is proposed to evaluate and assess the influence of Islamic banking in Muslim world and how is it rated as compared to conventional financing when it comes to real estate financing. Works Cited 1. Mahmoud A. El-Gamal, 2006. Islamic finance: Law, Economics and Practice. Cambridge University Press, United States 2. Angelo M. Venardos, 2005. Islamic banking & finance in South-east Asia: its development & future, World Scientific, Singapore 3. Tarek El. Diwany, 2003. Travelling the wrong road patiently. Islamic Finance.com, 4. Kabir Hassan and Mervyn Lewis, 2007. Handbook of Islamic banking, Elgar Original Reference, Edward Elgar Publishing, Great Britain 5. M. Mansoor Khan and M. Ishaq Bhatti, 2008. Islamic banking and finance: On its way to globalization, Managerial Finance, Vol 34, No. 10, pp 708-725 Emerald Group Publishing Limited 6. Zamir Iqbal, Abbas Mirakhor, and Hossein Askari, 2009. Globalization and Islamic Finance: Convergence, Prospects and Challenges Wiley Finance Editions, John Wiley and Sons, United States. 7. Global Islamic Finance Research Team, Global Islamic Finance magazine January. Business Media Group Ltd 8. Graeme Newell and Karen Sieracki, 2010. Global Trends in Real Estate Finance, John Wiley and Sons, Singapore 9. Anjum Siddiqui, 2008. Financial Contracts, risk and performance of Islamic banking, Managerial Finance, Vol 34, No. 10. Emerald Group Publishing Limited 10. Anthony Hearle Johns and Nelly Lahoud, 2005. Islam in world politics. Routledge, Great Britain 11. Ali Adnan Ibrahim, 2007. The Rise of Customary Businesses in International Financial Markets: An Introduction to Islamic Finance and the Challenges of International Integration. 12. Islamic Mortgages, Islamic Banking and Finance, Demystifying Islamic investing, 13. UK Islamic Mortgages with billions, 14. Peter Vayanos and Dr. Phillip Wackerbeck, 2008. Islamic Banking-How do Islamic banks compete in an increasingly competitive environment, Booz & Company, www.booz.com 15. Dr. C.R.Kothari, 2008. Research Methodology : Methods And Techniques, Ed.2. New Age International. 16. Ranjit Kumar, 2005. Research methodology: a step-by-step guide for beginners, Ed.2, Sage Publication, Malaysia 17. Wayne Goddard and Stuart Meville, 2004. Research Methodology: An Introduction, Ed.2, Juta and Company Ltd 18. Dr. J.A. Khan, 2008. Research Methodology, A.P.H. Publishing Corporation, India 19. Brenda Laurel, 2003. Design research: methods and perspectives, MIT Press, 20. Catherine Hakim, 2000. Research design: successful designs for social and economic research, Ed.2, Routledge, London 21. D.A. DeVaus, 2001. Research design in social research, Sage Publication, London 22. R. Panneerselvan, 2004. Research Methodology, PHI Learning Pvt. Ltd. India 23. Robert Murray Thomas, 2003. Blending qualitative & quantitative research methods in theses and dissertations, Corwin Press, United States 24. Y.K. Singh, 2007. Research methodology: techniques and trends, APH Publishing, India 25. John W. Creswell, 2003 Research design: qualitative, quantitative, and mixed method approaches, Ed.2, Sage Publication, United States 26. Mohammed El Qorchi, 2005. Islamic Finance Gears Up. Finance and Development, Vol 42, No. 4. Read More