Islamic Banking an Analysis of the Reasons for it's Growth in the Middle East during the Last Decade
MBA Program
Dissertation Proposal
February 23, 2009
2.2 Overview of Islamic Banking
2.3 Reasons for Islamic Banking Growth
2.4 Other Factors affecting Islamic Banking Competencies
3.6 Statistical Treatment of the Data
Chapter 1
Problem and its Background
1.0 Introduction
Over the last decade, Islamic banking has evolved dramatically. It has developed global rates of 10-15 percent per annum and has gotten an increasing number of conventional financial systems. Currently Islamic financial institutions have spread through 51 countries globally. Accordingly, the contemporary banking system was introduced to Islamic nations during the time when these countries were economically and politically at low ebb, i.e. the late 19th century (, 1995).
Most of the banks in the home countries of the Islamic regions established local branches in the capitals of the subject nations and they catered mainly to the import export needs of the foreign businesses. Banking industries were generally confined to the capital cities as well as the local population remained largely untouched by the banking system. The local trading community prevented the foreign banks both for religious and nationalistic reasons. Nonetheless, as time went on it became complex to involve in trade and other functions such as current accounts and money transfers. Borrowing from the banks as well as depositing their savings with the bank was rigorously prevented so as to keep away for transacting in interest which is prohibited by their religion (1991).
However, with the passage of time and other socio-economic forces which demands more involvement in national economic and financial activities, avoids the interaction with the banks became possible. Islamic banking is a banking activity which is coherent with the Islamic law. It is carried out in line with the rules of Shariah which is known as known as fiqh muamalat which means Islamic rules on transactions. Islamic Banking does not permit the receiving and paying of riba’ (interest) and encourages greater degree of fairness as well as equity in the conduct of banking operations.
Within the Middle East market the Islamic banks has recorded average growth rate higher than the standard growth average rate. Such growth rate are said to be competitive as compared to other banking industries.
Fig.1: Growing faster than the market
Being able to realize the rapid growth of Islamic banking, it is important to determine the factors or the reasons for its growth and development. For this research, the study will attempt to identify the factors that affect the growth of Islamic banking and how it emerges as a competitive industry in the global market. This paper also aims to determine the difference or similarities of Islamic Banks with other conventional banks.
1.1 OBJECTIVE
This paper aims on analyzing the major reasons for Islamic Banking growth during the last decade within the Middle East.; from different aspects; including the current offering of the Islamic banks comparing to the conventional banks as well as from the investors/consumer point of view. Specifically, this paper aims on achieving the following objectives:
· Identify the reasons for Islamic Banking growth
· Determine whether the profit sharing approach can be considered as the main reason for expanding Islamic Banks.
· Know the perception of the consumers about Islamic Banking.
1.2 Overview / Description
Muslims are disallowed by their religion to conduct in interest (riba) in whatsoever means. Contributing and getting as well as observation are all banned. Therefore an Islamic banking method cannot give any interest to its investors; neither can it requires or obtains any interest from the receivers. Nor could the banks observe or hold accounts of these dealings. Simply the lender is permitted to the return of his funds fully. This is a Qur’anic enjoining. The suggested method of banking abides by with these central Islamic essentials.
On the other hand a fundamental dogma of commercial banking is funds assurance. The funds trusted to the bank by an investor must be brought back to him fully. The anticipated method totally follows with this necessity. Islamic banking as exercised today does not supply funds guarantee in all its deposit accounts. In many countries, this is one of the two most important expostulations to allowing the organization of Islamic banks. There is no opposition to giving zero interest on deposit
1.3 Significance of the Study
This study provides in-depth information on the field of Islamic Banking. This study would be of great help to researchers who are planning to conduct a research on other issues concerning the subject. This study could serve as an academic tool in informing its reader about the reasons for the growth of Islamic Banking. This research will help in adding to literature that will be helpful to many companies and organizations in the field of banking and finance; it might also open up avenues for other researches in this area. The researcher views that this research might help in answering, to some degree, the questions above. Although a general overview of literature on Islamic Banking will be assessed.
Chapter 2
Review of Relevant Literature
2.1 Introduction
2.2 Overview of Islamic Banking
2.3 Reasons for Islamic Banking Growth
2.4 Other Factors affecting Islamic Banking Competencies
Chapter 3
Research Methodology
3.1 Research Approach
The study combines qualitative and quantitative approach. The qualitative approach is used to derive accounts and/or descriptions from people that can provide first hand information on the situation or phenomenon being studied ( 2003). The purpose of this approach is to draw in-depth information on a particular phenomenon to derive explanations, interpretations, and generalisations. The study uses qualitative approach to derive accounts and/or descriptions from banking experts. The quantitative approach is used to draw measurable or quantifiable information on the phenomenon subject of the study ( 2003). This reason for gathering measurable data is to determine the relationship between or among variables through descriptive statistics (i.e. frequencies and comparative data) expressed in the tables and graphs. In the study, quantifiable data is collected to determine the reasons for Islamic Banking growth.
This research will be based on real-practices information available in the financial market; in relevant to Islamic financial institutions within the Middle East financial markets.
3.2 Data Collection Method
To be able to gather pertinent data and to achieve the objectives of the study, primary data and secondary data will be used.
Primary Research
Primary research will be performed based on:
· Interviews with CFO’s and executives of Islamic and conventional banks’.
· Research and questionnaire with industry experts.
· Research and questionnaire with investors/business owners
Secondary Research
Secondary research will be performed on the basis of
· Data available within the Islamic and Conventional bank’s annual reports, websites and marketing materials.
· Data available through international organizations and big four annual industry review reports.
The secondary sources of data will come from the company’s annual report, published articles, business journals, research papers, and related studies on banking and financial industries, specifically Islamic Banking. On the other hand, primary research involved using the survey strategy, which allowed the gathering of a large amount of data from a sizeable population in an economic way ( 2003). The interview method provides a means of collecting insights or descriptions of experiences of the respondents on a given phenomenon or situation with answers expressed in words and analysed to derive insight and meaning (2003).
3.3 Sample Participants
The population for this study will be composed of managers, CFOs, banking experts and business owners. To make sure that the sample for this study is representative of the population, the researcher will conduct a random sampling. The sample will be composed of 50 respondents.
3.4 Survey/Questionnaire
The survey method applied in collecting primary data. Survey comprises a descriptive and non-experimental data collection method intended to draw information from a large sample. The survey method allowed the investigation to derive precise and impartial data to support conclusions and generalisations. This applies in studies requiring the determination and investigation of links or relationships between or among variables (2003).
However, there are advantages and disadvantages in using the survey method so that, the disadvantages should be addressed to justify the method and ensure the reliability and validity of the data collection process. An advantage is the ability to establish a relationship among variables but a concurrent disadvantage is the failure of the method to indicate the direction of the relationship (1994). In the current study, combining the quantitative and qualitative approaches led to the determination not only of the existence of a relationship but also the direction of the relationship and the explanation for this. Another advantage is the ability of the survey to draw data from many respondents but a related disadvantage is the heavy reliance of the method on self-reported data ( 1994) by the respondents making it imperative for the researcher to apply ways of ensuring the willingness of the respondents to participate and freely share information to support research validity. In the study, respondents were contacted beforehand to seek their willingness to cooperate in the data collection process by explaining to them the purpose of the study and the need for their participation in the data collection process to ensure that answers given can validly support conclusions. In addition, combining survey with interview method also allows the company to derive explanations for answers. Still another advantage is the ability of the data collection method to derive a wide range of experiences and opinions on the subject of the study but this also involves the concurrent disadvantage of requiring a tedious process ( 1994). The current study worked through a timetable that allotted sufficient time for data collection especially because of the need to draw willing respondents and wait for replies to the questionnaire.
The survey used a questionnaire, as shown below, composed of two parts. The first part of questionnaire contained demographic information while the second part involved the survey proper. The questionnaire was administered to the chosen respondents. In addition, another primary data collection method is interview with selected survey respondents conducted to derive insight on the responses. The data collection instrument will be a structured questionnaire that would be based on Likert scale. A Likert Scale is a rating scale that requires the subject to indicate his or her degree of agreement or disagreement with a statement. By rating scale we mean the scales that are usually used to measure attitudes towards an object, the degree to which an object contains a particular attribute, (Like or dislike), toward some attribute, or the importance attached to an attribute. The equivalent weights for the answers would be:
Range Interpretation
4.50 – 5.00 Strongly Agree
3.50 – 4.00 Agree
2.50 – 3.49 Uncertain
1.50 – 2.49 Disagree
0.00 – 1.49 Strongly Disagree
The use of the questionnaire would provide the project owner the ability to test the views and attitudes of the respondents. The distribution and collation methods used to manage the questionnaire process would ensure anonymity. For validation purposes, the researcher will initially submit a sample of the set of survey questionnaires for approval; the survey will be initially conducted to five respondents. After the questions are answered, the researcher will ask the respondents for any suggestions or any necessary corrections to ensure further improvement and validity of the instrument. The researcher will again examine the content of the survey questions/statements to find out the reliability of the instrument. Afterwards, the researchers will exclude irrelevant questions and changed words that would be deemed difficult by the respondents, to much simpler terms. The researcher will exclude the five respondents who will be initially used for the validation of the instrument. The researcher will then tallies score and tabulate all the responses in the provided questionnaire.
3.4 Ethical Considerations
The ethical considerations arising in the investigation covers the consent of the respondents to the data collection process and the confidentiality of the information given by the respondents. This could raise concerns on the part of the respondents. In order to allay this concern, the questionnaire includes a letter explaining how their information was obtained, the extent of information obtained on them, the researcher, the purpose of the study, the participation expected from them, and an assurance that personal information obtained would be kept in confidence and used only for the purposes of the study. Answering and mailing back the questionnaires indicates consent and voluntary participation to the data collection process. In addition, protecting the confidentiality of identities of the respondents and the information given would also be assured the respondents during the interview process. These steps are necessary to ensure that the respondents knowingly and willingly extend their cooperation and participation to the research process.
3.5 Data Processing
The method of data analysis for the qualitative data is deriving and interpreting meaning and deriving implications in relation to the aim and objectives of the study. Results and analysis are presented in text discussions and graphs or charts to facilitate readability. In relation to the quantitative data, correlation analysis determines the existence of a relationship between the dependent and the various independent variables.
3.6 Statistical Treatment of the Data
After the collection of information from self-administered questionnaire, and related studies, the researcher collated all the data. The statistical analysis for the information from semi-structure questionnaire was conducted using Microsoft Excel where the data is tabulated, graphed, and evaluated. The testing of the level of significance was conducted using the Statistical Package for Social Sciences (SPSS) and tabulated in the Excel files. The SPSS is the standard software in conducting statistical analysis.
Percentage – to determine the magnitude of the responses to the questionnaire:
Where: n = number of responses
N = total number of respondents
Weighted Mean:
where: f – weight given to each response
x – number of responses
xt – total number of responses
To evaluate the information gathered, the percentage analysis and mean analysis are used.
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