Introduction About Islamic Finance And Banking

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02 Nov 2017

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ABSTRACT

The purpose of the paper is to introduce about the Islamic finance and banking in Western countries. It provides much general information about the system of Islamic banking as well as its products and services. In addition, we discuss the advantages of Islamic banking in supporting Australia companies which consider using it for getting more benefits in financial crisis. In the other hand, its system also faces many challenges in entering new market which does not follow Muslim. However, some recommendations are proposed to improve their limitations so that using Islamic banking system can be approved by Australia companies.

Key words: Islamic banking, Conventional banking, Australia.

INTRODUCTION ABOUT ISLAMIC FINANCE AND BANKING

Islamic banking and financial industry was introduced in 1963 by Egypt’s Mit Ghamr Saving Bank and Dubai Islamic was known as the first Islamic bank in the world, formed in 1975. Nowadays, Islamic banking is currently working in more than 75 countries over the world. Islamic banking not only operated in Islamic countries but also developed in non-Islamic countries such as British, American or Australia, etc. Specially, University Bank, Devon Bank and HSBC are three banks which provided Islamic banking service in the United States of America.

"Islamic banking is consistent with the principles of Sharia law and its practical application through the development of Islamic economics." (Kamal Hayder, 2012). The basic principles of Islamic banking originate in the theorems of justice and harmony with reality and human nature.

Islamic financial banking products and services are variety of different ranges based on interest-based transactions in the purpose of satisfying customers’ needs (Hassanien, 2012). Its system focuses on the following:

Profit-and-loss-sharing.

The link between finance and productivity of real investment

Fair contracts.

The prohibition of all types of unjustified speculation and uncertainty in business contracts.

The prohibition of all unethical practices.

In addition, they also provide other normal banking services such as the letter of credits (LCs), the letter of guarantees (LGs), debit smart cards, ATM services, and services by the dealing room.

Islamic finance and banking follow basic concepts to provide services to customers. First of all, they use fund mobilization as same as conventional banking does but some aspects will be different from that. Specifically, resources are mobilized from shareholders and saving owners. In Islamic banks, depositors are in a sense a special category of shareholders. They do not share the private equity of the bank such as its building and equipment, but they do share as owners of fund in the profit-sharing investment operations of the bank. Deposit agreement is a contract between depositors and bank to provide funds that will be managed by the bank. The bank acts as an appointed agency. The depositors authorize the bank to invest their funds and share the return with them. In case of loss, the financial burden falls on funds’ owners and the bank would have lost its efforts that went without compensation. They also maintain current accounts for their customers with other services of checking, ATM and electronic access. Islamic bank has two categories of deposit:

Investment deposits: shares in the return of investment operation based on a contracted ratio.

Demand deposits: the deposits are guaranteed and represented liability and they do not earn any returns.

In the other hand, they also utilize funds effectively which customers invest in its bank. Islamic banks use available funds by means of three major categories of financing modes:

Sharing modes: Islamic banks provide financing to project on the expectation of a share in the return. In the case of failed projects, both financing contributors and capital providers lose together. There are two types including full partnership and non-voting partnership. In full partnership, the bank would be acted as the board of executive directors. However, the bank in non-voting financing gives fully decision making to the user of funds. Both groups of sharing modes may be formulated so as to share income or outputs.

Sale mode: Islamic banks would be asked to buy goods and give them to consumers. The consumer can pick an asset they would like to buy and ask the bank. They promise to buy the asset from the bank with bank’s price, normally is mark-up price. The bank will buy asset and transfer to customers. Customers will pay the bank’s price in installments over a period of time.

Leasing mode: Islamic banks also provide as same service as conventional banks with two kinds of leasing including operation lease and financing lease with variety of products such as vehicle, machine…

According to Australia demographics profile 2013, Muslim is 1.7% in Australia’s population, estimated around 400,000 people. They also have Australian center for Islamic finance with vision for raising the knowledge of Islamic financing and banking within Australia. The Board of Taxation Australia has been asked by government to review the taxation treatment of Islamic finance. With all the mentions above, Australia is almost ready for operating the Islamic finance and banking in its country and joining with Islamic banking network in the world.

ADVANTAGES OF ISLAMIC FINANCE AND BANKING

At the first, Islamic banking model is justice and fairness. Islamic banking is more humanizing than conventional banking (Mohamed, Shamsher, Ariff and Taufiq, 2008). Because the main feature of the Islamic banking is based on the profit and loss sharing principle, so the risk will be shared by the bank and the customer. This kind of financial intermediation system will contribute a more equitable distribution of income and wealth.

Secondly, Islamic banking does not use interest for deposit and loan. This brings a lot of benefits for customers and its banking together. At the customer side, the payment will be fixed and no more any interest must pay. It will not put a burden on the customer, and provide the social justice. While conventional banking is based on interest, the amount of loan automatically is greater with increased interest. That increased amount can be considered like injustice and oppression to the community as a whole. And through two financial crises in 1997 and 2008, Islamic banking showed their advantages in comparison with conventional banking. At that time, the world conventional banks are facing financial crisis, but Islamic banks seem to be prospering. Islamic banking was less affected by the interest rate fluctuations. The reasons for this happen were Islamic banks did not join any underground markets for earning benefits from loan between bank and bank. And they also do not apply interest for loan from customers..

Thirdly, Islamic banks have a better customer relationship. Investors have good motivation to participate in financial activities when their deposits are mobilized under profit and lost sharing arrangement. In addition, investors make sure Islamic bank using their funds for productive purposes in making more benefits for both. And when banks act as full partnership, they join in controlling project investment together with their clients. Banks will reduce many illegal investment activities because banks and customers are sharing benefits together. Moreover, banks also give recommendations and analysis for better investment project. Unlikely, conventional banks just give funds but they do not control how customers use these for what type of investment. In real life, many companies were bankruptcy because they do not know how to control their loans in effective ways. Some companies use loan for illegal activities such as taking loan from banks with bank’s interest rate and give to another people with higher interest rate. These activities will make the economy go down, then they leads financial crisis.

Lastly, Islamic banks also have transparency advantage. In order to profit and loss sharing, the bank must transparent to the account holder on investment. It is better than conventional banks because customers can control their funds effectively with high profit. In addition, Islamic banking does not provide any derivative products which bring risks to bank as well as customers. In global crisis 2008, the conventional banks did use derivative products which guaranteed by mortgaged contracts but they were bad debts.

LIMITATIONS OF ISLAMIC FINANCE AND BANKING

In the other hand, Islamic finance and banking also has many limitations in serving customers in non-Muslim countries. Firstly, there are less supervisory committees who are responsible for launching new products or making decisions in Islamic banking system. They are facing so many challenges in seeking skilled and experienced staffs in understanding all the fundamentals related to Islamic Sha’riah law as well as the use of Islamic financial practices because of customers’ enthusiastic of finding out Islamic banking practices such as home finance working, polices related to investment and profit sharing. Besides, they do not have strong institutional framework enough to perform their duties properly in variety of finance and banking sectors.

Secondly, one of the problems Islamic finance and banking faces is that it follows Islamic law while Australia has a proper legal system which manages all its states with variety of little different regulations and rules. It might be difficult for courts to solve any problems related to Islamic banking. In addition, they do not set up strong legal institution structure enough to compete with conventional banking which is more favourable in financial market of non-Muslim country. According to Islamic Sha’riah law, its finance and banking has investment limitation related to swaps or options in comparison with variety of different investment in conventional banking to satisfy customers’ needs.

Finally, many people do not know about Islamic banking because of less information system. The lack of information might affect to its development in non-Muslim countries. Furthermore, portfolios of products in its system are not attractive enough for customers who want to get more benefits from its products. The conventional banking does it better in marketing of benefits of products to customers in comparison with Islamic banking which has limits with many restrictions related to interests or get benefits from people who get in trouble.

RECOMMENDATIONS FOR ISLAMIC FINANCE AND BANKING

Islamic finance and banking is a new system for non-Muslim countries so it has to face many challenges to develop its system efficiently in competing with conventional banking. Improving its legal institutional framework properly will help it adapt with different regulations and policies which are favourable with traditional banking system in Western countries. Specifically, they need to develop the network with various sectors in the financial market such as financial service providers, accounting and auditing organisation, etc. In addition, it is important to hire more experienced scholars who are ability to make decisions and give recommend valuable information as well as keep Islamic banking stability on its real value related to ethnic and religious. Besides, more skilled staffs are required to understand proper Islamic products and Sha’riah law to fulfil customers’ needs. As a result, Islamic banking needs to train their staffs often to improve the customer service quality better.

The increase of awareness in community is also important to Islamic banking in developing its market segments in Australia. They should do more researches for finding more customers and developing more new products and improve the quality of financial system efficiently. Specifically, the Muslim Community Cooperative Australia (MCCA) provided Islamic saving and investment to Australian Muslims since 1989. MCCA manages assets worth AUS$28.536 million (US$ 23.09 million) and it has over 8000 members joined in its system which related to Islamic finance activities in the property and real estate sector (Khan, 2008).

In financial crisis period, there are many major cases about banks’ bankruptcy related to fraud, illegal activities through investment, stocks or real estate, etc. Conventional banking’s products satisfied investors who seek high profits but also high risks. In addition, many people cannot manage their finance with high interest in all risks which they have to suffer alone. On the other hand, Islamic banking can be a suitable solution which supports obstacles in Western countries. It brings many benefits such as no interest with borrowing, sharing profits and loss as well between banks and customers. In contrast, contrast conventional banking is easy to fulfil customers’ needs by providing different products and services which bring more benefits in short time. But there are many risks customers have to face when they put their money in investment sectors.

In conclusion, Islamic finance and banking is increasing in many non-Muslim countries in Middle East, South Asia and Western. Specially, its products are being introduced in Australia through National Australia Bank. Moreover, Oasis Group Holdings and Am Investment Group are interested in Islamic finance activities in Australia (Khan, 2008). It is a good chance to access in banking system in Australia and it can boost its system to support many Australia companies who requires more new resources to solve their financial problems with low risks as well as to find new good investments in the crisis period.



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