3 THE GLOBAL ISLAMIC BANKING: EXPANDING THE FRONTIERS OF ISLAMIC
FINANCE
Faridah Hj. Hassan
UiTM Global and Arshad Ayub Graduate Business School, Universiti Teknologi MARA, Malaysia
Email:[email protected] Nurnadhirah Mohd Zaki Arshad Ayub Graduate Business School Universiti Teknologi MARA, Malaysia
Email: [email protected] Norsalizawati Binti Hashmawi Arshad Ayub Graduate Business School Universiti Teknologi MARA, Malaysia
Email:[email protected] Abd Manan Bin Abd Rahman Arshad Ayub Graduate Business School
Universiti Teknologi MARA, Malaysia Email:[email protected]
ABSTRACT
The growth of Islamic banking is rising in most nations. This paper presents the study of global Islamic Banking with the objectives to explore the insight of Islamic banking concepts and principles, understands the modus operandi of Islamic banking, and finally to evaluate the recent development of Islamic Banking globally across five main continents. A qualitative case study was used for this research to evaluate Islamic banking systems across continents. The data collection method is online research on all expert writing materials, annual reports, academic and industry studies, and related material that can be found online. The material will then be used to construct a literature review, which will be followed by a SWOT and TOWS analysis. The findings conclude that the development of the Islamic banking system is concentrated in the Asian continent, the Gulf countries and also in the Middle East and Southeast Asia. Followed by the continent of Africa and others. The findings of the study also found that there is a gap of knowledge related to the Islamic banking system among customers of banking services. Educating the positive values of Islam and Islamic banking as an alternative to traditional banking and their financial advantages from a religious point of view need to be prioritized by the industry players. There is a need to use technology to provide access to all users of banking services other than existing customers. By utilizing technology, information about the benefits of the Islamic banking system can be organized and marketed to new target customers, hence help to increase the adoption of Islamic Banking by both muslim and non-muslim users.
Keywords: Islamic Banking, Global, Continents, Islamic Products
4 INTRODUCTION
Banking is a financial institution that is very crucial for the countries in the world. It aids in the management of money for any citizen to conduct any transaction such as deposit accounts (checking accounts, savings accounts, money market accounts), loans (mortgage loans, auto loans, and personal loans), credit cards, check-cashing services, wealth management services, insurance, and business banking (Lake & Strohm, 2022).
Background of Islamic Finance (4 main areas – Islamic Banking, Islamic Capital Market, Islamic Takaful, and Islamic Fintech)
Islamic finance refers to financial services that must abide by Sharia law, most notably banking, insurance, and financing (credit) (Islamic Law). The phrase can also be used to refer to larger capital and stock markets, as well as investments that comply with Sharia.
Islamic finance is also known as the shariah compliant finance. There are essential principles of Islamic finance that differentiate it from conventional banking. It is based on the Quran and Islamic teachings, which implement moderation and fairness for prosperity for the individual, community, and nation. Specific Islamic principles must be followed in all transactions, whether they are banking-related or not. Prohibited elements and practices in Islamic banking are:
i) Prohibition on the payment of interest (Riba): can be translated as usury or excess which the giving or taking interest is prohibited which main reasons lending with interest only advantageous to lender while it is exploiting the borrower.
ii) Sale of risky assets (Gharar): contracts with unclear expectations or parties unable to make informed decisions due to their vague or ambiguous character. It is seen as a type of gambling, an activity that is forbidden in Islam.
iii) Gambling or speculation (Maysir): Maysir is a game of chance by which a person either wins or loses.
Figure 1 Screening process of Islamic financial product development Sources: Lone & Ahmad, 2017
5 Figure 2 Basic rules in Islamic finance
Sources: Lone& Ahmad ,2017
Islamic financing first appeared 50 years ago in nations with sizable Muslim populations that wanted to make sure their financial sources complied with Shariah law and Islamic tenets. With Islamic financial institutions globally handling assets worth over 2.7 trillion USD, the Islamic finance sector is now expanding at a rate of 15 to 25 percent annually. More than 1,526 Islamic financial institutions were active globally in 2020, and more than 46 nations today support the expansion and advancement of Islamic banking within their own legal and regulatory frameworks.
There are now four major sectors that are propelling innovation and worldwide success of Islamic finance which are:
i. Islamic Banking ii. Islamic Capital Market iii. Islamic Takaful or Insurance iv. Islamic Fintech
Figure 3 Distribution of Global Islamic Finance Asset 2019
Sources: Mordor Intelligence, 2019
Islamic banking contributes to 69 percent, or USD 1.992 trillion, of the assets in the Global Islamic Finance business in year 2019, making it the largest sector. This is shown in Figure 3:
published in the Mordor Intelligence Report.
Islamic Banking Concept and Principles
The Organization of the Islamic Conference (OIC) defines Islamic banking as a financial organisation whose laws, regulations, and operations are in accordance with Islamic Sharia
6 principles, with a focus on the prohibition of distributing and paying interest on financial transactions (Bechir & Meriem,2019). There are two banking types which is islamic and conventional. In this research, Islamic banking was choose when there is competitive issues between this two institution. Furthermore, the formation of Islamic institutions has been recognised as the understanding of the system has been understandable, particularly among Muslims who adhere to the islamic principle.
Figure 4 Key differences between Islamic and conventional banking Source: Adapted from Suliman (2015)
There are three modes of Islamic Banking operating model:
i. Islamic Banking Windows ii. Islamic Banking Subsidiaries iii. Full-Pledged Islamic Banking
Article by Hidayat & Al-Khalifa, 2016 explains that Islamic banking windows are simply defined as special facilities offered by conventional banks to provide Islamic banking services to customers who wish to deal with Islamic banking. The "Interest-Free Banking Scheme," which permits conventional banks to offer Islamic banking products to consumers, was launched by the Central Bank of Malaysia or Bank Negara Malaysia (BNM) in 1993, and this is when the Islamic window banks first appeared (Aik & Tan, 2012). Implementation of Islamic banking windows require less effort and is more efficient than ablishing an Islamic banking subsidiary. Thus, it is an effective and efficient way of increasing the number of institutions offering Islamic banking services. Islamic banking windows are also a faster and easier way to attract customers since Islamic products and services can be promoted using the same channel of distribution as their conventional counterparts. However, Islamic banking windows are purely on commercial objectives. Priority of the management and board of directors of the conventional banks is to maximize profit and not the spirit of benefiting the society at large (maslahah) and compliance with the requirements of shariah. This leads to the advantage of Islamic banking windows as it is difficult to compare the performance and ensure adherence to shariah. The performance of Islamic banking windows may be contributed by the overall performance of the bank itself. To comply with
7 shariah principles is also not an easy task because of ignorance and lack of understanding of the employees about shariah principles.
Islamic banking subsidiary is defined as Islamic banking products and services offered by subsidiaries of conventional banks, but the operation and management of the two are clearly separated (Sole, 2007). From article Hidayat & Al-Khalifa (2016) also brief about the advantages of Islamic banking subsidiary. From the Islamic point of view, Islamic banking subsidiary would promote and provide the true spirit of Islam since there is no commingling of funds. Thus, it is more shariah compliant than Islamic banking windows. In terms of workforce, the employees of the subsidiary are more focused on Islamic financial services as compared to Islamic banking windows, where they are also responsible for the conventional services. In fact, this will create a larger pool of banking personnel that are conversant and competent.
The establishment of a subsidiary takes more time since it requires developing sufficient infrastructures to support the whole structure of the Islamic banking subsidiary. Regulatory requirements need to be amended, build customer base, and earn customer loyalty.
Establishing an Islamic subsidiary is costly than Islamic banking windows. This is because, to have a separate banking subsidiary that operating on its own rather that in one roof will involve duplication of resources. In other words, the bank needs to invest more in technology, human resources, bank branches as well as capital, whereas, in Islamic banking windows the same technology and the same expertise can cater for both Islamic and conventional banking services.
Hidayat & Al-Khalifa (2016) discovered that Islamic banking windows are a good strategy in the initial stages of developing Islamic banking. However, it has been shown that an Islamic subsidiary is better than Islamic banking windows in terms of shariah compliance.
Full-pledged Islamic Banking are standalone banks operate under its own and not tie with any conventional banks.
Current Global Islamic Banking Situation
According to the Islamic Financial Services Industry 2021 (IFSI, 2021) report, the performance of Islamic banking increased by 4.3 percent in 2020, compared to 12.7 percent in 2019. The Islamic banking segment now accounts for 68.2 percent of the global Islamic Financial Services Industry, down from 72.4 percent in 2019 as shown in Figure 5 and Figure 6 below. This decrease is primarily due to the growing importance and strong performance of Islamic Capital Markets in recent years, rather than a drop in Islamic Banking performance.
Figure 5 Data for Islamic finance as of the end of the third quarter of 2020
8 Figure 6 Data for Islamic finance as of the end of the third quarter of 2019
Islamic banking is still mostly restricted to specific geographical areas and economies, where it dominates the financial services sector.
Islamic product: Form of contract
Musharakah and mudarabah are two of Islamic finance's most significant products. In conventional banking and finance, these phrases are sometimes referred to as profit sharing and loss carrying.
The Musharakah contract is signed between several parties, with each contributing a portion of their money to a joint commercial operation. Profitability ratios must be stated ahead of time, but if they are not met, they must be shared in proportion to the equity provided. According to the agreements of the business partnership, it indicates that the financier must split both the profit and the loss with the bank or the financing partner. Murabaha is considered a trust contract since the vendor and buyer do not negotiate the price, but rather agree on a profit margin added to the cost, as revealed by the seller at the start of the contract. (Yustiardhi et al., 2020).
From Islamic Markets highlight Bai al-muajjal as deferred sales, it's a contract that is negotiated at no extra cost. thus, the parties agree to pay the price at a later time. This contract is valid if the payment date is set in a clear manner, that is to say according to a specific date.
However, the payment date cannot be set for a future event when the exact date of the event is uncertain. The deferred price may be higher than the spot price as long as the price is set at the time of purchase. and therefore, the price cannot be changed once the contract of sale is concluded.
Ijara is an Islamic product, it is a rental agreement by which the owner of the property rents it to another party. After that, the tenant (the tenant) can buy it and the rent is reduced until the property becomes the client's possession. Currently, Islamic Mortgage Finance is based on the concept of Ijara (leasing) which is a remarkably effective tool in the Islamic financial system (Obaidullah, n.d).
9 Figure 7 Contract used in the Islamic finance.
Source: adapted from Aris et al.,2013
Qard Hasan which known as loan, is considered an instrument of the Islamic financial system, provided to clients who face financial problems or unforeseen expenses, without having to pay interest. It is a loan that will be repaid at the end of the agreed period, without distributing any interest or sharing profit or loss (Obaidullah, 2017)
The objectives of this research are:
i.To explore the insight of Islamic banking concepts and principles ii.To understand the modus operandi of Islamic banking.
iii.To evaluate the recent developments in Islamic banking globally
This study might be advantageous to society since the study cover Islamic financial across continents Asia, Africa, America, Europe and Australia. It will also be helpful in assessing and comprehending the problems facing operation management as a future reference for studies in the field.
RESEARCH METHODOLOGY
A qualitative case study was used for this research to evaluate Islamic banking systems across continents. The data collection method is online research on all expert writing materials, annual reports, academic and industry studies, and related material that can be found online. The material will then be used to construct a literature review, which will be followed by a SWOT and TOWS analysis.
LITERATURE REVIEW
History of Islamic bank and its evolution
Islamic finance is a way of doing financial transactions and banking while respecting Islamic law or sharia. There is history behind it which have been undergo different era from prophet Muhammad S.A.W to Caliphs to Umayyad and Abbasid Eras to current time.
10 The Emergence of Islamic Finance: Banking Practices at the time of the Prophet and the
Companions
Finance carried out with sharia-compliant contracts has been part of Muslim tradition since time of the Prophet Muhammad. Practices such as accepting deposits, lending money for consumption and business purposes, and making money transfers have become inseparable part of Muslims' lives.
The provision of capital for profit-sharing based on working capital, such as mudaraba, musharaka, muzara'ah, musaqah, has been known since the beginning. Even in the time of Umar bin Khattab r.a, he used checks to pay allowances to those who were entitled.
Banking Practices in the Age of the Umayyads and Bani Abasiah
Banking functions performed by a single individual have been known in Islamic history since the time of the Abbasids. Banking began to develop rapidly when there were many currencies circulating so special skills were needed to distinguish between them. This is the forerunner of the practice of currency exchange (money changer). The role of bankers has covered three aspects, namely accepting deposits, distributing them, and transferring money. Money can be transferred from one country to another without the need to physically transfer the money. Sayf al-Dawlah al- Hamdani is noted as the first person to issue checks for clearing purposes between Baghdad (Iraq) and Aleppo (present-day Spain).
Banking Practices in Europe
Later on, organisations that are now known as bank institutions took over the operations. As soon as Europeans began to utilize banking, problems arose from transactions using interest-bearing instruments, which the Fiqh saw as usury and so haram. King Henry VIII allowed interest in 1545 but forbade usury if the interest could not be increased fourfold, which increased the predominance of interest-based transactions (excessive). The interest on money was eliminated by King Edward VI, who succeeded King Henry VIII after the latter's demise. It did not last long. After his death, Queen Elizabeth I reigned and resumed allowing interest on money. Europeans also began to emerge from relative obscurity.
Modern Islamic Banking
The first modern attempts to launch an interest-free bank were made in Malaysia in the middle of the 1940s, but they failed. The most successful bank formation experiment included the Mit Ghamr Local Savings Bank, which was founded in Egypt in 1963. By 1967, nine banks with a similar concept were already in existence in Egypt. The Mit Ghamr members increased their savings from LE40,944 in 1963–1964 to LE1,828,375 in 1966–1967. The bank's operations were taken over by the National Bank of Egypt and Egypt's central bank in 1967.The concept of interest-free banking was revived in 1971 with the establishment of the Nasser Social Bank during the Sadat administration. The Islamic Development Bank (IDB) was founded in October. Figure 8 below illustrates the global development of Islamic banking.
11 Figure 8 Islamic Banking History timeline (Al Rahahleh et al., 2019)
International monetary fund (IMF) and Islamic finance
The International Monetary Fund (IMF) is an organization of 190 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. IMF played a key role in the establishment of the Islamic Financial service board (IFSB). IMF also engaged it members on implication of Islamic finance, policy advice, capacity development effort, area regulation and supervision of Islamic bank and development of sukuk market.
Top global Islamic Bank
From the Asia Banker inform Saudi Arabia-based Al Rajhi Bank is the largest Islamic bank and the strongest Islamic bank in the evaluation of the top 100 largest Islamic banks largest Islamic bank globally, with assets of $166 billion. Plus, from Global Finance Magazine also informs that Al Rajhi has placed a lot of emphasis on digital and mobile banking, with cashless transactions accounting for around 80% of its total transactions. It has had great success since launching Emkan Finance, a digital lending business that offers quick personal microloans at cheap interest rates. Once accepted, the financing amount is provided through entirely digital methods in a matter of minutes. The top performing global Islamic banks are listed in Figure 9
12 Figure 9 World's Best Islamic Banks 2022
Source: Global Finance Magazine (Stubing, 2022)
The well-known Islamic banking in regional area
AFRICA
Al Baraka Banking Group
The largest Islamic financial institution in Africa is the Al Baraka Banking Group, which has its headquarters in Bahrain. Asset with $28.2 billion, Al Baraka has more than 700 branches and operates in 17 different countries. Among Islamic financial institutions, it has the broadest geographic reach, with significant operations in Tunisia, Morocco, Egypt, Algeria, South Africa, Sudan, and Libya. It has business in Turkey, Germany, Jordan, Bahrain, Pakistan, Lebanon, Syria, Iraq, Saudi Arabia, and Indonesia in addition to Africa. Plans have been adopted for the digital transformation of our electronic networks to create strong platforms that can offer all banking
13 services. Given that delivering goods and providing customer service would primarily be done through digital banking.
ASIA
Maybank Islamic Berhad
One of the world's top Islamic financial institutions for a long time, Maybank Islamic has regularly been the first to market with cutting-edge financial solutions that adhere to Shariah. It is the biggest Islamic bank in Asia with assets of $64 billion and a financing portfolio of $51 billion. Its primary market is Malaysia, where it holds a third of all Islamic assets. However, it also does business in Singapore, Hong Kong, and Indonesia, the latter of which is seeing rapid expansion. The bank has a significant market share in Malaysian ringgit sukuk and a strong position in international sukuk.
EUROPE KT Bank
Due to an increasing clientele over the past few years, KT Bank, the first Islamic financial institution in the eurozone, had strong asset growth. KT Bank, which has a balance sheet total of over €600 million ($714 million), reported increasing volumes in the retail, corporate, and institutional sectors. The fourth year in a row, the regional champion in Europe is KT Bank due to continued investments in technology, including mobile banking.
MIDDLE EAST Qatar Islamic Bank
Despite the pandemic, operational circumstances, and QIB's performance in 2020, assets increased by 7%, financing increased by 5%, and net profit increased modestly. At 1.8 percent, the bank's return on assets is still quite impressive. Having through QIB participates in the global sukuk market and holds a majority of the Islamic assets in Qatar.
The world development of the Islamic banking system
According to the report from the Islamic Financing Islamic Board in 2021 for the report as of 2020 found that the greatest development of the Islamic banking system is led by the GCC countries. The Gulf Cooperation Council (GCC) is a regional, intergovernmental, political, and economic union comprised of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The council's main headquarters are in Riyadh, Saudi Arabia. The GCC Charter was signed on May 25, 1981. The GCC countries' Islamic banking assets share remains significant, increasing by 14.7 % year on year to USD 979.9 billion [3Q19: USD 854.0 billion]. The region accounts for 53.2 percent of global Islamic banking assets.
The value of Islamic banking assets in the Middle East and Asia (MESA) region decreased by - 14.6% in year 2020 over year 2019, primarily because of the lower value of Iranian Islamic banking assets as a result of the depreciation of the Iranian Rial. Islamic banking assets in South East Asia (SEA) increased by 7.4% in 2020 compared to 2019 to reach USD 258.2 billion. As of the third quarter of 2020, this region accounted for 14.0 % of all Islamic banking assets globally.
The African region had seen the greatest improvement, with asset worth increasing by 27.1%
in the third quarter of 2020 compared to the previous year, to USD 43.1 billion. Despite this, the
14 region continues to have the lowest share of global Islamic banking assets, at 2.3%. Turkey and the countries of Europe and the Commonwealth Independent State (CIS) region are classified as
"Others." This group increased its Islamic banking assets by 16.4% year on year to USD 61.8 billion, compared to USD 53.1 billion in the third quarter of 2019. It accounts for 3.4% of global Islamic banking assets. The detailed discussion is also illustrated in figure 8 below.
Figure 10: 10 Regional Islamic Banking Assets (USD Billion) (2018-3Q20) Source: PSIFIs, IFSB Secretariat Working
Literature Review Matrix – Comparative Analysis of Global Islamic Banking Situation across continent
Asia Regi on
Author, Date
Focus Topic Analysis & Result Conclusion Asia Malek &
Rao ,2022
Profitability of Islamic Banking – A Study of Select Islamic Banks from Asia
This study attempts to measure the impact of internal and external (macroeconomic) factors on the profitability of Islamic banking using data of select Islamic banks from Asia (Bahrain, Iran, Turkey and
Malaysia) in the period of 2011– 2020
Islamic banks have an increasing trend of profitability except during the period of breakdown of Coronavirus which have influenced the whole financial system. Financial technology can help Islamic banks to avoid the
consequences of COVID-19 pandemic by providing access to electronic
transactions and non-physical contact with entrepreneurs and clints
Asia Malek &
Rao,2021
Determinant s of
Capitalization of Islamic
Banking:
Evidence from Select Islamic
This study attempts to determine the internal and external factors that effect on capitalization of Islamic banking in terms of equity-to-total assets ratio using data of select
Results suggest that the select Islamic banks have a steady capital structure due to depending on staple capitalization in terms of Equity Ratio (ER).
Additionally, the principles
15 Banks in Asia Islamic banks in Asian
countries where these banks operate in (Bahrain, Iran, Turkey and
Malaysia) in the period of 2011–2020.
of Islamic banking
contributed vastly to enhance the performance of Islamic banks.
Asia Chowdh
ury & Haron (2021)
The efficiency of Islamic Bank in the Southeast Asia (SEA) region
To measure efficiency in the individual country
& fill the LR Gap to measure efficiency &
productivity growth of Islamic bank in SEA region
Islamic Bank progress in Indonesia, consistence in Malaysia, significantly improve in Brunei, depicted drop in Thailand and
Philippines. Trigger manager bank to acknowledge source to investor and policymaker to observe bank performance to promote competence and sustainable SEA Islamic bank
Asia Juhandi et al.,2019
Growth Shariah banking in Asia
Sharia banking is alternative to explore Muslim countries as some Asia countries have large Muslim population
Sharia economy is known by the world as it considered safer than conventional economy that exist today
Australia
Region Author, Date
Focus Topic Analysis & Result Conclusion Australia Sian et
al.,2018
Financial Exclusion and the role of Islamic finance in Australia: A case study in Queensland
To explore the nature and extend of financial exclusion of Muslim community in Australia
The level of awareness about shariah –compliant financial products is low among Muslim’s
Australia Kaakeh at al., 2018
Attitude of Muslim minority in Spain towards Islamic finance
To investigate the effects of attitude, religious motivation, awareness and service and pricing on the intention to use Islamic Banking among muslims minority Spain
The results show
attitude, religious motivation and awareness are important factors affecting the intention to use Islamic banking. The potential Islamic banking customer in Spain is Muslim (Spanish, Moroccan or Pakistani) male and did not reach university degree in his education.
Australia Rammal
&Zurbrueg g et al., 2006
Awareness of Islamic banking
products among Muslims: The case of Australia
To examine the awareness of Muslim Australians of Islamic banking particularly profit –and-loss sharing
agreements
Personalized and tailored financial solutions must be available from financial institutions. It is critical for institutions to comprehend the dynamics of consumer segmentation, cultivate customer connections, and fulfil the needs and
16 preferences of certain market segments. It is also critical for financial institutions to invest in innovative products to fulfil the requirements and demands of Islamic
customers.
Africa Regi on
Author, Date
Focus Topic Analysis & Result Conclusion East
& North Africa
Albaity et al., 2021
Trustworthi ness, good governance and risk taking in MENA countries
(Middle East & North Africa)
To investigate role of trustworthiness and governance quality in bank risk behavior along with other bank-specific
& country-specific variables which study 202 banks in 16 countries in MENA
The effect of trustworthiness on risk- taking changes with good governance. The study recommends policies that need to be implemented to promote public trust and bank stability
South Africa
Saini et al.,2011
Consumer awareness and usage of Islamic banking product in South Africa
Use statistical analysis to determine factor important in the choice between islamic and conventional bank:
rate, efficiency, lower bank charge, automatic teller machine, and branch network
Islamic want to attract and retain customers and remain relevant in South Africa by develop relevant strategies to meet customer need.
East &
North Africa
Al- Shboul et al., 2020
Political Risk and bank stability in the middle East &
North Africa region
Examine relationship between political risk &
bank stability in middle EastT & North Africa
Islamic bank in Gulf cooperative council (GCC) sub region are less exposed to political risk compared with those operating in non GCC countries
South Africa
Vahed &
Ehsanul Hoque (2016).
The perception of Islamic banking by the first national bank sales staff in the Kwazulu-Natal region of South Africa
The findings revealed that, while respondents believed there was a need for Islamic banking, they also believed that Islamic banking was more complicated than conventional banking.
The study also revealed that there was a general negative perception of Islamic banking, which was primarily due to a lack of knowledge, awareness, and understanding.
This research recommended that banks should provide adequate and effective training to their employees on all products and services in order to eliminate any negative perceptions.
South Africa
Vawda et.al (2014)
Islamic Banking in South Africa:
Five most important criteria in bank selection for Muslim are the
The issue of bank selection criteria, most of the respondents were
17 An Exploratory
Study of Perceptions and Bank Selection Criteria
secrecy of the bank, faith in the management's abilities and knowledge, the bank's reputation and image, and friendliness of bank staff. For non- Muslims, the first four requirements are the same with Muslims, with the fifth crucial criterion being financial soundness and strength.
engaged in conventional banking and the provision of fast and efficient services was clearly primary importance to both Muslim and non-Muslim
Europe and America Region Author,
Date
Focus Topic Analysis & Result Conclusion Europe &
America countries
Ernawati
& Asri (2020)
Knowledge awareness of Islamic Financial in Europe and America Countries
To determine the correlation between knowledge and awareness with industrial
development, state religious status and state location
Awareness movement unites the academic and public aspects in Islamic financial campaign
Europe Nosheen
& Rashid (2019)
Business orientation, efficiency, and credit quality across business cycle: Islamic versus conventional banking. Are there any lessons for Europe and Baltic states?
Investigate between Islamic and conventional banks in term of business dynamics, cost structure, credit quality and stability which show the result that Islamic bank more involved in free-based business, less cost- efficient, have higher credit quality and have higher capitalization
Islamic bank
outperformed conventional bank regarding the credit quality and stability indicator which different in provisioning strategies, the non-aggressive lending profile and investment in real assets
Europe &
North America
Alharbi, 2016
Developmen t of Islamic Finance in Europe and North America:
Opportunities and Challenges
The purpose of this article is to provide clarity on the growth of the Islamic financial business in the West.
There are various causes for the western world's increased interest in Islamic finance. Because of the increasing number of Muslims in Western countries, as well as the demand for ethical products and socially responsible services, many investors are looking for new instruments, products, and asset classes that are unrelated to existing products and services in order to diversify their
18 portfolios.
Europe Sobol
(2015)
Islamic Banking in The European Union Countries
The analysis should give an answer to the question whether Islamic banks can have more significant presence in the European financial market in the future.
The major findings indicate that Islamic banking is still in its early stages in European Union nations. Even in the United Kingdom, there is a
possibility for the growth of the Islamic banking
industry in the EU, which is primarily due to Europe's huge and growing Muslim population. A greater desire among Europeans for ethical investments, which might translate into a greater demand for Islamic financial services.
Challenges: Global Islamic banking Post –covid 19 Current issues
Worldwide, Covid 19 influences every country. It also has an influence on how the financial industry, particularly the banking sector, conducts its routine daily operations which impacts in the shutdown of economic activities, financial markets, etc. The Islamic financial system consists of the Islamic banking system, the Islamic money market, Islamic insurance or takaful, the Islamic capital market, and specialized financial entities that offer alternative forms of funding that play a role and support in the economics of the countries. Thus, the presence of Islamic Fintech has been introduced as alternative to curb the problem appear. From Hassan et al. (2020) Islamic fintech can as the delivery of Islamic finance products with the use of technology, or in simplest of the words,
“It is the digital delivery of Islamic finance. In terms of definition, both Fintech and Islamic Fintech have the same meaning. The distinction is found in shariain' sharia welcomes any innovation and disruption that does not compromise the fundamental ethos and principles of Sharia. For example, any Fintech is lawful and accepted according to Islamic finance if there is clear proof that it does not violate or contradict any sharia concept. In other words, if there is no convincing proof against it, every innovation is permitted in Islam (Hassan,2020).
Some of the biggest challenge for the Islamic finance are:
Figure 11: 11 IFI’s Challenges
19 FINDINGS
Cross Continent comparison
✓ Islamic banking is the most widely used service in the Islamic finance system.
✓ The development of the Islamic banking system is concentrated in the Asian continent, especially in the Gulf countries and also in the Middle East and Southeast Asia. Followed by the continent of Africa and others.
✓ The Asian region has the most research on the Islamic banking system or Islamic finance, followed by the African continent and a few from the European continent. However, we are having difficulty obtaining research from the American continent and Australia.
✓ Acceptance and use of the Islamic banking system as a whole is still low compared to the conventional banking system due to the lack of information on the advantages of the Islamic Banking system as discussed by Sian et al (2018) for resarch findings in Australia, Sobol (2015) for research findings in Europe while Ernawati & Asri (2020) for research in Europe & America countries.
✓ On the other hand, those who know the Islamic banking system feel that this system is based on Sharia and is more transparent as found by Alharbi (2016), Nosheen & Rashid (2019) for research in Europe and North America and Kaakeh at al. (2018) findings for a research in Australia.
SWOT and TOWS Analysis
The SWOT analysis in Islamic banking was analyzed to evaluate decisions based on internal and external factors. Here is identification from the review that has been done by researchers: TOWS MATRIX
A TOWS analysis enables a company to match its internal strengths with external opportunities (SO) in order to develop 'maxi-maxi' strategies for those with the highest potential for success. TOWS, developed by Heinz Weihrich in 1999, takes a SWOT analysis one step further to assist with the results. The Islamic banking Tows Matrix is as follows:
Internal factors
SWOT / TOWS
External factors
STRENGTH 1. Wide distribution
network
2. Experience in national banking
3. Substantial number of customer bases 4. Syariah values 5. Large Muslim
populations
WEAKNESSES 1. Lack of shariah
compliance control 2. Limited product and
imperfect product infrastructure 3. Lack of product
awareness
4. Overcrowded banking industries
OPPORTUNITY 1. Financial alternative
system
2. Wide Islamic Market 3. Technology adv 11
ances
4. Halal economic growth 5. Huge conventional (non-
SO STRATEGIES o Maximizing
distribution network, electronic channel, and customer base to gain advance market (S1,S2,S2,O1,O2,O3) o Create innovative and
WO STRATEGIES o Using technology to
improve efficiency and increased awareness towards Halal economic and Islamic banking (W2W3O3O4) o Alternatives to
20 Islamic) market unique Islamic banking
products based on non- Muslims' needs.
(S4,O4,O5)
traditional banking and their financial
advantages from a religious standpoint (W2,W3,O1,05) THREAT
1. Competition with conventional bank 2. Economic crisis 3. People lack
understanding toward shariah banking product
& services (change mindset)
4. Security and political situation
5. Negative perception of Islam
6. Market risk
ST STRATEGIES o Educate positive values
of Islam and Islamic banking (S4,T3,T5) o Intensify marketing of
the products and services as well as the benefits of Islamic banking (S4 T1,T3,T5,T6)
WT STRATEGIES Create awareness and education toward shariah compliance banking (W3,T3,T5)
CONCLUSION
This finding indicates that Islamic banking has grown throughout the global area which has follow the shariah principle. The Islamic banking industry has a very strategic role in economic development, contribute economic transformation, value added and economic activities (Iskandar et al., 2020). The findings of the study also found that there is a gap of knowledge related to the Islamic banking system among customers of banking services. The findings of the study also found that those who understand the Sharia-based system are more transparent to customers. Accordingly, industry players need to amplify awareness and education about the advantages of Sharia-compliant banking. Educating the positive values of Islam and Islamic banking as an alternative to traditional banking and their financial advantages from a religious point of view. this effort can be enhanced by intensifying the marketing of products and services as well as the benefits of Islamic banking.
among the methods that can be implemented is to create innovative and unique Islamic banking products to meet the needs of their potential customers in the future.
Recommendation
According to our findings, there is a need to use technology to provide access to all users of banking services other than existing customers. By utilizing technology, information about the benefits of the Islamic banking system can be organized and marketed to new target customers.
Increase the size of your distribution network, electronic channels, and customer base to gain access to more developed markets. Developing innovative and one-of-a-kind Islamic banking products to meet the needs of non-Muslims. Making use of technology to improve efficiency and raise awareness of the Halal economy and Islamic banking.
Global Islamic banking is also changing its methods of serving customers by adapting business patterns and digitalizing bank services (Azizah et al., 2020). This means that if industry players are to remain relevant now and, in the future, they must enter the online Islamic banking system, or Fintech for short.
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