The Comparative Study of Islamic Banking and Investment

The comparative study of Islamic banking and investment- Afghanistan and key Islamic states

Abstract

Islamic banking is a growing and settling sector in the industry of banking and finance. Through this banking we can manage our investment and financial management system because Islamic banking with the characteristics of better finance management policies, risk management tools, its operating principles, and various investing products which distinguishes the conventional banking and Islamic banking systems, thus why major economies of the world started to implement and develop banking segment.

Islamic finance offers various contracts with specific investment which are interest free. These are Mudaraba, Musharakah, Murabaha, Salam, Istisna, and Ijarah. Which operates on profit and loss sharing and this feature make Islamic banks and capital in particular less risky and thus increase its financial sustainability. There are enough empirical evidences suggesting that Islamic banks are more sustainable to market fluctuation, especially after recent financial crisis.

Various services and researches show the significance and importance of Islamic banking practices and investment specially. According to MOODY’s credit rating agency “Islamic banking investment is to grow ten times more than it exists till the end of2025.

This study will investigate and research the Islamic Banking practices and investment in Afghanistan as compared to other key Islamic states which are the leading players in this sector, so at the end the result could help develop the Islamic banking in Afghanistan and perform much better in today ’s technological and rapidly developing world of e-commerce and e-banking and this clearly indicates the emergence of Islamic banking was dynamic and spread internationally.

Keywords: Islamic Banking, Investment, Finance, Afghanistan, Key Islamic States

Introduction

Today Islamic banks are main issue in media and economic world. They offer new products and constantly increase their presence in markets, ranging from USA to china. Muslim population of the world discovered innovative financial products that are in line with the law of Shariah. While Non­Islamic banks mostly struggling for clients and the basic problems were connected with the products such as saving, investment and Mortgage. Greater involvement of public in investment activities can grow this sector, and also empowers both economy and welfare of the society.

The idea of bank operating under zero interest rate seemed impossible for western researches and analysts. Zamir Iqbal and Hennie van Greuning (2007) outlined their six prepositions according to which banking system is operating without interest and debt is not feasible. As well they also outlined counterarguments, when necessary research was undertaken based on modern economic knowledge.

“The profit and loss sharing system should help ensure greater discipline by making the bankers more careful in lending and the depositors more vigilant about the health of their banks. Asset-based debt should further help by not allowing the debt to exceed the growth of the real economy. The introduction of such a discipline carries the potential of helping realize not only greater stability, but also greater efficiency and equity in the financial system.”

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Figure 1: Figure of Islamic Law

According to Antonio Perwataatmadja and Muhammad Shafi, the Islamic Bank is a bank whose implementation is according to the principles of Islamic law, especially on ways for doing business in Islam. One element that should be shunned in the "business of Islam" is a practice which has elements of "" usury "." Also explained that Islamic Banking is the bank that implement the provisions referring to the Quran and Hadith, by the recommendation and the ban, which shunned the practice that has elements of usury, while those are followed by the implementation of business conducted at the time of the Prophet or form of business that has been there before, but not forbidden by the Prophet.

Hasan, M. (2008). New Statesman, Shariah banking is growing fast and the mainstream banks are starting to offer Islamic accounts. Its system of shared risks and profits could offer a model for the financial services of the future, 137 (4926), 28- 30.

Today Islamic banks are main issue in media and economic world. They offer new products and constantly increase their presence in markets, ranging from USA to china. Muslim population of the world discovered innovative financial products that are in line with the law of Shariah. While Non­Islamic banks mostly struggling for clients and the basic problems were connected with the products such as saving, investment and Mortgage. Greater involvement of public in investment activities can grow this sector, and also empowers both economy and welfare of the society.

Methods

In this article, I am going to use descriptive analysis. It is mostly based on theoretical observations of Islamic Banking system and practices in Afghanistan. An Islamic bank’ main principles of banking activities depend on Islamic Jurisprudence termed Sharia law, conventional, specific literature, Journals and internet has been used to collect data.

In the title that I would be researching, I would collect quantitative and qualitative data regarding the Islamic banking and Finance using the following methods which seems to be effective and informative. Use of (mixed-mode of design) helps to develop unique understanding into a complicated social phenomenon that cannot be obtained from either type of data alone.

An coppens “combine qualitative and quantitative, with observation and data analysis and then you have a very solid base to design from.”

1- Questionnaire: it is widely exercised in several economic and business surveys; through this we can collect the data required from different states through the facility of internet and social media. Finding wide range of similar surveys can be found such as: Warsame’s PHD thesis conducted in 2009 and the title of thesis was: “The role of Islamic finance in tackling of financial exclusions in the UK.”
2- Interviews and Observations: (Online) it is a qualitative collection of data which is used to collect accurate data from the people which are targeted to provide information. I will be in turkey so I will have chance to do this physically and done more interviews through organizing various interviews with other Islamic states and Afghanistan.
3- Books, Academic Journals, Researches, and Statistics: These are without a doubt can support and help my study to have more strength and become more informative.

Discussion

Investment in the industry of banking sector is growing rapidly, which needs more attention and supervision due to its expansion and technological improvement. Fraud and with the emergence of E­Commerce and E-Banking, the need for cyber security has also increased. As I have been writing my bachelor dissertation in debt management and thesis of master’s degree on Analysis of investment options in Afghanistan, which tends me to update my information regarding Analysis of investment in Islamic banking sector in Afghanistan.

Islamic banking which is almost new sector into banking industry in case of Afghanistan, while Islamic banking itself has a history. Thus, why Investment in Islamic Banking can be challenging but also effective. Due to the supervision of banks, we need to analyze the Islamic banking and its windows which grows initially in Afghanistan but with quick pace in the globe. The proactive and application of Islamic Banking is effective in the sense that it can be convenient to be applied in an Islamic country, where people believe in such type of fair banking practices and justice.

With proper Application of Islamic Banking and its products, every sect and level of people can be benefited by receiving Halaal benefits and profits, helping the struggling entrepreneurs and investment opportunities can be built. Islamic banking industry has recently been enjoying an image of a safe haven for the investors given its reliance on the conventional methods of banking operations and its rejection of high-risk re-bundled financial assets. The banking sector has been one of the leading industries to benefit from this growth of macro-economy.

A banking system in which interest is not allowed may appear strange to those accustomed to conventional Western banking practices. In this respect, it is necessary to distinguish between the expressions ‘rate of interest’ and ‘rate of return’. Whereas Islam clearly forbids the former, it not only permits, but rather encourages, trade and the profit motive. The difference is that in trade there is always the risk of loss or low returns. What is eschewed is the guaranteed rate of interest: the pre-agreed, fixed return or amount for the use of money (Khan, 1986).

Islamic Banking according to Mohammad, in his book “Financial Institutions of Contemporary People” (2000) defines that Islamic Banking is: “Financial institutions are businesses primarily providing financing and other services, the traffic and circulation of cash payments adjusted with the implementation of Islamic law.”

Islamic banks unlike conventional banks, are not based on interest and conducts their business in accordance with a wide array of ethical and moral issues and this results in bring fairness and justices to the society. Conventional Banking has a capitalistic economic ideology, which profits and benefits the rich and the elite, but Islamic banking system does pay attention about public welfare. As higher interest rates in conventional banking which keeps the poor out of the business, but Islamic banking enables the poor to gain profits, which in the long-run would raise the status of society economically and minimize financial-related crimes.

In Islamic banking the form of loan they provide could support struggling entrepreneurs because of no extra added interest burden and helps the customers to work harder with full concentration because of no extra and huge interest burden. Free to get loan and no fear of added interest.

Another Problem of conventional banking is the area of risk management and this happens as a result of the greed-driven centered benefits of few. But Islamic Banking comes with a product Mudaraba (Partnership) where it involves an investor and business prospect to commit in it. This means that conventional banking retrieves all risks and financial losses itself, while Islamic banking shares this through some products and agreement and thus why Conventional Banking is currently in Crisis and deteriorating alongside its declining status. With careful audits and analysis, the Islamic finance institute lessens the occurrence of risks and enhances the financial stability more.

In the study of Umer Chapra in his work “The case against Interest: Is it compelling?” outlines that the main factors of world financial crisis occurred in the last five decades, he argues that the main factor of credit turnovers throughout the world was excessive expansion of debt and the lack of adequate disciple in financial system.

Islamic banking is growth both in GCC Region and the western countries. It has more risk management tools than conventional banking and it is considered by the IMF as a means to better the economy of major world regions. Islamic Banking and finance are capable of replacing the conventional banking model and it has proven its viability and it is still growing. Islamic Banking strengthens the financial stability in the sense that the investments are approached cautiously and the decision-making process is carried out thoroughly unlike the conventional banking system. The companies who appear risky are usually kept away from the financial institutes. This is why during the global 2008 crisis; The Islamic Financial institutes are untouched.

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Figure 2: Top Sukuk Markets in 2018

Source: Thomson Reuters, MIFC estimates

Turkey ’s President Erdogan also stated in the 12th Conference on Islamic Economics and Finance in Istanbul that: “Islamic Economy can pull the world ‘Out of the Crisis’ as Turkey aim to make Istanbul Center of Islamic Finance and Economy.”

The Credit rating agency MOODY’S also announced that today’s Islamic banking assets are set to double within a decade, as government initiatives drive growth in the sector. According to EURONEWS, Islamic Banking is forecasted to be worth 3 Trillion $ by 2021 with Malaysia, Saudi Arabia, and UAE currently leading the market.

Turkey is a splendid country full of blessing and opportunities as Turkey to become banking and Finance hub in coming years according to researchers. Kyrgyzstan, Tajikistan, Azerbaijan, Uzbekistan, and other central Asian countries are endorsing Turkish banking and financial system and developed banks working in the country including ALBARAKAH, KUVWEYT TURK BANK, TURKIYE FINANS, and with Istanbul International Financial Center (IIFC) has given more growth to this sector while benefiting from evolving regulation and supervision.

Conclusion and Result

This study will describe mainly Islamic Banking in Afghanistan with comparative analysis with key Islamic countries and western Islamic windows, using its system, principles, instruments, practices, viability, challenges, and opportunities, riskless as compared to conventional banking system.

To make it brief, Islamic Banking and Finance can have the following benefits to the economy and people:

1. Creation of Legal and Halaal employment opportunities through investment in less risky and more reliable sources of investing.
2. Effective use of resources which are the inputs of investors and management of Banking which tends all people to invest in different criteria.
3. Helping and backing up struggling entrepreneurs to grow their investment skills and work with no fear of extra added interest burden.
4. It will add to the economic development due to better risk management tools which lessens the losses and shares it fairly.
5. Economic growth and Economic Development due to the elimination of capital Economic ideology and making close attention to the public welfare through the fairness and justice to the society through investment options it provides.
6. Poor has the chance to invest in many investment opportunities found by Islamic Banking Institutions and better management of risks, selection of suitable institutions and caution decision-making process.

Acknowledgment

I thank and praise the Almighty Allah for giving me the power and strength to write this article which is helping me to grow my career and show my professional and critical writing abilities. It’s been a privilege to write articles which are the current issues in the global economy, specially in Afghanistan, as it will motivate me and youth generation to focus on vital problems which needs creative and alternative solutions and this will give us out of box thinking time.

I would like to take this moment to express my deepest gratitude and respect to my father and my family friends, they were constant source of motivation and support through every moment of life. I would be unsuccessful without their existence and prayer.

References

As mentioned in the research methodology, I will be using books, academic journals, previous researches etc. as mentioned below:

BOOKS:

1) Amr M & Ahmed T (2010), Islamic Banking: How to manage risk and improve profitability? https://ebookcentral.proquest.com/lib/haaga/reader.action?docID=699448 (4/2017)

2) Brian K, (2011), Case studies in Islamic Banking and finance https://ebookcentral.proquest.com/lib/haaga/reader.action?docID=698009 (9/2017)

3) Omar M, (2013). Islamic Banking and finance https://ebookcentral.proquest.com/lib/haaga/reader.action?docID=1336760. (6/2017)

4) Archer, Simon & Abdel Karim, Rifaat Ahmed. (2002) Islamic finance: Innovation and growth. London: Euromoney Books.

5) Iqbal, Munawar and Llewellyn, T. David (2002) Islamic economics systems. London: Zed Books Ltd.

6) Warde, Ibrahim. (2000) Islamic finance in the global economy. Edinburg: Edinburg University Press. 1

ARTICLES AND ACADEMY SOURCES:

1) https://tez.yok.gov.tr/UlusualTezMarkezi/TezGoster?key=7IOJXw 8PRQU1mSHU6- jlX8xRJPG3TgLvfr OCkESrNvAkB3-91l2HoqdPB1JXX#page66

2) https://tez.yok.gov.tr/UlusualTezMarkezi/TezGoster?key=7IOJXw 8PRQU1mSHU6-jtUJkq- mjyiVG88GgH71Urcjkci7U5gHA3-E CP 5P2R#page66

3) https://tkbb.org.tr/Documents/Yonetmelikler/.MahmutK.MustafaG. Islamic finance system and Turkish capital markets.pdf#page66

4) Independent journal http://www.independent.co.uk/student/postgraduate/mbas-guide/why-is- islamic-finance-important-for-mbas-8009567.html (5/2017)

5) The Conversation/business + economy (Academic journal). http://theconversation.com/is-islamic- banking-more-risky-compared-to-conventional-banking-62993 (5/2017)

6) Adel Elgharbawy, Risk and risk management practices, Journal of Islamic Accounting and Business Research, 10.1108/JIABR-06-2018-0080, ahead-of-print, ahead-of-print, (2020).

7) Saad Azmat, A. S. M. Sohel Azad, M. Ishaq Bhatti, Hamza Ghaffar, ISLAMIC BANKING, COSTLY RELIGIOSITY, AND COMPETITION, Journal of Financial Research, 10.1111/jfir.12207, 43, 2, (263-303), (2020).

8) Jocelyn Grira, Chiraz Labidi, Banks, Funds, and Risks in Islamic Finance: Literature & Future Research Avenues, Finance Research Letters, 10.1016/j.frl.2020.101815, (101815), (2020).

9) Elisa Aracil, Corporate social responsibility of Islamic and conventional banks, International Journal of Emerging Markets, 10.1108/IJOEM-12-2017-0533, (2019).

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