Understanding Islamic Banking and its Prospect in the UK

TABLE OF CONTENTS

Chapter 1 Introduction
1.0 Changes in perception in the West
1.1 Objectives of the Study
1.2 Significance and benefits of the study
1.3 Historical background of Islamic Bank of Britain Plc (IBB)
1.4 Prospect/Challenges for IBB

Chapter 2 Literature Review
2.0 Introduction
2.1 History of Islamic Banking
2.2 Is Shariah the foundation of Islamic banking laws and regulations
2.3 Sources of Shariah Law
2.4 Principle of Shariah in Islamic Banking
2.5 Prohibition of Riba from a legal and moral standpoint
2.6 Disputes among Muslims Scholars on Riba
2.7 Islamic banking and ethical investment
2.8 Conventional Banking vs. Islamic Banking
2.9 Why Muslims Countries set aside Shariah Law for a long time
2.10 Rebirth of Islamic Finance
2.11 The factors that led to the emergence of Islamic banking in UK
2.12 Government initiatives
2.13 Historical background and prospect of IBB
2.14 Review on Consumers attitudes towards Islamic Banking
2.15 Conclusion & conceptual framework

Chapter 3 Research design and methodology
3.0 Introduction
3.1 Research Philosophy
3.2 Research approaches
3.3 Deductive and Inductive thinking
3.4 Research Strategies
3.5 Descriptive studies
3.6 Exploratory studies
3.7 Research Methods
3.8 Time horizon
3.9 Reliability and validity of Research design
3.10 The credibility of research findings
3.11 Validity of Research findings
3.12 Relevant threats to validity for the research
3.13 Data collection methods
3.14 Primary data
3.15 Secondary data
3.16 Designing the questionnaire
3.17 Population and Sampling
3.18 Deciding on a suitable sample size
3.19 Ensuring the information needed
3.20 Conclusion

Chapter 4: Data Presentation
4.1 Presentation of data findings (IBB Customers)
4.2 Presentation of data findings (IBB Management)

Chapter 5: Discussion
5.1 Analysis of primary data
5.2 Linkage between main research questions with the analysis
5.2.1 Contradictory primary data findings
5.2.2 Lack of risk-sharing attitudes among the respondents
5.2.3 Risk of IBB customers switching off to other Banks
5.3 Analysis of secondary data
5.4 SWOT Analysis
5.5 PEST Analysis

Chapter 6: Conclusion and Recommendations
6.0 Final discussions
6.1 Present and future challenges
6.2 Suggestions and Recommendations
6.3 Limitations of the Study
6.4 Suggestions for future research

Chapter 7: Reflections on Learning
7.0 Introduction
7.1 Development on my persistency with ambiguous terminologies
7.2 Development on Critical Reviewing
7.3 Development in choosing the right alternative
7.4 Development in interviewing techniques
7.5 Development in Analytical abilities
7.6 Self realisation on my abilities & conclusion

Reference and Bibliography

Appendices

1. Questionnaire to IBB Customers
2. Questionnaire to Islamic Bank of Britain Plc
3. Glossary of Islamic terminology
4. Gantt Chart (Dissertation Time Management)

List of tables and charts Pages

Table 2.1 Islamic vs. conventional banking

Table 2.2 Conceptual framework with linkage to questionnaire

Table 3.1 The research onion

Chart 3.2 : The Hourglass notion of research

Chart 3.3: Deductive & Inductive thinking

Table 4.1.1 to Table 4.1.21 40 -

Table 5.1: Variance in data findings

Table 5.2 Analysis of secondary data

Table 5.3 SWOT Analysis

Dedication

This dissertation is dedicated to my beloved Mother; late Mrs. Begum Dilruba, who passed away on 7th December, 2007; she was always an inspiration for me and motivated me to pursue this MBA programme. May God always bless her departed Soul.

ACKNOWLEDGEMENTS

I would like to direct my gratitude to my supervisor, Shuaib Masters, for his encouragement and support during the completion of this dissertation. I also would like to pass my thanks to Tim Harris (MBA Course Director) and our MBA tutors at Kaplan.

Special thanks to our administrator; Rory Page and Natalie, for their co-ordination and prompt responses to all my academic requirements, throughout the MBA programme at Kaplan.

I send my thanks to Ms. Fatima El Banna and Mr. Samir Alamad (Asst. Manager, Product & Sharia’a Compliance), Islamic Bank of Britain Plc, Birmingham, UK for their time, effort and valuable information on Islamic banking.

My sincere gratitude to Ms. Komla Ali for her incomparable mental and financial supports; throughout this MBA programme, I am ever grateful to her.

Finally, I would like to show my appreciation and my deeply-felt thanks to my families and friends for their love and support.

.November 2008

Sohail Bin Mohammad

Chapter One

I. INTRODUCTION

This chapter will start with perception, introduction to interest free banking, and brief review on the history of Islamic Bank of Britain ((IBB). Later it will show the significance with justification to research objectives.

1.0 Changes in perception in the West

Islamic Banking is more or less of an unknown concept in the Western World and at best only associated with a dislike to interest. But the ideology of Sharia Banking contains much more than its prohibition of interest in the financial transactions as it strives for a just, fair and balanced society as envisioned by the Islamic economics, and therefore cannot finance any project which conflict with the moral value known to be detrimental to society. The obvious connection of Islamic banking to the religion Islam might have been causing suspicion among Western citizens, perhaps, more out of fear for the unknown. The concept behind Islamic banking system to ‘eradicate injustice in the society’ and for a number of certain other economic reasons the global society of today the Arab World and its Islamic banking system getting closer to Western World.

When Islamic banking with its ethical values first appeared as Dubai Islamic Bank in 1975, it was treated as a utopian dream by the financial circles in the world (El- Qorchi, 2005). But today ‘Islamic banking and finance is attracting widespread attention and interest in the form of fresh investments and regulators’ mindshare. Today Islamic finance has come a long way indeed, with approximately USD 1.3 trillion in designated assets and more than 400 financial institutions offering Sharia compliant products globally.’ (Maiya & Banerjee, 2008).

The attitudes of both Western and Eastern World, however, are changing gradually and in the last few years as the neutral conventional banking has begun to trouble the consciousness of an increasing number of people. There is a reluctance to hand over funds to banks and financial institutions that invest in companies engaged in unethical and socially harmful activities. Moreover, new markets are moving towards the Islamic banking practice not merely because of the religious imperatives, but due to the positive ‘risk-reward’ expected pay offs (Maiya & Banerjee, 2008).

The primary feature of the modern banking and finance is to generate credit, and through the process of financial intermediation between savers and investors they exert immense employment and income generation effects, which ultimately help in economic advancement and social welfare. This credit system has produced a dynamic force in the creation of modern world’s wealth, which is highly appreciated by the capitalist theory. But according to Kniffin (1937) ‘while a banking system, if badly constructed or badly handled, is capable of inflicting great harm on trade and industry and may even upset the whole economy.’ The present global scenario of credit crunch, specially, in the Western World is a strong witness, and for this fixed interest and excess greediness of Bankers are responsible. However, in Islamic finance, risks are allocated between Bankers and Clients which makes it much more even to initiate this kind of financial disasters.

1.1 Objectives of the Study

There are two elements in this study ‘Understanding Islamic Banking & its prospect in UK’. The first one is to know the prospect of Islamic Banking in UK, and for this to achieve it is required to understand the full concepts of Islamic Banking, by analysing the theoretical foundations of Islamic banking and the factors that have contributed to the emergence of Islamic banking in UK. To carry out the missions I have chosen Islamic Bank of Britain Plc (IBB) as a model. In dealing with these issues, the study aims to achieve the following objectives:

a) To introduce the sources of shariah or Islamic legal system as the foundation for Islamic banking laws and regulations, which have shaped the evolution of modern Islamic finance.
b) To investigate the issues of the prohibitions of riba (interest), from a legal and moral standpoint as enshrined in al-Qur’an and the Sunnah (practices of Prophet Mohammed), and as prevalent in the literature of Islamic banking.
c) To identify the similarities and differences in the structure and practices of
Islamic and conventional banks.
d) To understand Consumers attitudes towards Islamic Banking in United
Kingdom.
e) To examine the factors which have led to the emergence of Islamic banking with a brief review of the growth, development and future of Islamic bank in United Kingdom.
f) To offer some tentative suggestions on the subject based on the findings of the research

1.2 Significance and benefits of the Study

Islamic banking is a subject which many people, including Muslims, know very little about. The theory of interest-free banking itself is a revolutionary idea in the banking business of a country, but this aspect often gives rise to confusion and misconceptions about the operation of Islamic banking. The growth of Islamic banking partly reflects demand from Muslims clients for Islamic deposit facilities and fund management services which involve shariah compliance. At the same time, Islamic banking methods are viewed as a challenge and opportunity by conventional bankers, many of whom have sought to get involved in this growing industry. In client driven societies there is a willingness by those in financial services to learn from the experiences of Islamic banks. Further, the globalization of trade necessitates the conducting of affairs of Islamic bank with non-Islamic banks, and vice-versa. Such integrated international trade demands that business communities, banks and other trade regulatory bodies of both Muslim and non-Muslim countries should gain some understanding of the principles of Islamic banking. So the knowledge of current Islamic banking as compared to the conventional banking is very significant for economists, bankers, administrators and other peoples involved with international trade and commerce. Added to these, the increasing number Islamic banks in various countries made it a necessity for banking communities to have some insight into the workings of Islamic banks.

Therefore, the present comparative research will familiarize the readers with the principles of shariah and will provide an insight into the rules and principles of Islamic banking as well. In spite of the fact, that the Islamic banks are operating successfully alongside other conventional banks and playing an increasing role in the economy, there has been little comprehension research on Islamic banking in United Kingdom.

1.3 Historical background of Islamic Bank of Britain Plc (IBB)

In early 2002, few non-executive directors of IBB in the Middle East discussed the idea to create the UK’s first stand-alone Islamic bank. Prior to this, UK had only conventional Banks like HSBC with ‘Islamic window’ providing Shariah products. FSA regulations welcomed the proposal and in August 2004 IBB came into existence. Initially it started with £14 million capital invested from the Gulf. IBB is commercial entity based bank strictly regulated by the Islamic Shariah (Islamic legislation) principles and believes will meet the financial needs of the British Muslims. Shares are available to all interested individuals (Muslims and non-Muslims). I have chosen Islamic Bank of Britain (IBB) to serve the purpose of research and to study Islamic Banking system as this is only Bank in UK which only runs only on the Shariah (Islamic legislation) system (www.islamic-bank.com). Currently it has over 50,000 accounts and some 42,000 customers. It is also important to note the Bank has been making losses since its inception in 2004.

1.4 Prospect/Challenges for IBB

Islamic Banking, based on the Islamic economic system, is not restricted to Muslims only and it is no longer confined to concepts and ideas only. There has always been a demand among Muslims for financial products and services, by the immigrant UK Muslims that conform to Shariah (Islamic Law). ‘Given the UK’s position as one of the leading international financial centres, it is no surprise that part of this growth has taken place in London which is now seen as an emerging global ‘hub’ for Islamic finance. At the same time, the government has wanted to give the UK’s relatively large Muslim community (around 3% of the population) access to financial services consistent with their religious beliefs (Michael, 1997). Moreover, the UK government is coming with lots of initiatives for Islamic Banking system and wants to make Britain the world's biggest centre for Islamic finance, as Mr. Gordon Brown, while being chancellor of the Exchequer, in his speech on Wednesday, June 14, 2006, (www.hm-treasury.gov.uk) pledged to make it possible for banks to increase sales of Islamic financial services in Britain.

It shows the Islamic banking system in UK doesn’t have to struggle like a decade before for the help of Government backing. Still we can see IBB is not doing well and being in loss as par its Financial Statements. It could be the lacking of understanding and the perceptions of customers towards them in terms of service quality and other patronage factors to secure customer’s allegiance. This scenario actually prompted me to investigate the reasons behind these issues, as I believe the growth and increased demand requires innovation and product developments etc which IBB might be missing.

Chapter Two

II. LITERATURE REVIEW

This chapter critically appraise the appropriate Islamic banking literatures; contrast and compares relevant sources and support discussion. Ends with questionnaires linkage to conceptual framework

2.0 Introduction

According to Saunders et al. (1997) literature review is a process of reading and writing to enhance subject knowledge to help in clarifying research questions. With this literature reviewing, the author aims to dissect the research questions to determine their relevancy and impacts in Islamic banking industry.

The Muslim scholars started paying strong attention to the issue of the Islamic socio- economy system soon after world war II and in the 1960’s and 1970’s research intensified and specialisation emerged in different fields, and among this specialisation, the economic system of Islam has received the most attention (Chapra, 1985). With the increasing popularity of Islamic banking, books in this area have become quite common. We see in the last three decades prolific studies and writings on Islamic Banking within the scope of modern finance industry have started (Haron et al, 2003). But still the author finds there has been an acute dearth of literature which tends to be more academic and covers both concepts and application of procedures.

2.1 History of Islamic Banking

From the very early stage in Islamic history, Muslims were able to establish a financial system without interest. The system to finance business activities was based largely on the profit-and-loss sharing (PLS) modes of mudārabah (passive partnership) and mushārakah (active partnership). Deferred trading and interest-free loans (qurūd hasanah) were also used to finance consumers’ as well as business transactions (Haron & Shanmugan, 2001). The system worked quite effectively during the heydays of Islamic civilisation and for centuries thereafter to mobilise the “entire reservoir of monetary resources of the medieval Islamic world” for financing agriculture, crafts, manufacturing and long-distance trade (Udovitch, 1970). They were used not only by Muslims but also by Jews and Christians to the extent that interest bearing loans and other overly usurious practices were not in common use.

Schatzmiller (1994) has mentioned that during the time of the ‘Abbasid Caliphate’ (908-932AD), Muslims had started performing most of the basic functions of modern banks. They had their own markets, something akin to the Wall Street in New York and the Lombard Street in London, and fulfilled all the banking needs of commerce, industry and agriculture within the constraints of the then-prevailing technological environment. The legal instruments necessary for the extensive use of financing through mudārabah and mushārakah were already available in the earliest Islamic period. These instruments, which constituted an important feature of both trade and industry and provided a framework for investment, are found in a developed form in some of the earliest Islamic legal work (Udovitch, 1970) practices and concepts already fully developed in the Islamic legal sources of the late eighth century did not appear in the West, according to Udovitch, until several centuries later provided a great boost to trade which flourished from Morocco and Spain in the West, to India and China in the East, Central Asia in the North, and Africa in the South. In Spain and the Mediterranean and Baltic states, Islamic merchants became indispensable middlemen for trading activities. The extension of Islamic trade influence is indicated not only by the available historical documents but also by the Muslim coins of the seventh to the eleventh centuries found through excavations in countries like Russia, Finland, Sweden, Norway, the British Isles and Scotland which were on the outskirts of the then-Muslim world (Kramers, 1952).

2.2 Is Shariah the foundation of Islamic banking laws and regulations?

According to Sami Zubaida (2005) Shariah is a ‘body of rules deriving its legitimacy from the theological premise that it is God’s law.’ In other words, Shariah is the way which directs man’s life to the right path (Rahman, 1979). The very objective of the Shariah is to promote the welfare of the people which lies in safeguarding their faith, their life, their intellect, their posterity and their property (Ghazali, 1937).

The concept of Shariah is not only to govern man in the conduct of his life in order to realise the Divine Will, but covers all behaviour- spiritual, mental and physical. Shariah principles are more than law, covering the total way of life that includes faith and practices, personal behaviour, legal and social transaction. In other words, Shariah is a comprehensive principle of a total way of life (Haron & Shanmugan, 2001). Shariah is, therefore, expected to provide not only the right path but also to govern all activities of the Muslims toward the betterment of the whole community, and this includes the monetary transactions as well. These facts automatically convince author, that Shariah is the foundation of Islamic banking laws and regulations, which shaped the evolution of modern Islamic finance.

2.3 Sources of Shariah Law

The author finds is quite important to know the sources of Shariah law as the underlying theories of Islamic banking principles originates from them. There are four fundamental sources of Shariah law. The first source is the Islamic Holy Book called Qur’an. The Holy Qur’an is the original and eternal source of Shariah law. It constitutes messages that Allah presented to the Prophet (pbuh) for the guidance of mankind. These messages are universal, eternal, and fundamental. The Hadith, second foundation of Shariah, is next in importance to the Qur’an. It refers to information, accounts, narratives, stories and records of Sunnah (practices) of the Prophet (phub). These were handed down from generation to generation to become the rule of faith and practice of Muslims. The Sunnah signifies the customs, habits and usages of the Prophet (pbuh). The third source of Shariah law is the Ijma. Ijma means a consensus of opinion of mujtahids (learned scholars of Islam or those authorised to exercise independent legal reasoning), or an agreement of Muslim jurists of a particular age on a question of law. The fourth and last source of Shariah is the Qiyas which literally means ‘measuring by’ or ‘comparing with’ (Ali, 1950). Qiyas is the process of reasoning by analogy of the mujtahids with regards to difficult and doubtful questions of doctrine or practice, by comparing them with similar cases already settled by the authority of the Quran and Hadith and thus arriving at solutions of undecided questions (Klein, 1985). The author believes agrees modern financial products at Islamic banking came into existence by the decisions through Ijma and Qiyas even though Islamic way of financing is there for the last 1400 years.

2.4 Principle of Shariah in Islamic Banking

Currently, there is no Muslim country which has succeeded in formulating and implementing a complete package of Shariah law which covers all aspect of living. Similarly Islamic banks laws are not comprehensive. But Muslim Scholars are actively working to make it better. In most cases the law is similar to conventional banking law except with an additional clause that prohibits the banks from dealing with interest (Haron & Shanmugan, 2001). The author view is same here and it was complemented by same opinions from a number of bank managers at Islamic Banks in Bangladesh.

Islamic banks in all countries are expected to conform to two types of laws. As normal business entities, Islamic banks are governed by laws and regulations imposed by the government of their domiciled country. These laws are commonly known as positive laws. As institutions whose foundations are based on Islamic doctrines, Islamic banks must also operate within the ambit of Islamic principles and laws. Positive laws or the laws that are given by a person of authority are distinct from moral and sacred laws given by God or with God’s guidance (Haron & Shanmugan, 2001). These positive laws refer to Western laws and also to secular statutes borrowed by Islamic countries. The positive laws, in most cases are in the supervision of that country’s Central Bank. Islamic banks must conform to all requirements stipulated in both Acts in all the countries. Similarly, other governments have passed special laws that govern the operations of Islamic banks in their country. Schacht (1964) a contemporary historian in Islamic civilizations believes that Islamic law was created not by an irrational process of continuous revelations but by a rational method of interpretation. He also claimed that both religious standards and moral values which were introduced into the legal subject-matter provide the framework for a structural order (Shariah).

2.5 The prohibition of Riba (Interest & Usury) from a legal and moral standpoint as stated in the Islamic literature

The author has found the prime concern of Shariah law in Islamic banking is Riba. But not long ago Islam’s prohibition of riba (interest) was generally regarded as an almost impossible proposition – even among most Muslim intellectual circles (Chapra, 1985).

The biggest question author kept in mind through out literature reviewing was ‘What is Riba?’ and its position in Shariah?

Riba is an Arabic word which literally means ‘increase’, ‘growth’, ‘to rise’ and ‘to become lofty’ (Ahmed, 1992). From the Shariah (Islamic law) point of view, however, riba technically refers to the ‘premium’ that must be paid by the borrower to the lender along with the principle amount as a condition for the loan or for an extension on its maturity (Chapra, 1992). Throughout literature on Islamic banking, the author found it is the most important aspect of Islamic banking and its operation must be conducted without any element of riba, as Islam condemns those who associate themselves with the practice of riba. The Qur’an explicitly states that the charging of interest will draw a declaration of war from Allah and His Messenger and promises total destruction of an economy which allows interest-based transactions.

2.6 Disputes among Muslim Scholars on Riba

While reviewing, the author also found, that there have been some disputes amongst the Muslim scholars about whether Riba refers to interest or usury. Some scholars have argued that what Islam prohibits is usury and not interest. They claimed that interest paid on loans for investment in productive activities would not contravene the Qur’an for it refers only to usury on non-productive loans which prevailed in pre- Islamic times when people were not familiar with productive loans and its influence on economic development. The author agrees with Khan (1987), that there is no segregation between interest and usury in Islam, and author has the same opinion.

At this point, the author ask the question here ‘Why Islam tends to be so harsh and intolerable with riba, whereas, accepting and paying interest is an acceptable and common practice to other communities?’ Those who are used to the conventional banking system may believe that interest is the ‘life blood’ of the entire banking system. Without interest, it is argued the system would grind to a halt (Mannan, 1986). Hosein (1997) argues, that interest on a loan is a dangerous form of riba and that William Shakespeare created the role of the moneylender, Shylock, in his play, The Merchant of Venice, to highlight the danger of riba and money-lending to the well-being of the community. The author believes, the prohibition of riba, in Islam, is to discourage society from conducting business undertakings in such a manner that will encourage debt and passive participation in the economy. Karim & Archer (2002) also added, that riba works against the Islamic concept of caretaking in that it is a means of creating an unjust situation and disadvantaging the poor of society by creating a situation in which the poor can never escape the chains of debt.

2.7 Islamic banking and ethical investment

To talk about Islamic Banking in UK, the author find it prospective as the philosophy underlying Islamic banking principles as discussed above is similar to that of socially responsible investment (SRI) and ethical funds that received wide recognition in the West for the last two decades (Wilson, 1997). Investing money involving in the production of armaments, alcohol, and tobacco; possess poor environmental performance record; engage in indecent advertising and practise cruelty to animals, which is totally banned in Islam. In the UK, the concern for ethical investment and socially responsible financial firm has become increasingly popular since the mid- 1970s, and the author believe this would create a positive impact on the image of IBB.

2.8 Conventional Banking Vs Islamic Banking

The ideology of Shariah Banking contains much more than its commonly known ‘prohibition of interest in the financial transactions’ as Mirakhor & Warde (2000) correctly stated Islamic banks strives for a just, fair and balanced society as envisioned by the Islamic economics, and therefore cannot finance any project which conflict with the moral value system of Islam such as financing a brewery factory, a casino, a night club, affecting environment or any other activity clearly prohibited by Islam or known to be detrimental to society. Therefore, the idea behind the banking system is to eradicate injustice in society.

The author believes, ‘Islamic banking’ is conducting banking operations in consonance with Islamic teachings. He also understands that Islamic banks are not expected to have philosophies and objectives similar to conventional banks. Islamic banks perform mostly similar functions to that of conventional banks, but their approach is distinctly different (Chapra, 2000)

The similarities between the two systems are that in an Islamic system, banks, although controlled by the rules of the Shariah, essentially perform the same functions as those in a conventional system; that is, they act as administrators of the economy’s payments system and as financial intermediaries. The author strongly believes it as true, and would ask for IBB customers’ views through questionnaires.

Due to the nature of operation, we see there are a lot of differences between Islamic and conventional banking. Contrary to Islamic banking, conventional banking has been defined as ‘accepting, for the purpose of lending or investing, deposits of money from the public, repayable on demand or otherwise, and withdraw able cheque, draft, order or otherwise’ (Meenai, 1998). Moreover, the Bank functioning in the way must reflect Islamic principles in real life. The Bank should work towards establishment of an Islamic society. So, one of its primary goals is the deepening religious spirit among the people. (IAIB, 2001). The author finds there are obligations of Islamic banking towards society are greater than conventional banks due the following reasons:

a) Islamic banking has certain philosophical missions to achieve, and are not free to do as they wish; rather they have to integrate moral values with economic actions. There is a moral filter based on the definitions of halal (permissible) and haram (prohibited and undesirable) operating at different levels, carving the conscience of entrepreneur and firm, promoting a positive social climate for society, and providing an expedient legal framework (Chapra, 1992).
b) To provide credit to those who have the talent and the expertise but cannot provide collateral to the conventional financial institutions, thereby strengthening the grass-root foundations of society; and to create harmony in society based on the Islamic concept of sharing and caring in order to achieve economic, financial and political stability (Chapra, 1992). As par Shariah, prohibitions like interest, gambling, excessive risks, etc. are to provide a level playing field to protect the interests and benefits of all parties involved in market transactions and to promote social harmony (Ahmad, 2000; Chapra, 2000).

The basic important departure of Islamic banking from conventional banking is the prohibition of riba and the promotion of bai’ or trade, and so the depositors with Islamic banks have to be mentally prepared for risk of money diminishing as a result of losses incurred by the bank in its efforts to generate income (Gafoor, 2001). From this perspective the major differences between the Islamic and conventional banking systems are as follows:

1. A conventional bank finances its customers based on the contract of loan where the bank is the creditor and the customer is the debtor. Thus, it is a creditor-debtor relationship. On the other hand, in an Islamic bank it is run by a contract of sale i.e. a deferred sale contract on which the bank itself or the bank appoints the customer to purchase the goods needed and later sells them to the client with a mark up (cost plus and agreed profit margin). The payment will be made in instalments over a specified period of time (Chapra, 1985; Haron & Shanmugan, 2001).
2. The prevailing practice of interest in the conventional banking system involves injustice to the borrowers since the interest on their loans have to be paid irrespective of their business positive or negative outcomes (Lewis and Algaud, 2001; Iqbal and Molyneux, 2005). But, Islamic banking aims to promote economic growth through risk-sharing (Asquith et al., 1994; Andrade and Kaplan, 1998)
3. An Islamic bank is said to make a legitimate profit from its trading activity as it involves risk, an effort as compared to a conventional bank, which merely finances the customer at a fixed interest rate. According to Gafoor (2001) profits would have accrued from one year to another according to the performance of the bank, not according to changes in interest rates.
4. The author has found the nature of Islamic banking is not merely lending the money as practiced by conventional bank; rather it is involved in buying and selling the commodity/property. Like with IBB, the Home Purchase Plan is based on the accepted and widely used Islamic financing principles of Ijara (leasing) and Diminishing Musharaka (reducing partnership). For example, the bank may contribute 80% and you 20% of the purchase price. Over a period of up to 30 years, you will make monthly purchase instalments through which the Bank will sell its share (80%) of the home to you. With each instalment paid, the Bank’s share in the property diminishes while your share correspondingly increases (www.islamic-bank.com). In conventional banking practice, interest is regarded as the price of the loan.
5. Profit margin imposed by an Islamic bank in some modes of investment e.g., in murabahah or cost plus profit is fixed at the time of contract and must be agreed upon by the customer. Therefore, even if the client does not pay on time, the bank cannot ask for a higher price due to delay in settlement of dues. While interest rate, which is also prefixed at the time contract either would be unchangeable or would change according to the Base Lending Rate (BLR) that constantly monitored by the Central Bank (Faruq, 2002).
6. Under Islamic banking system, no penalty is charged for late payment of instalments. In order to get the Islamic type of financing, a customer needs to open an account with the bank and to deposit some amount of money in the account so that the deposited money could be set off in case of late payment. (Faruq, 2002). On the contrary, conventional bank charges penalty for late payment. There will be the compound interest. The longer the delay the bigger would be the compounding effect (Faruq, 2002).
7. In Islamic financing, no money is advanced to the clients by the bank. Instead, the bank, in murabahah for example, itself purchases the commodity required by the clients. Since these transactions cannot take place unless the clients assure the bank of their willingness to purchase a commodity, therefore, it is not possible at all, unless the bank creates inventory. In this manner, financing is always backed by assets (Chapra, 1985; Haron & Shanmugan, 2001).
8. Islamic banks face a risk not faced by their counterparts. Both have to take credit risks, capital adequacy, liabilities and asset-matching risks, currency fluctuation and liquidity risks, but the risk under Islamic banking system is higher. In the case of the former where Islamic banks are organised mainly on the basis of profit earning arrangements permitted by Islam, both profit and loss are possible in every single deal, while in the case of lending at interest by their conventional counterparts the risk of loss is borne entirely by the borrow (the client), but the lender (the bank) safeguards himself/herself against any possibility of loss. (Faruq, 2002)

We can summarise the main differences in the following diagram:

Abbildung in dieser Leseprobe nicht enthalten

Table 2.1 Islamic vs. conventional banking

2.9 Why Muslim Countries set aside Shariah Law for a long time?

Like author, everyone would ask the above common question. Shariah Law came into existence 1400 years back, still in reality Muslims are constantly bound by mostly customary and positive laws. This is because through trade activities and colonialism, Muslim countries began to adopt conventional banking and Islamic banking activities which were initiated by early Muslims, ceased to exist (Haron & Shanmugan, 2001). This situation, which prevails in modern times commenced during the medieval age of Islam when the Shariah was frequently set aside by orders of the Caliph and governors, especially in matters related to commerce and civil order (Guillaume, 1977). So till modern times we saw in all Muslim countries banking laws were conventional banking laws or interest-based laws. And author believes like Ali (1988) that the emergence of Islamic banking in the 1960s and 1970s served as an impetus for the re-establishment of Shariah law in commercial activities.

2.10 Rebirth of Islamic Finance

The independence of Muslim countries has led to the revival of Islam and there is a longing to gradually reinstate most of the lost institutions, the Islamic financial system being one of them. (Chapra, 1985). The ‘so-called’ Islamic resurgence which swept many parts of the Muslim worlds was the renewal point of Islamic banking system. The main notion of these resurgences was the application of Islamic teachings in all aspects of life. Since Islam prohibits interest, it is obvious that the elimination of interest from the economic and banking system became top priority among Muslims scholars. The establishment of Mit Ghamr Local Savings Bank in 1963 marked a new milestone in the revolution of the modern Islamic banking system (Haron & Shanmugan, 2001). Today it’s a USD 1.3 trillion industry with more than 400 institutions offering Shariah complaint products (Maiya & Banerjee, 2008).

2.11 The factors that led to the emergence of Islamic banking in UK

The author agrees with Islamic bankers, that Islamic finance has grown rapidly across the world in recent years and part of this growth has taken place in United Kingdom which is now seen as an emerging global ‘hub’ for Islamic finance. The government has wanted to give the UK’s relatively large Muslim community (around 3% of the population) access to financial services in connection with their religious beliefs (Michael et al., 2007). The UK government wants to make Britain the world’s biggest centre for Islamic finance which would benefit 1.8 million Muslims in Britain and companies like HSBC Bank and Lloyds TSB Bank that are already offering some services which are in line with the Shariah Banking. Mr. Gordon Brown, while being Chancellor of the Exchequer, in his speech on Wednesday, June 14, 2006, pledges to make it possible for banks to increase sales of Islamic financial services in Britain (Michael et al., 2007). The author is concerned with the Islamic bank customers’ knowledge’s, whether they are aware of this fact or they assume UK government is just not supportive to Islamic banking. As par research work of Omer (1992) much ignorance is prevailed among Muslims in UK regarding this banking system, and the author too believes many of them still do having the same lacking of knowledge in this aspect.

The author agrees with Michael et al. (2007), that most of the growth of Islamic finance in the UK has taken place in the last six years we can see Shariah compliance based transactions been taking place in London since the days in 1980s. Products developed at that time were aimed exclusively at wholesale and high-net-worth investors as these products were relatively uncomplicated in structure and fell outside the scope of the regulators.

The author agrees, again, with Michael et al (2007) and has no question, that on a very limited scale, retail Islamic products started appearing in UK in the early 1990s: few banks from the Middle East and South East Asia began offering and selling simple products such as home finance. However, found themselves unfavourably tough to compete with their conventional equivalents especially in the pricing. The growth of the retail market remained slow throughout the 1990s and early 2000s as these products did not fall within the regulatory framework and thus consumers did not have the same protection as other consumers like the availability of the Financial Ombudsman Service and the possibility of having support from the Financial Services Compensation Scheme.

2.12 Government initiatives

The author agrees the UK government has recently taken important steps to promote the Islamic Finance industry. For example the Treasury established an ‘Islamic Finance Expert Group’, in April 2007, to represent a broad cross-section of opinion from the industry, the City, Muslim organisations and the FSA ( www.fsa.gov.uk). The primary objective of this board is to advise the government on opportunities to help Islamic finance in the UK. The Chancellor confirmed in his pre-Budget Report (October 2007), that the group is overseeing an official study by the Treasury and the UK Debt Management Office on the possibility of the UK government issuing a sovereign Sukuk in the wholesale market. Sukuk (Islamic Bond) has already achieved a massive success in the Middle East. Author also finds it prospect, that UK Government is thinking National Savings and Investment Institute to invest this Islamic bonds in the market (www.hm-treasury.gov.uk)

2.13 Historical background and prospect of Islamic Bank of Britain (IBB)

In early 2002, few non-executive directors of IBB in the Middle East discussed the idea to create the UK’s first stand-alone Islamic bank. On this ground alone, author has chosen IBB for his research work. Prior to this, UK had only conventional Banks like HSBC with Islamic window providing Shariah products. FSA regulations welcomed the proposal and in August 2004 IBB came into existence. Initially it started with £14 million capital invested from the Gulf. IBB is commercial entity based bank strictly regulated by the Islamic Shariah (Islamic legislation) principles and believes will meet the financial needs of the British Muslims. Shares are available to all interested individuals (Muslims and non-Muslims). The researcher has chosen Islamic Bank of Britain (IBB) to serve the purpose of research and to study Islamic Banking system as this is only Company Bank in UK which only runs only on the Shariah legislation. During four years of its operation it has made a good impact in Islamic Shariah Market. As par financial statements of IBB, author can see in spite of increase in customer base IBB has been making losses like GBP £8.83 million losses as at December, 2007. The author takes this information for his research behind these losses. Currently, the Bank has eight branches, nationwide, and has over 50,000 accounts and some 42,000 customers. The company was listed on the Alternative Investment Market (AIM) of London Stock Exchange in October 2004. As at 30 June 2008 there were 419,000,000 ordinary shares in issue (www.islamic-bank.com). The author has found that 57.33% of the ordinary shares are not in public hand. Out of this 15.99% ordinary shares been invested from UK Institute, and rest from the private equity firms in Middle East.

2.14 Review on Consumers attitudes towards Islamic Banking

The author strongly believes the increasing patronage of customers is behind the prospect of Islamic banking in UK, and we understand attitudes of customers towards this banking are the primary step for patronising. A substantial amount of literatures on individual consumers’ attitudes towards conventional financial products and services are already in place concerning selection criteria and customer satisfaction. The following section focuses on individual consumers’ attitudes towards Islamic banks, it would be useful to first briefly summarise the most-recent findings concerning individual retail consumers’ attitudes.

Devlin (2002) in his field work in UK market showed that professional advice was the most significant motivation for the choice of a home loan institution by customers in the United Kingdom. The author easily agrees with Devlin (2002) as the increasingly competitive environment in which conventional banks operate has seen customer satisfaction become the focus of increasing attention. There is a consensus among many studies that service quality is the primary factor in customers’ satisfaction with conventional bank services (Taylor and Baker, 1994; Levesque and McDougal, 1996; Jamal and Naser, 2002). The author noted that, Pont and McQuilken (2005) have also mentioned, that a high level of customer satisfaction impacted positively on the continued loyalty of a customer towards a particular bank. Haron’s et al (1994) in his study on Malaysian bank customers also found fast, efficient serve and confidentiality were the primary motivations for bank selections. The author is convinced this would be true in any continent as customer wants importance and good customer services first. As Wilson (1995) correctly said ‘as a business that is ineluctably in need for winning over customers whilst retaining the old one’. This necessitates Islamic banks to really understand the perceptions of their customers towards them in terms of service quality and other patronage factors to secure customers' allegiance.

Gerrard and Cunningham (1997) surveyed the market in Singapore and found in his main findings, that non-Muslims were completely unaware of Islamic methods of finance but Muslims fared little better. The author noted the work of Gerrard & Cunningham (1997) well to compare the scenario with UK as Muslims are minority in both the country.

Talking about Gerrard and Cunningham (1997) findings, it is also worth to point that Omer (1992) surveyed three hundred Muslims in the United Kingdom on their patronage factors and awareness of Islamic financing methods. During that time, Shariah-compliant products and services were primarily available though Islamic finance ‘windows’ at conventional banks like HSBC. The main finding was noted as high level of ignorance prevailed among Muslims in the UK concerning Islamic finance principles. The author slightly disagree with this and thinks scenario have changed a lot in UK with more Muslim population, and want to do research whether this problem is still prevalent or not. Elsewhere in the literature it is mentioned that Muslims living in a notionally Muslim country have a greater awareness and knowledge of Islamic banking than immigrant Muslims. Also added, that although UK Muslims were largely ill-informed about Islamic methods of finance, religious motivation comprised the most significant factor in their strong preference for Islamic banking services. The author agrees with Omer (1992) second findings, that religion is the primary factory in the choice of an Islamic banking institute and wants to find out more due to probable change of situation out of fifteen years time gap.

2.15 Conclusion and Conceptual framework

While reviewing the relevant literatures, the researcher has realised one important aspect that reviewing has actually created a vacuum for more knowledge and raise more questions in the mind set to distract this thesis work. To keep himself within track, the author has created the following:

Conceptual frame with link to questionnaires (Questions in blue colour are administered for IBB Management).

Table 2.2 Conceptual frame work with linkage to questionnaires

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Chapter Three

III. RESEARCH DESIGN AND METHODOLOGY

This chapter justifies methodological approach in relation to the research questions.

3.0 Introduction

People undertake research in order to find things out in a systematic way, thereby increasing their knowledge (Jankowicz, 1995). Methodology refers to the choice and use of particular strategies and tools for data gathering and analysis (Saunders et al. 1997).

So we can say research methodology is a careful and diligent search using a certain strategies of analysing data. We find all research projects share a goal of furthering our understanding of a society and thus share certain basic stages as suggested by Bailey & Harvey (1982):

1. Choosing the research problem and defining specific hypotheses or research questions;
2. Formulating the research design.
3. Gathering data;
4. Coding, preparation of the results and analysis;
5. Interpretation and presentation of data.

With reference to the above definition author would carry out working his chosen topic ‘Understanding Islamic Banking and its prospect in UK’. We can see there is two parts in this topic a) to understand Islamic Banking in full details, and b) Prospect of this Banking system in Great Britain at the moment and in the future. This is the first step in defining the basic programme that author is going to endeavour. Next is to pursue on these matters looking at the extensive materials from books, journals, internet search, interviews, etc. In this second step where author would formulate a research design, and decides on how to go about finding things out and gather relevant information. Third stage of research comprises of gathering data only; the author would then look at the information that have been collected and consider how this fits into his idea of good thesis writing. In research terms, this fourth stage is called coding and analysing data (Saunders et al., 1997). Finally, after weighing all the options, the author would decide the best route that would help in to work smoothly. This fifth and the final stage of a research is the analysis and the presentation of the results, and then author would come to a conclusion.

Saunders et al. (2003) defined the so-called research process as ‘onion’, consisting of five different layers, as in Figure 3.1 below:

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Table 3.1 The research onion (Saunders et al., 2003)

3.1 Research Philosophy

Philosophers treat Research Philosophy as logical reasoning. All research is based on assumptions about how the world is perceived and how we can best come to understand it (Trochim, 2006). According to Saunders et al. (2003), research approach includes positivism and phenomenology approach. The positivism approach to research owes much to what we would think of scientific research. The phenomenological approach is based on the way people experience social phenomena in the world in which they live. The author’s research is related to a part of natural science and is attached to the social phenomena where he is trying to understand ‘what is it?’ and ‘possibility’ (Saunders et al., 1997). The characteristic of the research, which author is conducting is linked to this phenomenological approach, as Easterby-Smith et al. (1991) states this method is appropriate while studying a small number of people and researchers in this tradition are more likely to work with qualitative data. The author believes this is appropriate due to time constraints and other factors like expenses.

In this approach, the author appreciates the flexibility to changes, but also understands its draw back like data analysing may be difficult and time consuming. Understanding the nature of problems, author has taken adequate steps to counter the difficulties by following his research schedules, well in advance.

3.2 Research approaches

Usually all research process originates with a broader area of interest with the initial problem on deciding a topic. Researchers have to narrow questionings down to one that is feasible and reasonably can be studied; formulating a hypothesis or a focus question. Keeping following diagram into consideration, author engaged in narrowing broader perspective to a research question of interest

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Chart 3.2: The Hourglass notion of search

(Source: www.socialresearchmethods.net)

Once the basic information is collected, the author began to understand and analyze the scenario of Islamic banking. It has been found, that for a certain area of interest there are a number of analyses that can be conducted and finally author managed to formulate a basic question that address the original broad question of interest in Islamic banking.

3.3 Deductive and Inductive Thinking

Quite often researchers refer to two broad methods of reasoning as the deductive and inductive approaches (Saunders et al., 1997)

[This chart had to be removed by the editorial staff.]

Chart 3.3: Deductive & Inductive thinking

(Source : www.socialresearchmethods.net/kb/strucres.php)

As par the above diagram and according to William et al. (2006) deductive approach works from the more general to more specific. This is also called “top-down” approach and its conclusion follows logically from available facts. The author would use this approach to test the prospect of Islamic banking in UK, which is he narrows down from what he collects or observes to address the second part of his topic chosen.

On the other hand, inductive approach is where observation will take first and then pattern and tentative hypothesis will be described (William et al., 2006). To obtain result on the first research objective, author uses inductive approach to understand ‘Islamic banking’ moving from specific Sharia laws on finance to broader generalization in Islamic banking. Further, William et al. added, this approach involves a degree of uncertainty. In order to avoid unwanted uncertainty, the author applied this approach only to specific areas. Both deductive and inductive (multi- method) approaches have been implemented in this research to serve different purposes and triangulation of results (Saunders et al., 1997).

3.4 Research strategies

According to Saunders et al. (1997) research strategy is a general plan of how author would go about answering the research questions he has set. He also added, that research strategy contain clear objectives, derived from his research questions; specify the sources from which he intends to collect his data and also considered the constraints which he would inevitably have.

Robson (1993) listed three traditional methods as research strategies:

- Experiment;
- Survey;
- Case study.

There is no scope for author, in this research, to work on experiment basis. Both survey and case study basis have been used to conduct the research, as two questions in the topic require two different methods for better results.

Survey: The author has chosen survey method to answer for the second part of his chosen topic ‘prospect of Islamic banking’. Survey allows the collection of a large amount of data from a sizeable population in a highly economical way. Based most often on questionnaire, these data are standardised, allowing easy comparison. Much time is spent in designing and piloting questionnaire and the progress is delayed due to independence on others for information (Saunders et al., 1997). So, the author has been careful in setting the number of questions and only the most relevant ones are used. Apart from this problem, the survey approach actually gives the author better control over his research process.

Case study: To answer the first part ‘understanding Islamic banking’ the author has chosen case study basis method as Robson (1993) mentioned this approach has considerable ability to questions the author. ‘What is Islamic Banking?’ ‘Why it’s essential to understand Islamic Banking?’ etc. These questions actually boost to draw attention to search for relevant data to find out ‘the prospect of IBB in UK’. According to Emory and Cooper (1991) a well constructed case study can enable author to challenge an existing theory and also provide a source of new hypothesis.

The author used multi-method approach, which include ‘descriptive research and exploratory research’ in terms research queries as well as by the research strategy used (Robson 1993).

3.5 Descriptive studies

The object of descriptive research is ‘to portray an accurate profile of persons, events or situations’ (Robson, 1993). To identify the clear picture on Islamic banking industry author has arranged self-administered questionnaires and telephone interviews to get an average profile pictures of IBB customers, and secondary data primarily (collected through numerous database, websites and articles) to get the historical and present profile of Islamic banking. This may be an extension of, or a forerunner to exploratory research (Saunders et al, 1997).

3.6 Exploratory studies

A search of the literature, talking to experts in the chosen field and conducting focus group interviews are three suggested exploratory research by Emory and Cooper (1991). The author, by conducting research, would like to understand the reason behind Islamic banking concept, comparative analysis between conventional and Islamic banking and UK government’s outlook and contribution towards operations of Islamic Banking, etc. To answer all of these questions exploratory studies are valuable means of finding out ‘what is happening; to seek new insights; to ask questions and to assess phenomena in a new light’ (Robson, 1993).

3.7 Research Methods

There are two types of researches: qualitative and quantitative (Saunders et al, 1997). As per the author’s view, qualitative research is the best suitable as data meanings are expressed through words, which are relevant in this kind of research. Qualitative research results in the collection of non-standardised data which requires classification, and is analysed through the use of conceptualisation. The process of ‘understanding Islamic banking and its prospect in UK’ involves the development of data categories, allocating units of original data to appropriate categories, recognising relationships within and between categories of data, and developing and testing hypothesis to produce well-grounded conclusions (Saunders et al, 1997). Interviews, questionnaires, observation etc will help the author in the process of this qualitative analysis.

3.8 Time horizon

The time horizon is the time, that author have taken for his research. It initiates an important question: ‘Do I want my research to be a snapshot taken at a particular time (cross-sectional studies) or do I want it to be more akin to a diary, and be a representation of events over a given period (longitudinal studies)?” (Saunders et al, 1997). Due to the nature of research, the author has kept it on longitudinal studies basis as he finds the flexibility in studying over a period of time and makes changes and developments accordingly (Saunders et al, 2003).

3.9 Reliability and validity of Research design

According to Saunders (1997) to reduce the possibility of getting the answer wrong attention has to be paid to two particular areas of research design: reliability and validity.

3.10 The credibility of research findings

The credibility of research findings is translated by Saunders et al (1997) as reducing the possibility of getting the answer wrong. Raimond (1993) has also raised question like ‘how would author know that the evidence and the conclusion collected by the author is up to the closest scrutiny?’ Omer (1992) collected data from 300 UK Muslims through self-administered questionnaire and the information may not be same now in 2008. ‘Will the measure yield the same results on different occasions?’ (Easterby-Smith et al., 1991). The author finds this has nothing to do with credibility but it is a change of situation over the time.

There are four threats asserts by Robson (1993) to reliability. One of the two threats considered important by author for this research is subject error. To avoid this error author has to arrange the interview at the ‘neutral’ time instead choosing different time, where people could be found in different mood.

Second is subject bias. Interviewees may have been saying what they thought their bosses wanted to say. The author is aware about this potential problem and will be taking elaborate steps to avoid this situation not only whilst designing but also whilst analysing data.

3.11 Validity of Research findings

According to Saunders (1997) validity is concerned with whether the findings are really about what they appear to be about. The author would be taking care while designing the research that could help to get the right result related to his research.

The author will be taking care of some of the threats to validity described by Robson (1993). Author has chosen to interview people related to Islamic banking industry, and those who are willing to give interview can give valid and right information.

3.12 Relevant threats to validity for this research

Testing: If the bank officer believe that the results of the research may disadvantage them in some way, then this is likely to affect the results.

Confidential problem: The bank officer may be worried about intimating some information which he assumes should remain confidential.

3.13 Data collection methods

Data Collection is an important aspect of any type of research study. Inaccurate data collection can impact the results of a study and ultimately lead to invalid results as Saunders et al (1997) pointed out nicely ‘Is it logical to assume the way your data is going to yield valid data?’ So the author has taken careful step in choosing the following methods of data collection:

The aim of data collection procedure is to get worthwhile data for the problem as defined. Data collection method consists of presenting a stimulus to respondents or subject and recording his / her responses.

Two types of data are available to a researcher:

1. Primary data
2. Secondary data

3.14 Primary data:

Consists of raw information, which would be collect by means of administering questionnaire as well as conducting oral interviews. First hand information to be collected by the researcher. Questionnaire is used as the major instrument to gather information along with few personal interviews (on phone and face to face).

3.15 Secondary data:

These are already published data and developed for some other purposes, which are different from the research problem at hand, compiled through the internal and or external source. Internal secondary data are collected within the organisation and this includes the company’s in-house magazines, annual reports, and employee handbook, etc. While the external secondary data were collected principally from the library and these include journals, textbooks, handout, lecture notes and some other unpublished materials within the campus.

Now let’s elaborate few things in the following:

a) Face -to -face interviews: according to Leedy and Ormod (2001), this interviews yield highest response rates in survey research. To clear the ambiguity of responses from questionnaires author would arrange face to face interviews with IBB customers. It will be very useful to take in-depth ‘non- standardised interview’ to find out what is happening to seek new insights (Robson, 2002).
b) Questionnaire: It is a general term, which includes all techniques of data collection in which each person is asked to respond to the same set of questions in a predetermined order (Saunders et al, 1997).

3.16 Designing the questionnaire

When designing, individual questions researchers do one of three things (Bourque and Clarke, 1994):

- Adopt questions used in other questionnaires;
- Adapt questions used in other questionnaires;
- Develop their own questions.

The author would be comparing his findings with previous authors’ relevant work in UK and so he finds this ‘adopting’ and ‘adapting’ questions as to some extent necessary, as this would allow reliability to be assessed.

The questionnaire would be divided into two sections:

Section A and B

In section A of the questionnaire the demographic data of the respondents are to be sought while the Section B contains mainly of questions, which are expected to be used in data analysis and interpretation of findings and other variables.

An assumption is any important fact presumed to be true but not actually verified. The questionnaire assumptions in this research work are as follows:

- That the questionnaire could get the correct information accurately.
- That the questionnaire is possible to measure respondent.
- That respondent will answer the questions.
- That what they say is their personal opinion unbiased.

3.17 Population and Sampling

The author like most researchers would find impossible to collect or to analyse all the data available due to restrictions of time, finance and access. And, in this situation sampling techniques enable the author to reduce the amount of data he needs to collect by considering only data from a sub group rather than all possible cases (census). The full set of cases from which the sample is taken is called the population (Saunders et al., 1997)

Henry (1990) suggests using sampling enables a higher overall accuracy than does a census. So it implies collecting data from fewer cases author can actually collect more detailed information for the research.

3.18 Deciding on a suitable sample size

Probability and non-probability are two types of sampling. The author is considering probability sampling as Saunders et al (1997) implied probability sampling is a compromise between the accuracy of finding and the amount of time and money the author invest in collecting, checking and analysing the data. The author would be taking data from 100 individual as population of 50 or under is often no need to sample (Saunders et al., 1997).

The group of people the author is going to generalise is called population from Muslims community in UK and sample is the selected people, mostly IBB customers, for the research (Saunders et al., 1997). Thinking practically, the author is not expecting everyone selected would respond. The group that actually completes the author’s study is a subsample, and doesn’t include non-respondents or dropouts (Henry, 1990)

3.19 Ensuring the information needed

The researcher finds it important to select appropriate characteristics to answer his research questions and address his objectives. As par Ghauri et al. (1995) suggestion he gives utmost importance to:

- Reviewing relevant literature carefully, and
- Discussing his ideas with colleagues, project supervisor and other interested parties.

Moreover, where possible the author will use his findings to relate to earlier research work of Omer (1992) on his self-administered questionnaire’s findings and work result in United Kingdom.

The author understands the essence of full fledged understanding of Islamic Bank of Britain as an organisation. Without this it is easy to make mistakes, such as using the wrong terminology, and to collect useless data (Ghauri et al., 1995).

3.20 Conclusion

Planning on any methodology is stressful; however, author found it enriching as it helped him mapping out how data to be collected and analysed on the suitable proven path of past researchers. It's very analytical and satisfying giving the confidence to move forward in a planned way.

Chapter Four

IV. DATA PRESENTATION

The chapter presents the data collected from 75 respondents and from IBB Head Office in Birmingham, UK.. The data have presented in pie diagrams.

4.1 Presentation of data findings (IBB Customers)

The chapter will be able to confirm the answers to questions stated in chapter one of this research work. This would involve analysing the responses received against the questionnaire, which were collected and examined with reference to the research questions. For effective analysis, clarity and comprehension, tabulation has been made and respective percentage was found based on the frequency of response to the questions.

The questionnaires were administered on one hundred and twenty IBB customers from three branches (London & Birmingham) but only seventy five were returned. The data has been analysed and only question that are directly relevant to the research questions have been further tabulated and percentage of responses calculated.

The author has applied simple description analysis of average and percentage in analysing the collected data; and the presentation of the analysis is in the pie chart form. The questionnaire is divided into 2 sections; A and B.

The data collected is summarised according to the numerical order of the questionnaire and analysed according to the importance and need of the study. Some of the questions are analysed in details and some are not due to the requirement of the study. Total response frequency for each of the question is 75.

Section A: Demographic Profile of IBB customers

Section B: Descriptive analysis of the variables of the study.

Section 1: Analysis of Demographic Profile

Distribution of Respondent by sex

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Table 4.1.1 shows that 49 of the respondent were male representing 65% while 26 were female representing 35%.

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Table 4.1.1a:

Remark: Female respondents are almost half of the male respondents.

Table 4.1.2 Distribution by Age Group

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Remarks: The table shows clearly Islamic Banking is more popular with the 41-54 age group followed by the people in their twenties.

Table 4.1.3 Distribution by academic qualification

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Remarks: IBB is popular with people educated up GCSE level. Least popular with highly educated people.

Table 4.1.4 Distribution by Employment Status category

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Remarks: 69% of the respondents are employed; there are more unemployed customers with IBB than retired customers. Shows least popular with senior citizens

Table 4.1.5 Distribution by ethnic origin

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Remarks: Asian (mostly Indian subcontinent origin) comprises 84% of the respondents, while only 4% respondents are European.

SECTION B

(Following questions related to knowledge/awareness of Riba concept/ Sharia principles)

Question 7: Do you know the meaning of the term ‘Riba’?

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Table: 4.1.7

Remark: 97% respondent knows the meaning of Riba; much more than researcher had expected.

Question 8: Do you know the concept of Al-Mudarabah products?

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Table: 4.1.8

Question 9: Can you explain the full concept behind Islamic banking?

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Table: 4.1.9 Remark: None of the respondent marked ‘No’

Question 10: Do you agree? Islamic Banks can contribute more to the societal balance, human prosperity and welfare?

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Table: 4.1.10 Remark: None of the respondent ‘Disagreed’ (Following questions related to understanding the differences between Islamic and conventional banking)

Question 11: Do you understand the basic difference between an Islamic and conventional banking system?

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Table 4.1.11 Remark: None of the respondents marked they don’t understand the difference

Question 12: Do you feel the interest based system in conventional banking is, sometimes, unjust to customers?

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Table 4.1.12

Question 13: Do you believe the present global recession is due to the interest system and greediness of conventional bankers?

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Table 4.1.13

Question 14: Are you motivated to use Islamic product on religious ground or due to any other reason?

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Table 4.1.14 .

Remarks: None of the respondent marked ‘other reason’. All the respondents opened accounts with IBB due to religious reason.

Question 15: Do you have account with any other bank?

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Table 4.1.15

Remark: It shows 99% of the respondents have accounts with other banks

Question 16: In your opinion how much are the services charges of Islamic/Conventional bank as compared to conventional/Islamic banks?

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Table: 4.1.16. None of the respondent marked ‘Low’. It shows IBB service charges are quite high compared to the conventional banks

Question 17: Would you continue to deal with Islamic bank even the risk on investment is higher/more expensive than the conventional bank?

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Table 4.1.17

Remarks: Majority (43%) marked this ‘no comment’ to this questions. It clearly shows respondents are in dilemma; otherwise, they don’t want to express their true reaction to any future high risk involved dealing with IBB transactions.

(Following questions related to consumers outlook/approaches towards Islamic Banking)

Question 18: Do you think that Islamic bank of Britain (IBB) are good with their customer services like their conventional counterparts?

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Table 4.1.18

Remark: None of the respondents strongly agreed

Question 19: Your view on the following phenomena that Islamic Banking at IBB is:

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Table 4.1.19

Remark: Only 1% respondents believed banking at IBB is just like conventional banking

Question 20: How would you rate your level of your satisfaction with IBB during your transactions?

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Table 4.1.20

Remark: Majority (61%) are content with IBB customer services

Question 21: Finally, how would you evaluate the development level Islamic Bank of Britain has achieved in the past 4 years in United Kingdom?

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Table 4.1.21

Remark: Majority (48%) rated as ‘satisfactory’ with IBB developments

4.2 Presentation of data findings (IBB Management)

Questionnaire addressed to: Mr. Samir Alamad.

Position: Assistant Manager, Product & Sharia'a Compliance

Email: Samir.Alamad@islamic-bank.com Name of Respondent: Fatima El Banna Email: Fatima.ElBanna@islamic-bank.com

Organisation: Head Office, Islamic Bank of Britain PLC

Email Sent date: Monday, 10th November, 2008

Response receipt date: Tuesday, 11th November, 2008

Questionnaire with Responses (in bold orange colour)

1) Demographic Profile of customers (Age, sex, occupation, education, religion &
marital status).
2) Your average customers are low/middle or high income earners?

(No answers received for the above two questions)

3) Purpose of your customers’ using this Islamic Bank: Investment/Savings/Borrowings/Others? All
4) Do you have non-Muslim customers? Yes
5) In previous studies in UK (1992 & 2004) it was established, that there is high level of ignorance prevailing among UK Muslims customers regarding the Islamic products and only religious factors work as motivation to use these products. Would like to know whether your Bank believes the same? More education is needed
6) If so, what step your Bank taking to educate the UK Muslims’ perceptions about
Sharia banking? Events, online information, public speeches
7) Do you believe the fact, that UK Government is easing the ways for Islamic Banks, regulation wise, and want London to be the ‘hub’ of Islamic Banks in the World? Yes
8) Islamic Banks can contribute more to the societal balance, human prosperity and welfare? Does IBB makes efforts to preach this truth to the UK population? Do you think you are spending enough on advertising to improve the views of potential customers on Sharia Banking? We try to, however, educating everyone would not be within most marketing budgets
9) Do you think you have enough firms having business accounts with your Banks? What step your bank taking to increase it? We have business accounts and constantly look to offer our services to more business customers.
10) Sukuk (Islamic Bonds) getting huge applause in the financial world specially in Middle Eastern, South East Asian countries and some countries in Europe ? Is your Bank thinking to market this Bonds, near future, in the retail/whole sale market? We are a retail Bank, Sukuk are distributed by Investment Banks
11) Do you think its quite expensive/problematic to recruit and train staff who deal with the Islamic products compared to the high street conventional banks? We have in house training, and external Sharia’a training is developing staff professionally.
12) Does Islamic bank distribute higher profits as compared to conventional bank? Do not understand question. However most Banks are listed on the Stock Exchange and if the question relates to dividends this can be checked on stock exchange websites
13) Do you feel Islamic products are more costlier than interest bearing products? Not always, depends on the provider and the product. Some of our products have been in the Top 5 of the Moneyfacts bestbuys of UK finance providers over the last year or two
14) What are the factors responsible for IBB’s losses? What areas you are concentrating to improve this trend? Banking is a high fixed cost industry. It takes time for the marginal profits to cancel out the high fixed costs so early in a business such as Retail Banking
15) What’s the present and future challenges for IBB? Sharia’a education, market growth and customer expansion
16) Any comment you would like to add regarding this topic? Islamic banking is still in the early growth phase within the UK, and education is still needed but the institutions are showing that they can be innovative and competitive and the future bodes well for the industry.

Chapter Five

V. DISCUSSIONS

The chapter discusses on the critical analysis of data presented in chapter IV; find linkage to original research questions and key concepts and then test the findings with SWOT and PEST analysis to find position of Islamic Bank of Britain.

5.1 Analysis of primary data

The survey-study has tested a number of perceptions using pre-designed questionnaires. After scrutinising the answers of the respondents following points can be summarised:

Demographic Profile:

Sex: There are more male (65%) customers than female (35%) at IBB. Almost double than that female respondents (table 4.1.1)

Age Group: IBB is more popular with 41-54 age group. Shows matured and working people are more into it. And least with senior citizens and age group below 20 (table 4.1.2)

Qualification: 48% are high school qualified, found less popular with highly qualified Muslims (4.1.3).

Employment Status: 69% are employed. To my surprise found 24% of the respondents are unemployed and living on dole money (4.1.4).

Ethnic Origin: Popular with South East Asian Origin (Indian, Pakistani & Bangladeshi) (4.1.5).

Table 5.1 Variance in data findings (the researcher vs. Omer, 1992)

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Following the above agree/disagreement or difference against Omer (1992) findings, the researcher now tries to link between the main research questions with the primary data analysis:

5.2 Linkage between main research questions with the primary data analysis

A) Understanding Sharia and B) Riba concept:

UK Muslims are ignorant in the understanding of Sharia Banking (Omer, 1992). Table 4.1.9: 52% claimed they understand the full concept behind Islamic banking. Riba refers to the ‘premium’ that must be paid by the borrower to the lender along with the principle amount as a condition for the loan or for an extension on its maturity (Chapra, 1992).

Table 4.1.7: 97% claimed they know Interest free (Riba) is the reason behind Islamic banking (Basic Sharia concept behind Islamic Banking)

Table: 4.1.8: 62% knows the meaning and concept of Al-Mudarabah product.

Shariah governs all activities of the Muslims toward the betterment of the whole community, including financial transactions (Haron & Shanmugam, 2001).

Table 4.1.10: 89% responded Islamic banks can contribute more to the societal balance, human prosperity and welfare.

Views of IBB Management (Product & Sharia'a Compliance Department)

Ms. Fatima El Banna (IBB) agrees with the previous studies in UK (1992 & 2004) and believes more education is needed for the UK Muslims regarding Sharia finance.

Events, online information, public speeches are arranged by IBB to educate the general UK Muslims. However, Ms. Banna informored ‘We try to; however, educating everyone would not be within most marketing budgets’.

C) Understanding the difference between conventional and Islamic banking:

The prevailing practice of interest in the conventional banking system involves injustice to the borrowers since the interest on their loans have to be paid irrespective of their business positive or negative outcomes (Lewis and Algaud, 2001; Iqbal and Molyneux, 2005).

Table 4.1.12: 28% strongly agreed that interest based system at conventional banks are sometimes unjust to customers, 60% only agreed, while 12% just ‘disagreed’.

Islamic banking stands for equity sharing, risk sharing and stake taking (Gafoor, 2001).

Table 4.1.11: 65% of the respondents claimed to large extent they understand the difference, while 35% responded to understand the differences to some extent. None of the 75 respondent marked they don’t understand the difference.

Islamic banking is a moral filter based on the definitions of halal (permissible) and haram (prohibited) carving the conscience of entrepreneur and firm, promoting a positive social climate for society, and providing an expedient legal framework (Chapra, 1992)

Table 4.1.13: 45% of the respondents strongly agreed that interest systems and excess greediness of conventional bankers are responsible for the global recessions, 36% agreed to it while 19% disagreed.

Views of IBB Management:

Ms. Fatima El Banna (IBB) believes ‘Islamic banking is still in the early growth phase within the UK, and education is still needed’. For better and deeper understanding of the differences between Islamic and conventional banking and the adverse affects of interest system IBB organises events and public speeches according to their budget and opportunity.

D) Consumers’ attitudes towards Islamic Banking at IBB

For UK Muslims religion is the primary factor in the choice of an Islamic banking institute (Omer, 1992).

Table 4.1.14: 100% of the respondents use IBB banking service due to religious reasons.

High level of customer satisfaction impacted positively on the continued loyalty of a customer towards a particular bank (Pont and McQuilken, 2005)

Table 4.1.18: 75% of the respondents agreed IBB customer services are good like their conventional counterparts on the High Street. None of the respondents strongly agreed while 25% disagreed to this fact.

Table 4.1.20: 20% of the respondents are very content with IBB customer service, 61% are just content/satisfied while 19% at not satisfied.

Table 4.1.21: 24% rated ‘very good’ on the development of IBB in the past four years, 48% rated ‘satisfactory’ and 28% rated as ‘poor’ development.

Table 4.1.19: 79% of the respondents believe that IBB provides simply banking without Riba, 20% respondent believes IBB provides socially acceptable JUST banking system while 1% believe it’s just doing conventional banking with a different name.

5.2.1 Contradictory primary data findings (Table 4.1.14 vs. Table 4.1.19)

Table 4.1.14 analyses that 100% of the respondents use IBB banking service due to religious reasons while table 4.1.19 shows 1% of the respondents IBB just doing conventional banking with a Islamic name.

The author believes this 1% originally started with IBB due to religious reason and later on started believing its just conventional banking that IBB is practicing. Ms. El Banna (IBB) confirmed that IBB have non-Muslim customers as well. Since the researcher didn’t ask religious status in his questionnaire so from this finding it’s not sure whether the respondent is non-Muslim or Muslim who simply believes IBB is acting as conventional banker in the name of Sharia finance.

5.2.2 Lack of risk-sharing attitudes among the respondents

According to Maiya & Banerjee (2008) ‘New markets are moving towards the Islamic banking practice not merely because of the religious imperatives, but due to the positive risk-reward expected pay offs’. This scenario is observed in the global Islamic finance market, mainly in the wholesale market. The researcher has observed this is not the case in the retail market because of following findings:

99% of the respondents (Table 4.1.15) confirmed they have accounts with other banks and 93% of the respondents (Table 4.1.16) agreed IBB charges are higher than using conventional banker’s service. Only 7% informed its same, and none of the respondents claimed ‘low’. Only 32% of the respondents (Table 4.1.17) commented they would continue with Islamic banking even if risk gets higher investing or more expensive with IBB.

5.2.3 Risk of IBB customers switching off to other Banks

The above responses clearly shows, that there is a strong possibility of the remaining 68% respondents (25% commented ‘No’; 43% marked ‘no comment’) might switch to conventional bank accounts, anytime, if there is higher risk/service charge associated with IBB banking. Religious convictions won’t help here in the long run. People might start being IBB customers with zeal and high spirit but may not last longer. With my close observations and informal conversations I encountered with people who terminated their bank accounts with IBB. Many of them are foreign students studying in United Kingdom.

The above shows religious faith is the primary factor of using Islamic banking service and they realise the significance of Islamic banking to create a Just society. The author agrees with Gafoor (2001) the depositors with IBB have to be mentally prepared for risk of money diminishing as a result of losses incurred by the bank in its efforts to generate income. Otherwise, the teachings and Sharia finance principles are missing here. The author also found most of the respondents believe the present global recessions is due to the fixed interest system by the greedy conventional bankers (table 4.1.13), and understand the importance of interest-free banking for current and future prospects of the society (table 4.1.10).

E) Growth, development, and future of Islamic bank in United Kingdom

Islamic banks must be competitive not only within itself but also with the conventional financial system to survive (Haron & Shanmugam, 2001).

None of the 75 respondents ‘strongly agreed’ to the fact that IBB is good with their customer services like their conventional counterparts. However, 75% of the respondents agreed to good customer services while 25% respondents disagreed good customer services (table 4.1.18). 93% of the respondents rated normal banking service charges to be ‘higher’ than conventional banks (table 4.1.16). 48% rated IBB’s development ‘satisfactory’ in the last four years (table 4.1.21). The researcher observed the reason on this finding is due to IBB having only eight branches nationwide (UK). We can see IBB has to improve has to improve its services and increase branches for broader customer base.

IBB management agrees with Michael et al. (2007) ‘United Kingdom which is now seen as an emerging global hub for Islamic finance’. IBB management states ‘Some of our products have been in the Top 5 of the Moneyfacts bestbuys of UK finance providers over the last year or two’.

5.3 Analysis of secondary data

IBB Final Accounts (Extracted): (For the year ended 31 December)

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Table 5.2 Source: www.islamic-bank.com

We can see from the financial figures IBB have been losses every years and this is due to high operating expenses than its net operating incomes. The author found the high operating expenses are mainly comprised of the fixed cost like rental expenses of the premises, staff expenses and maintaining Sharia Board. IBB reasons for the ongoing losses as ‘Banking is a high fixed cost industry. It takes time for the marginal profits to cancel out the high fixed costs so early in a business such as Retail Banking’. IBB management also commented ‘Islamic banking is still in the early growth phase within the UK, and education is still needed but the institutions are showing that they can be innovative and competitive and the future bodes well for the industry’.

IBB management is taking ‘Sharia’a education, market growth and customer expansion’ as it’s present and future challenges to ensure IBB prospects in UK financial market.

5.4 Analysis of above findings through SWOT Analysis

SWOT (Strengths, Weakness, and Opportunities & Threats) was developed by Ken Andrews in the early 1970s. Organisational strategies are the means through which companies accomplish their missions and goals. Successful strategies address the above four elements of the setting within the business operates.

Strengths are the IBB’s capabilities and resources that allow it to engage in activities to generate economic value and competitive advantage.

Weaknesses are the lack of resources or capabilities that can prevent IBB from generating economic value or gaining a competitive advantage if used to enact the company's strategy.

Opportunities provide IBB with a chance to improve its performance and its competitive advantage. Some opportunities may be anticipated, others arise unexpectedly.

Threats can be an individual, group, or organization outside the IBB that aims to reduce the level of the company's performance.

Table 5.3 : Following diagram is for SWOT Analysis:

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SWOT analysis educates us to determine how to use its strengths to take advantage of opportunities and neutralise threats. A strong strategy could help IBB to avoid or fix its weaknesses. IBB has strong ‘strength’ and opportunities against ‘weakness’ and ‘threats’. Putting IBB under the SWOT magnifying glass, the author finds IBB’s future is prospective if the weakness can be improved to avoid customers switching off to other banks.

5.5 PEST (Political, Economic, Socio-Cultural and Technological) Analysis with primary and secondary data findings

Kotler (1998) claims that PEST analysis is a useful strategic tool for understanding market growth or decline, business position, potential and direction for operations. Like many successful organisations IBB can use PEST analysis to build its vision for the future. The analysis examines the impact of its factors (and their interplay with each other) on the business.

Reasons why PEST can be important are:

The ‘radical and ongoing changes occurring in society create and uncertain environment and have an impact on the function of the whole organisation’ (Tsiakkiros, 2002). By making effective use of PEST Analysis, IBB can ensure that what the management is doing is aligned positively with the powerful forces of change that are affecting the UK business market.

- Good use of PEST Analysis can help IBB to avoid taking action that can lead to ongoing losses
- PEST is an important tool to help its management to develop entry strategy development and quickly adapt to the realities of the new environments in those countries.

To use PEST analysis tool, IBB can follow the three stages:

- Management brainstorming for the relevant factors those apply to IBB business.
- Identify the information that applies to these factors; and then
- Drawing conclusions from this information.

The following factors may help as a starter for brainstorming:

Political:

- Stable Government in UK
- Government’s willingness and full support to expand Islamic finance in UK
- Environmental and consumer-protection legislation
- Public policy in favour of Islamic finance since 2007
- Less likely changes in political environment

Economics

- Due to recession economic growth is negative at the moment, high inflation.
- UK’s unemployment rate is high at the moment, but quality of labour supply is excellent. Markets and skills base is one of the best in the World.
- Globalisation impact is prominent in UK
- Excess liquidity in the Middle East for its Gas and Oil money for Islamic finance to thrive.
- Muslim population have positive mentality towards Islamic banking

Socio-Cultural

- Muslims populations comprise of 3% of the UK total population. Due to migration and by birth this figure is soaring.
- Ethical business conceptions are getting stronger since the last two decades in the
Western Europe. Islamic finance preaches and practice ethical funds and investment. So strong possibility of public accepting this method of finance once they realise the underlying theory of Sharia banking.

Technological Environment

- Online banking: The number of adults using online banking has increased by 505% in the past seven years from less than 3.5 million in 2000 to just over 21 million last year. (http://www.apacs.org.uk/08_07_24.htm). IBB has full fledged online banking services
- Online advertising: More and more people these days go through products online and make decisions. This place IBB in advantage to preach the teachings of Sharia products and their specialities.

Chapter Six

VI. CONCLUSIONS AND RECOMMENDATIONS

This chapter concludes in relation to research questions, objectives and findings analysis in the previous chapters, provides reasoned recommendations supported by the concepts, states the limitations of this study and ends with suggestions for future research.

6. 0 Final discussions

The thesis started with looking at the changes in perception towards Islamic finance in the Western World. Considering UK’s position as one of the leading international financial centres, it is no surprise that part of this growth has taken place in London, which is now seen as an emerging global ‘hub’ for Islamic finance (Michael et al., 2007). This has been confirmed during discussions in the previous chapter. Also from the PEST analysis we can strongly predict the growth prospectus of Islamic banking due to the major supports from UK political and economical environment.

The author finds the growth of Islamic finance are mainly in the wholesale market while a number of problems and challenges are existing in the retail Islamic financing sector, where IBB operates. Karbhari et al. (2004) found most of his respondents were convinced that involving Islamic methods of finance in conventional banks’ operations would help promote the establishment of Islamic retail banks. IBB is the first stand alone bank in UK since 2004, and unlike the so called ‘Islamic windows’ the situation is not same with IBB. Omer (1992) has concluded, in his research, that there is high ignorance about this finance system among the UK Muslim populations. In order to understand the prospect of Islamic banking in UK, the author understood the need to review the findings of Omer (1992). Thus, on the first part of this thesis the author worked on the understanding of Sharia principles and its sources to understand the Sharia finance. The recent findings do not fully agree with Omer (1992) but he found the full concept of Sharia finance is still lacking among majority Muslims in United Kingdom.

We need to understand, that without proper Sharia finance knowledge among UK Muslims Islamic bank won’t grow well in the retail sector. We have seen the consumers are highly enthusiastic to be a part of Islamic banking but don’t have the mentality of participate in profit-loss sharing to a large extent. So it is essential to educate and come with various events to preach and motivate on the ‘risk sharing’ Sharia principle. People need to understand, that Islamic Banks lending policy and lending principles are excellent tools for creating and developing entrepreneurs. In relation to entrepreneurs, the status of the Islamic Bank is either of partner or investor, whereas, for conventional banks the relationship is more of creditor-debtor. Entrepreneurs who maintain a relationship with Islamic Banks are expected to be more ethical and not be involved in businesses that are prohibited by the Islamic laws

We have come to know conventional banking is the result of thousands of years of trial, error and evolution. These practices have been guided by a single albeit unwritten principle, that is, to maximize profits (Chapra, 1985). Despite such simplicity and a slow evolutionary process history is replete with casualties like the present global recessions. We also found Islamic banking on the other hand is faced with a far greater challenge and have less freedom than Conventional bankers due to the establishment in line revelations in the Quran and teachings of Hadiths. These rules being Divine ordinance cannot, therefore, simply be amended to suit changing economic conditions and practices. Based on the literature review and research findings we see the following major challenges for IBB to prosper.

6.1 Present and future challenges

a) A pure profit-and-loss-sharing system has some specific qualities but demands a lot of the Islamic bank. IBB cannot know in advance its absolute income from its activities. In order to receive information IBB has to study and evaluate entrepreneurial proposals and their economic viability. This is a task that requires highly qualified personnel. Business operations financed by them must be supervised and audited with great care. In this respect and from SWOT analysis IBB need to have or engage more staff expertise than conventional banks. It’s a big concern as quality personnel are available in UK market for conventional banks whereas IBB is struggling for the same.
b) We have seen IBB is running on losses since its inception in 2004 due to its high operating expenses. Its’ customer base is increasing but people are investing in less amount. They are having IBB accounts for the sake of religious but most are not willing to take risk investing in high volume. The SWOT analysis confirms this and we have also seen there is high risk of customers switching off to conventional banks as majority of them don’t have the risk-sharing mentality. This problem would always remain there if Muslims don’t fully realise the fundamental teachings on ‘Riba-prohibition’ and ‘participation in profit-loss sharing’ (Concept by Gafoor, 2001)
c) The IBB has to provide its depositors with a higher rate of return than the rate paid in interest in comparable financial institutions since the Islamic bank’s depositors assume a greater degree of risks. IBB can face real problems here. It has to look for investment opportunities in all Sharia permissible sectors of the economy, not only in the ones that promise to yield a quick and high return but also investment projects that give a long-term social return. Besides, SWOT analysis also showed high service charge to customers/ordinary customer service are weaknesses for IBB and so higher return is a big challenge for IBB to retain its customers’ patronage. The author again agrees with Pont and McQuilken (2005) who concluded that a high level of customer satisfaction impacted positively on the continued loyalty of a customer toward a particular bank. For growth and development of IBB author firmly believe in the increase of patronisation. For this to occur IBB must be able to outperform or must at least be on equal footings with conventional banks.
d) According to Archer et al (2002), the future of the Islamic financial sector depends on its capacity to innovative- to improve the competition concerning the range of products and services and the ability to manage the risks more efficiently. The author also believes and agrees that in order to survive in todays and future dynamic world of business, IBB must be competitive not only within the Islamic banking industry but also with the conventional financial system.
e) In order to compete with the traditional conventional bank it is important for the Sharia scholars to produce more Sharia-compliant financial instruments that meet the market needs of today. The author sees the importance to harmonise the rich variations of the Sharia ruling through the acceptance of Sharia standard issued currently by AAOIFI. By doing so, the scholars would be focusing on the implementation of the standard, instead of producing individual and diverse solutions to Sharia issues (Archer et al, 2002).
f) The author understands the obvious connection between the Islamic banking system and Islam is a threat to some extent, since it arouses suspicion among European and American people. Investing money involving in the production of armaments, alcohol, and tobacco; possess poor environmental performance record; engage in indecent advertising and practise cruelty to animals, which is totally banned in Islam. Philosophy underlying Islamic banking principles as discussed above is similar to that of socially responsible investment (SRI). Ethical funds have received wider recognition in the West for the last two decades (Wilson, 1997). IBB’s effective communication about its present and future social, environmental and ethical investments can strengthen its’ brand image, enhance its’ corporate reputation with customers and suppliers to ensure better risk management

According to SWOT analysis IBB, currently, has the following two big strengths:

- IMAGE factor: First ‘Stand Alone’ Sharia Bank in UK
- Best Buy product: Some of the products offered have been in the Top 5 of Money facts best Buy in UK (last two years)

The author believes everyone would appreciate IBB’s products in the Top 5 of Money facts best Buy in UK; just being in the market for last four years. Considering all the problems, limitations and challenges discussed above, the author summarise and adds few suggestions and recommendation, in the following, for IBB’s future prospects.

6.2 Suggestions and Recommendations

- The further growth and development of the IBB will depend largely on the nature of innovations introduced in the UK market.
- More finance from the Middle East’s oil economy and better human resources needs be deployed to develop Islamic financial instruments to enhance liquidity, develop secondary and interbank markets, and perform asset/liability and risk management.
- More unbundling and repackaging of financial assets are required to enhance their marketability, negotiability, and liquidity in Islamic financial markets.
- Since the Islamic finance industry is blossoming in UK, IBB must offer a more diverse range of services and products for middle and low-income depositors. People from all walks of life need to participate in risk sharing investment to in order change the trend of general people relying on fixed interest only. This should be complemented with educating people views on Sharia financing.
- Besides Arabic names IBB should name all its products in English for more people to show interest in Sharia financing methods and its products.
- Sponsoring students for Sharia finance courses to help creating experts in the market.
- Islamic bankers in UK need to ask Government to establish Sharia court so that investors can have more courage to invest in the high risk products

Final comment: In the 1990s when Islamic banking came to United Kingdom through ‘Islamic windows’ many people including Muslims and conventional bankers were in doubt of its success. Islamic banking has come so far that the UK Government wants London to be the ‘hub’ of Islamic finance in the world. At this stage of research, the researcher is quite sure IBB would be very prospective bank in UK considering its’ effective efforts on all the challenges and suggestions discussed above.

6.3 Limitations of the Study

This research study is result of a pioneer fieldwork conducted so far on Islamic bank of Britain Plc. Besides the significance of this kind of unique study on this topic, there were several following limitations of the application of this study:

- Limited period of time and small sample size. Results may not be indicative for the target respondents at large.
- Some respondents, who have limited knowledge of Islamic banking concept or no
knowledge about the financial modes of conventional and Islamic banking also responded to the questions; hence some of the replies of some questions may be based on their own imagination or thoughts
- All the respondents of this questionnaire were account holders of IBB, so the result of this study is not fully applicable to other Islamic banks.

Therefore, in this study the results should be taken only as indicative and perceptive rather than conclusive.

6.4 Suggestions for future research

Future research could focus on the following:

- How the Banking Council as regulator could possibly improve the progress and success of Islamic banking in United Kingdom.
- How the adaptation of Islamic banking products can stimulate the growth of small and medium enterprises in United Kingdom.

Chapter Seven

VII. REFLECTIONS ON LEARNING

This chapter contains personal reflections, which have arisen during my dissertation writing. I have tried to narrate the difficulties that I have encountered while working with the materials and how these have improved my thoughts and skills to help in my future endeavours.

7.0 Introduction

The journey throughout my thesis writing has been enriching and interesting while experiencing various new things to complete it. Have found each part of the dissertation has opened up the door to several new subjects as well as new perspective and aspects. Prior to working with this thesis, I knew I had to deal with knowledge with finance in Islamic way but soon after I started, realised that I was going through the historic period since the inception of Islam in the Middle East towards the medieval era both in the East and West. Besides these history, faced religious, political, data sampling management, etc studies to enrich my learning.

David A. Kolb (1984) believes “learning is the process whereby knowledge is created through the transformation of experience”. According to Branch & Paranjape (2002) “reflection leads to growth of the individual – morally, personally, psychologically, and emotionally, as well as cognitively". So we can say Reflective study is a process of learning style which facilitates in enhancing, understanding and coordinating of activities enabling experience oriented learning transform to value added knowledge. It makes the learner more sensitive and guides choices for further learning thus uncovering new information to be a competent practitioner. Reflective learning is unique within an individual to learn any new skill confidently and help him applying it subconsciously throughout his future endeavours. Since reflective learning is unique within an individual so it works differently from person to person and an individual has to build up his or her own style. Copying someone else’s style doesn’t always act, optimally, to achieve a target.

Going through the experiences on this assignment, I have realised the beneficial impacts of reflective learning. I have seen reflective learning requires more than just technical skills as it revolves around attributes like patience, persistency and understanding self psychology. I can say this self reflective learning is a brilliant exercise for future managerial activities as it prepares us works in a team, to set better plan of action.

7.1 Development on my persistency with ambiguous terminologies

Many literary works have been written on the subject over the last few decades and much of them are not in English. Since this dissertation is based on literature written in English I am afraid of a risk that we have overlooked some important sources of knowledge and information for instance in Arabic. When I started with going through the literatures in libraries and the ones, that I have I bought, in some parts of the literature, caused a lot of confusions and mental exertion upon me. I would have given up long before, if it wasn’t related to my thesis work. Though the books gave meaning to the Arabic work still I found uneasy in the beginning to face these Arabic words. The authors, whose works I have used, tend to use several different English names for the same concept in Arabic and even new Arabic terms have occurred as the dissertation has been written. There is a need for harmonisation in the use of language. Otherwise, the material has been quite interesting, informative and some even excellently written. To clarify on some words/phrase and concepts I even had to speak to a few Islamic Scholars on my last visit to Bangladesh (last June-July, 2008). I shall never forget the favours of some people, specially, Mr. Abdur Rauf (Manager, Islamic Bank of Bangladesh, Shatkhira Branch, Bangladesh). Besides discussions on the key issue on Shariah finance he directed me which books to select for literature review and other guidance. Have learnt a lot on the methods of being more persistent with learning and understanding new terminologies.

7.2 Developments on Critical Reviewing

Initially, I found it painful everything with Literature Reviewing but the end was very satisfying. First of all I was finding it difficult to understand the ‘Literature Review’ itself. I went though numerous books but still I couldn’t grasp the idea how to start writing on it. I had to sit with my supervisor, Mr. Shuaib Masters, twice alone in October (2008) just to understand about Literature Review’s ambiguous matter. Literature Review has developed my critic ability on Authors’ viewings, opinions and creates comparisons with them and with my self viewings. I should also acknowledge that Literature Reviewing has increased my appetite for prolific readings on far ranging subjects, on which I never had much interest before. Reviewing sounds like a formula, which can prepare one to successfully act on a chosen field.

7.3 Development in choosing the right alternative

My dissertation to a larger extent is based on secondary data, which has been collected from several sources. Relevant literature has been gathered from a number of libraries while I searched data from numerous database, websites and articles. Ability to retrieve the right data at the right time does actually makes a difference and to source them in efficient manner is vital thing, which I have learnt. I have also learnt various methodology concepts, including the limitations on using them; and for future assignments (either at work or at educational level), now I know how to choose the better alternative and planning on a research work.

7.4 Development in interviewing (primary data collection) techniques

For the selection of samples I have chosen London and Birmingham and customers was randomly picked at Islamic Bank of Britain’s branches. The data for this study were collected through self-administered questionnaires distributed by myself. A series of telephonic interviews with financial institution senior personnel (in UK and Bangladesh) and customers were also conducted. For the same, I interviewed people, over phone, in Sheffield, Manchester and Birmingham and most of them are my friends and their relatives. I faced problems with their accents while questioning some people from the North of England, like Birmingham; I had to ask the questions more than once due to my inability to understand their accent. I faced the same as well to absorb some of their replies too.

Moreover, I would like to add some respondents, who have limited knowledge of Islamic banking or no knowledge about the financial modes of conventional and Islamic banking, also answered the questions very willingly; hence I guess the replies of some questions may be based on their own imagination or thoughts. This was my first experience of this kind and learnt plain talk doesn’t make interviewing successful; some diplomacy is required to dig out more useful information. I tried to learn interviewing techniques from talk show programme and tips from websites, but it was from my trail and error over the interviewing time, which actually taught me how to handle an informative interview.

7.5 Development in Analytical abilities

a) Data (secondary) collection

My thesis started with becoming familiar with my research area going through the past related research and searching academic database. Having identified my subject area I carried out a systematic literature search to ascertain what books have been published in my chosen area. The prolific searching over few months had helped me gaining knowledge of the past developments and the current state of the topic, with a view to identifying gaps in the existing knowledge. The compilation of the search profile assisted me a lot in focusing on my total efforts. I have learnt the factor ‘time’ is very precious and realise ‘procrastination is a curse’ and without the proper filings of my secondary data collections I would have been no where amidst oceans of information. I realised, in every single way, over this crucial period of time that creating an appropriate search profile is a must for our future managerial job if we need to make a right decision at the right time.

b) Analysis of the data collected

Being full alert, while working on the findings is another realisation in my learning process. Things can go wrong at this stage and might develop a wrong finding if proper attention is not ensured. I have mostly used mathematical techniques learnt at senior high school level, and so had to reflect on my past school works like how to make a pie chart, etc. Basically, this learning sharpened my analytical ability on dealings with raw or secondary data from different perspective and producing meaningful facts. This experience gives me the confidence about my aptitude on managing data to develop managerial decision for making my business plans in future.

c) Findings and Discussions

Following a series of hectic and critical time, I was quite ardently looking forward to seeing this stage of my thesis writing. Correlation with previous works on literature reviews, research methodology chosen, parameter set, and analysis of the data collection required setting a mind mapping. We may or may not call this mind mapping a ‘mind game’ but found it quite essential for effective coordination on my future assignments if I don’t want to waste my time spent and hard labour provided.

7.6 Self realisation on my abilities & conclusion

Basically, I used to find myself pessimistic on my certain abilities, prior to writing this dissertation, which I have no regret to admit at this level. While going through the phase of writing this piece of assignment I found myself ‘retarded’ at times, specially, in the primary and mid-stage. We should all agree writing a thesis can be boring, time to time, and lack of motivation can work as the biggest negative factor to meet the deadline agreed. I tried different books on ‘how to write thesis’ and followed many tips from internet search. At times, I even had to listen to soft soothing music to set a positive atmosphere and to create the necessary motivation to avoid giving up in the mid-way, out of frustration. I realised and learnt the importance of tapping positive affirmations into one’s subconscious mind and stay positive all throughout a critical journey. The completion of an assignment, like this, can be most satisfying and wonderful experience in one’s life. This final completion really gives me the confidence to stay positive and share a certain work into a multiple sets and follow a targeted time after each portion of work. In this way I believe, fervently, that I can achieve success in any endeavour (further studies or work) that I may undertake in my future.

References and Bibliography

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www.hm-treasury.gov.uk (Accesses 11th October 2008)

Appendix 1 (Questionnaire to IBB Customers)

Questionnaire

Dear Sir/Madam,

I believe you are keeping well. Would appreciate your few minutes to fill-in the below questionnaires, which is in connection to my research work in part fulfilment of the requirements for the degree of Masters of Business Administration at Liverpool John Moores University, UK. This questionnaire, consisting twenty one questions, is designed for the research topic; Understanding Islamic Banking and its Prospect in UK.

All questionnaires are anonymous and all the results will be treated with strictest confidence. The result will only be used for the completion of my studies and not meant for any other purpose.

I sincerely appreciate of your taking time to fill it. Many thanks. Best Regards from

Sohail Bin Mohammad

MBA Student

Liverpool John Moore University (External Programme)

Please read each question carefully, in the following pages, and cross the bracket (x) provided beside each question for your response. There are two sections in this questionnaire.

SECTION A

1. Sex: Male ( ) Female ( )

2. Marital status:

a. Married ( ) b. Single ( ) c. Divorced

3. Age group:

a. Below 20 years ( ) b. 21 – 30 years ( ) c. 31-40 years ( )
d. 41-54 years ( ) e. 55 years and above ( )

4. Education Qualification:

a. GCSE ( ) b. HND/BACHELOR c. POST GRADUATE ( ) d. Other ( )

5. Employment Status:

a. Employed b. Unemployed c. Retired

6. Race:

a. European ( ) b. African ( ) c. Asian

SECTION B

7) Do you know the meaning of the term ‘Riba’?

a. Yes ( ) b. No ( ) c. No comment ( )

8) Do you know the concept of Al-Mudarabah products?

a. Yes ( ) b. No ( ) c. Don’t know ( )

9) Can you explain the full concept behind Islamic Banking?

a. Yes ( ) b. No ( ) c. No comment ( )

10) Do you agree? Islamic Banks can contribute more to the societal balance, human prosperity and welfare?

a. Strongly agree ( ) b. Agree ( ) c. Disagree ( )

11) Do you understand the basic difference between an Islamic and conventional banking system?

a. A large extent ( ) b. To some extent ( ) c. Not at all ( )

12) Do you feel the interest based system in conventional banking is, sometimes, unjust to customers?

a. Strongly agree ( ) b. Agree ( ) c. Disagree ( )

13) Do you believe the present global recession is due to the interest system and greediness of conventional bankers?

a. Strongly agree ( ) b. Agree ( ) c. Disagree ( )

14) Are you motivated to use Islamic product on religious ground or due to any other reason?

a. Religious ground ( ) b. Other Reason ( )

15) Do you have account with any other bank?

a. Yes ( ) b. No ( ) c. No comment ( )

16) In your opinion how much are the services charges of Islamic/Conventional bank as compared to conventional/Islamic banks?

a. High ( ) b. Same ( ) c. Low ( )

17) Would you continue to deal with Islamic bank even the risk on investment is higher/more expensive than the conventional bank?

a. Yes ( ) b. No ( ) c. No comment ( )

18) Do you think that Islamic bank of Britain (IBB) are good with their customer services like their conventional counterparts?

a. Strongly agree ( ) b. Agree ( ) c. Disagree ( )

19) Your view on the following phenomena that Islamic Banking at IBB is:

a) Banking without RIBA only ( )
b) A socially acceptable Just Banking System ( )
c) Same as conventional banking with different name only ( )

20) How would you rate your level of your satisfaction with IBB during your transactions?

a. Very content ( ) b. Content ( ) c. Very discontent ( )

21) Finally, how would you evaluate the development level Islamic Bank of Britain has achieved in the past 4 years in United Kingdom?

a. Very Good ( ) b. Satisfactory ( ) c. Poor ( ) d. Don’t know ( )

Appendix 2 (Questionnaire to Islamic Bank of Britain Plc)

1) Demographic Profile of customers (Age, sex, occupation, education, religion & marital status).

2) Your average customers are low/middle or high income earners?

3) Purpose of your customers’ using this Islamic Bank: Investment/Savings/Borrowings/Others?

4) Do you have non-Muslim customers?

5) In previous studies in UK (1992 & 2004) it was established, that there is high level of ignorance prevailing among UK Muslims customers regarding the Islamic products and only religious factors work as motivation to use these products. Would like to know whether your Bank believes the same?

6) If so, what step your Bank taking to educate the UK Muslims’ perceptions about Sharia banking?

7) Do you believe the fact, that UK Government is easing the ways for Islamic Banks, regulation wise, and want London to be the ‘hub’ of Islamic Banks in the World?

8) Islamic Banks can contribute more to the societal balance, human prosperity and welfare? Does IBB makes efforts to preach this truth to the UK population? Do you think you are spending enough on advertising to improve the views of potential customers on Sharia Banking?

9) Do you think you have enough firms having business accounts with your Banks? What step your bank taking to increase it?

10) Sukuk (Islamic Bonds) getting huge applause in the financial world specially in Middle Eastern, South East Asian countries and some countries in Europe? Is your Bank thinking to market this Bonds, near future, in the retail/whole sale market?

11) Do you think its quite expensive/problematic to recruit and train staff who deal with the Islamic products compared to the high street conventional banks?

12) Does Islamic bank distribute higher profits as compared to conventional bank?

13) Do you feel Islamic products are more costlier than interest bearing products?

14) What are the factors responsible for IBB’s losses? What areas you are concentrating to improve this trend?

15) What’s the present and future challenges for IBB?

16) Any comment you would like to add regarding this topic?

Appendix 3 – Glossary of Islamic terminology

Ijara

Ijara is a form of leasing. It involves a contract where the bank buys and then leases an item – perhaps a consumer durable, for example – to a customer for a specified rental over a specific period. The duration of the lease, as well as the basis for rental, are set and agreed in advance.

Ijara-wa-iktana

Ijara-wa-iktana is similar to Ijara, except that included in the contract is a promise from the customer to buy the equipment at the end of the lease period, at a pre-agreed price. Rentals paid during the period of the lease constitute part of the purchase price. Often, as a result, the final sale will be for a token sum.

Ijara with diminishing Musharaka

The principle of Ijara with diminishing Musharaka can be used for home-buying services. Diminishing Musharaka means that we reduce our equity in an asset with any additional capital payment you make, over and above your rental payments. Ownership in the asset increases and ours decreases by a similar amount each time you make an additional capital payment. Ultimately, Islamic Bank transfer ownership of the asset entirely over to you.

Mudaraba

Mudaraba refers to an investment on your behalf by a more skilled person. It takes the form of a contract between two parties, one who provides the funds and the other who provides the expertise and who agree to the division of any profits made in advance. In other words, Islamic Bank would make Sharia’a compliant investments and share the profits with the customer, in effect charging for the time and effort. If no profit is made, the loss is borne by the customer and Islamic Bank takes no fee.

Mudarib

In a Mudaraba contract, the expert who manages the investment is known as a Mudarib.

Murabaha

Murabaha is a contract for purchase and resale and allows the customer to make purchases without having to take out a loan and pay interest. Islamic Bank purchases the goods for the customer, and re-sells them to the customer on a deferred basis, adding an agreed profit margin. The customer then pays the sale price for the goods over instalments, effectively obtaining credit without paying interest.

Musharaka

Musharaka means partnership. It involves you placing your capital with another person and both sharing the risk and reward. The difference between Musharaka arrangements and normal banking is that you can set any kind of profit sharing ratio, but losses must be proportionate to the amount invested.

Qard

A Qard is a loan, free of profit. We use this arrangement for our Current Accounts. In essence, it means that your Current Account is a loan to the bank, which is used by the bank for investment and other purposes. Obviously it has to be paid back to you, in full, on demand.

Riba

Riba means interest, which is prohibited in Islamic law. Any risk-free or guaranteed interest on a loan is considered to be usury.

PBUH: Peace be upon Him (Prophet Mohammad)

Appendix 4

Gantt Chart (Dissertation Time Management)

Abbildung in dieser Leseprobe nicht enthalten