Although Islamic Financial system is as old as the religion itself, however the beginning of Islamic banking really took place during 1970s. The considerable growth of Islamic finance as an alternative to conventional finances both in Muslim and non Muslim world has triggered the interest of most global financial institutions. According to Al-Hamli et.al (2003) the Islamic Financial market worth exceeds USD 200 billion. The need for an understanding of the fundamentals of Islamic finance is now recognized universally. This fact has been highlighted even more after the recent financial recession.
The overarching principle of Islamic Finance based on Islamic Law (Shariah) is that all form of interest is prohibited. The Islamic financial model works on the basis of risk sharing between lender and borrower whereas Conventional banking draws profit from the difference in interest rates at which they pay to their account holder and the rate which they receive from entrepreneurs and entire risk is transferred to the borrower. Secondly Islamic Finance is said to be asset based rather currency based whereby an investment is structured on ownership of assets and money is simply the payment mechanism.
In contrast to conventional mortgage where money is borrowed to buy a property and then paid back over specified number of years with interest, Islamic home financing share with the buyer in purchasing the property and rent is paid on bank's share of the property. Overtime the bank's shares can be purchased to reduce the rentals and finally completely own the property. The two most common forms of Islamic home purchase finance are Ijara and Musharaka.
I have keen interest in Islamic Banking and see my future in this sector. My research will be based on extensive review of different aspects of both financial concepts (conventional and Islamic), people preference for finance, strength and weakness. I intend to evaluate the future challenges and opportunities for Islamic finance and contrast the implications of both mortgages on lender and purchaser. I will also look at the existing Islamic home finance options available in UK to see whether they have been implicated in true Islamic spirit.
PRELIMINARY LITERATURE REVIEW:
The literature review comprises of following sections:
Brief history of Islamic Finance.
Reason for choosing Islamic bank.
Public awareness of Islamic financial principles.
Definitions.
Comparison between Islamic and conventional lease.
Islamic finance in UK.
Current concern.
Brief History of Islamic Finance:
Although Islamic Financial system has been in existence since 7th century in different forms but the very first concept of Islamic banking was introduced in 1963 by late Dr.Ahmad Elnaggar in Egypt. Later on in 1973 the project was named as Nasser Social Bank. The first Islamic development bank (IDB) was built in 1975 with the mutual consultation of Abdul Rehman of Malaysia and Prince Faisal of Saudi Arabia. During the period of 1975 to 1990 the rapid growth of Islamic banking was seen where investor focused on replicating conventional banking in a Sharia'a compliant manner. Now there are more than 300 Islamic institutes in more than 70 countries where Islamic financial principles are applied. In 1990s Europe and America also felt the importance of Islamic banking. The year 2002 was turning point for this sector in UK when Bank of England and Financial Service Authority (FSA) began to encourage the development of Islamic Financial institutions. Many banks in Britain like HSBC, Lloyds TSB, and Citigroup have started providing Islamic services simultaneously which are flourishing. The first Islamic bank of Britain was opened in 2005.
Reasons for Choosing Islamic Banks:
The survey reported by Omer (1992) highlighted a high level of unawareness of many Muslims in the United Kingdom regarding Islamic finance principles. He concluded that people who are more religious and less educated prefer Islamic over conventional finance.
However Ahmad et.al. (1994) found that in Malaysia the preferred selection for Islamic Banks was largely based on non-religious factors namely efficiency in service, quick transaction and the friendliness of bank employees. However, 40% of their respondent chooses Islamic banking due to religion. They also found that public understanding was poor about the difference between Islamic and conventional banking. Nasser et.al.(1999) documented in a survey of more than 200 customers that bank's reputation and perceived level of confidentiality were also important factors in the selection of a bank.
In the same way, Cunningham & Gerrard (1997) in their research also found that there is no difference in bank selection criteria between Muslims and non-Muslims however 25% of their respondents indicated religion as a sole reason in choosing an Islamic bank. These finding were endorsed by Metawa and Almossawi (1998) who interviewed almost 100 Islamic bank customers in Bahrain and concluded that the sole reason for choosing an Islamic bank is the religion.
Public Awareness of Islamic Financial Principles:
The above studies uniformly demonstrated lack of basic knowledge about Islamic financial products among members of public. This could be partly due to poor knowledge of Arabic Vocabulary to identify Islamic financial products. Also many of these products are still new to the market and public information remains low. Surveys conducted by Hamid (2001) and Haroon (2002) demonstrated limited knowledge of Islamic financial products and poor understanding of basic differences between Islamic and conventional banking even in an Islamic country like Malaysia.
Definitions:
IJARA
Mufti Usmani.MT (1998) stated that the word "IJARA" is derived from Arabic word "ajara" which mean compensate or give a consideration a return. The word "Ajr" means worker's wages and "Ujrah" means rental payment. "Ijara" is term of Islamic fiqh. Lexically, it means to give something on rent (. According to Islamic law ijara refers to both a hire contract as well as rental on the basis of interest. Ijara lease is also called as operational lease but emancipation feature is similar to conventional lease.
Ijara can be classified into two categories according to its use.
Ijara Wa Iqtina: (Operational lease and Financial lease)Lease for gaining possession at the end of the lease.
Ijara Mawsoofa Bil Thimma: This type of lease is usually a mishmash of construction finance followed by a valid lease that buys out the complete project either in parts or as a whole.
CONVENTIONAL LEASE:
The Conventional lease is a contract between lesser and lessee in which asset is transfer to user for an agreed period on an agreed consideration. In conventional lease the bank usually lend cash directly to a borrower for a period of time based on credit rating. The borrower would return the principle amount and interest.
THREE BIG LOAN TYPES OF CONVENTIONAL FINANCE:
In conventional leasing there are countless aspect involved in a securing a loan, (Mercus Fleming, 2008) which are
FHA-Insured loans, These loans are insured by Federal Housing Administration.
Conventional Loans, These loans are not guaranteed or insured by Government and therefore do not confirm to the same strict guidelines as the FHA loans.
VA-Guaranteed Loans, These loans are like FHA loans.
SHARIA'a: "Sharia'a is divine law as revealed in Quran ( book of Allah SWT)" (IFQ, 2007, page 04)
Fiqh: "Fiqh is the understanding and interpretations of sharia'a law". (IFQ, 2007, page 04)
Riba "That kind of loan where a specified repayment period and an amount in excess of capital is predetermined" (IFQ, 2007, page 29)
Murabah: "An unconditional sale contract where pre-approved and pre-agreed goods are sold at a cost-price plus mark-up for which the sale date is clearly defined and agreed" (IFQ, 2007, page 68)
Comparison BETWEEN ISLAMIC & CONVENTIONAL LEASE:
Islamic Mortgage Finance
Conventional Mortgage
Islamic Bank purchases asset and then sell it back to purchaser, called as "asset back"
Bank lend cash to borrower which is returned with interest.
Rent can only be charged after delivery of assets.
Rent charged from the days the price has been paid even if delivery is delayed.
Charges of late payment of rental given to charity.
Penalty of late payment of rental is taken into income.
The buyer contributes a certain proportion towards the price of property and share the ownership with the bank.
The buyer contributes a certain proportion towards the price of property but entire property remains mortgaged with bank.
Transfer of asset at the end of lease period to lessee may or may not be included in the lease agreement.
Transfer of asset at the end of the period to buyer is a part of the lease agreement.
All risks and rewards of asset should be held with the bank.
All risks of asset transferred to lessee
Islamic Financing in UK:
For many decades Muslims in the UK have been unable to finance their businesses or homes based on Islamic principles. There has been a marked lack of Shariah compliant finance solutions, and this has created problems in the finance industry and prevented many Muslims from home ownership.
In 2002 the Bank of England, recognizing these obstacles, asked the high street banks to find financial solutions for Muslims. Until then only the United Bank of Kuwait offered Islamic mortgages in the UK. Stamp duty, which is charged on property purchased at a certain value, was another hurdle to home ownership. The way that Islamic mortgages are structured meant that any client wanting to purchase a property would end up being charged stamp duty twice, once when the property transferred to the bank from the seller, and again when the property transferred to the client.
In April 2003 Gordon Brown abolished double stamp duty on Islamic mortgages opening the way for more Muslims to own their own homes. Since then the UK has seen an emergence of many Shariah compliant mortgage schemes including providers such as HSBC (Amanah), Arab Bank Corporation (Al-Buraq) launching products.
Although Islamic finance is considered as a niche sector in terms of its place in the overall UK financial services industry, the rate of growth quoted by many to be in the region of 10-15% per annum, has provided encouragement for new providers and has led to UK's first wholly Shariah compliant bank 'Islamic Bank of Britain' being established to serve the growing demand.
2009 and beyond signals further expansion of the industry with many Shariah compliant investment and commercial banks being granted licenses to operate in the UK Sharia-compliant products currently available in the UK are based on" Ijara" and "Murabha" methods.
Current Concerns
There has been a debate among various scholars whether the current Islamic financial products available truly comply with the Shariah principles or a hybrid product of both Islamic and Conventional banking.
RESEARCH QUESTIONS AND OBJECTIVES:
Based on preliminary literature review it has come to my understanding that Islamic Mortgage Financing is a big topic which is continuously growing. The public awareness about various Islamic financial products is not sound and there have been concerns about the compliance of these products with Shariah in true spirit. Furthermore I am yet to find a study comparing the two mortgage models.
RESEARCH QUESTIONS:
What are different Islamic Mortgage products available in UK?
What share Islamic Banking has in UK Mortgage Market?
What are the similarities and differences between Islamic and traditional mortgage systems and what are the costs involved?
What is the level of public Understanding of Islamic Financial Products?
RESERCH OBJECTIVES:
To critically appraise the two types of mortgages.
To contrast the implications of both mortgages on lender and purchase.
To evaluate the future challenges and opportunities for Islamic mortgages.
To evaluate the public understanding of Islamic and conventional Mortgages.
RESEARCH PLAN:
RESEARCH PERSPECTIVE:
The study will be a combination of both quantitative and qualitative types. I will use combination of interviews, questionnaires observation and secondary data to make sure the research question is validly answered. Both deductive and inductive reasoning will be used.
RESEARCH DESIGN:
A comparative study design will be used where both mortgage models will be compared using similar methods.
DATA COLLECTION METHODS:
Following three data collection methods will be used to ensure accurate data availability for analysis and answering of the research questions.
SECONDARY DATA:
The secondary data on this topic will be collected from existing sources such as different journals, articles, books and internet. The extensive online data base is available through various websites i-e Islamic Development Bank, Advisory Council for Islamic Finance (ACIF), International Association for Islamic Economics U.K, international institute of Islamic business and finance, financial service authority UK and various banks. Most of the data collected will help to answer some of the research questions and will help to achieve objectives one and two. The secondary data collection has some disadvantages and I will ensure standardized data collection to answer the research questions.
INTERVIEWS:
I intend to interview the customers (Muslim and non-Muslims), sale staff of Islamic banks and any financial brokers of both Islamic and conventional banks. During interviews I will adopt a semi-structured approach and will be conducted on 1:1 basis. This will enable both qualitative and quantitative data collection and flexible answers will help me to achieve some of the objectives. The length of these interviews will be approximately 30-40 mins. I hope to interview at least 15 people either face to face or over the telephone. The questions will be pre-determined, but the interviewees will be allowed to express their views fully. The response will be recorded on the paper and in some cases audio recording may be used for qualitative analysis. This method of data collection will help to achieve the final objective by answering the last question.
QUESTIONNAIRES:
In order to seek the views of the customers and to obtain a large quantity of structured data questionnaires will be used. The questionnaire will be sent out to approximately 200 people as I expect a response rate of approximately 40% with the possibility of delayed response, incomplete answers etc. The questionnaires will be postal; however in certain cases telephonic questionnaires can be used. This method will generate data for quantitative analysis and hence will help to address the third and fourth objectives.
ANALYSIS OF DATA:
The quantitative data obtained will be subjected to various appropriate statistical analyses to obtain valid and reliable results. For qualitative data deductive and inductive analysis will be performed. Weft QDA soft ware will be used for analysis of interviews. Content analysis will be employed for review of documents and texts.
LIMITATION:
There can be problems in holding interviews at a convenient time so that respondents are free of any distractions so that the reliability should not be affected.
To ensure validity of data collected, I will make sure that the questionnaires are designed to cover all the aspects of my research using appropriate measurement tools however the variable response to this method of data collection can affect the results.
ETHICAL CONSIDERATIONS:
RESEARCH ETHICS:
This research project will abide by the Coventry University's BES ethical guidelines. As this research is partly based on interviews, I will make sure that all interviewees are provided with an information leaflet and an informed consent is obtained before undertaking interview. The details of the interview questions will be discussed with my supervisor beforehand. The opinion and rights of the subject will be respected.
I will collect, analyze and present my data honestly and will ensure that all the data collected will be kept strictly confidential in line with data protection act.
PLAGIARISM:
I am fully aware of plagiarism and whenever I use the work of others I will give due acknowledgment and paraphrase into my own words.
Planning Special Resources:
25-Mar
29- Mar
25-Apr
27- Apr
25-June
15-July
28-Aug
25-Sep
15-Oct
28-Nov
30-Dec
Data collection
Easter holidays
Read literature
Writing Proposal
Finalizing proposal
Submission of proposal
Review secondary data
Draft interview questions
Draft questionnaire
Make appointment for interviews
Conduct interviews
Post questionnaire
Enter data in software
Analysis data
Prepare draft
Finalize draft
Submit to tutor for feedback
Make adjustment to draft
Complete remaining part
Readjust and submit to tutor for final feedback
Format for submission
Print and bind
Submission date
REFRENCES:
Abdullah.NI and Dusuki.AW (2006) "Customer Perception of Islamic Hire-Purchase Facility in Malaysia". Economics and Management 14 (2), 177-204.
Al-Ahmed.AY (1996) 'THE ISLAMIC FINANCIAL INSTRUMENTS UTAILIZATTION'. Msc Dissertation 1.
Al-Hamli.S, Al-Dhahiri.S, Al-Khamiri.M, (2003) 'A New Alternative & Opportunity'. Islamic banking and finance 1.
Ahmad.N, Haron.S, Planisek.S (1994) 'Bank Patronage Factors of Muslim and non-Muslim Customers'. International Journal of Bank Marketing 12 (1), 28-42.
Cunningham.JB & Gerrad.P (1997) 'Islamic Banking Study in Singapore'. International Journal of Bank Marketing 15 (6), 200-220.
Dr.Ghuddah.AS (2007) 2 ed. by Austen Hall ISLAMIC FINANCE & QUALIFICATION (IFQ). London: Security & Investment Institute.
Fatima.M (2006) 'Origins of lease':" difference between Ijara & conventional lease" 1 (4), 1
Jorg.B and Kermit.K, "CONVENTIONAL VERSUS ISLAMIC FINANC"'. International Journal of Islamic Financial Services 5 (4),
Kamali.MH (2007) "A Shariah Analysis Of Issue In Islamic Leasing''. Islamic Economics 20, 3-22.
Mufti Usmani.MT (2003) 'Islamic finance'. Islamic Studies 14 95-98.
Metawa.SA & Almossawi.M (1998). "Banking Behavior Of Islamic Bank Customers" International journal of Bank Marketing 16 (7), 290-315
Mercus.F (2008) 'The big 3 loan type'. : Ezine Articles .com, 1
Nordin.NZ & Hamid.AH (2001) 'A Study on Islamic Banking Education and Strategy for the new Millennium'. International Journal of Islamic Financial Services 2 (4),
Naseer.K, Ahmad.J & Al-Khatib.K (1999) 'Islamic Banking: a Study of Customer Satisfaction and Preferences in Jordan'. International Journal Of Bank Marketing 17 (3), 120-147.
Omer.SH. (1992), "The Implications of Islamic Beliefs and Practice on the Islamic Financial Institutions in the UK.". Loughborough University Leicestershire UK.
Omar.M & Chichti.JE & Walid.M & Amin.QA, 2009. "Role of Islamic mortgage in UK," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, 2(3), 366-383.
