ABSTRACT
Islamic finance has been fully grown systematically and in prominence. it’s currently wide called a viable different to traditional, thought finance. However, this ascension has been performed per sharia law beneath the restricted convenience of risk management tools, the framework of governance and regulative standards with the Islamic banking or Islamic financial set-up and its impact on client satisfaction.
This analysis seeks to assess the state of each performance and development of the Islamic financial set-up and its impact on client satisfaction.
It investigates the analysis through a spread of strategies equivalent to quantitative portfolio creation and economic science modeling of diversification edges, theoretical development of management tool and analysis of semi-structured interviews on the perceptions of however governance and regulative standards have an effect on each the performance and money innovation at intervals Islamic finance and its impact on client satisfaction.
The results has given during this study offer strong arguments for the inclusion of Islamic indices at intervals typical portfolios each from a performance and diversification point of view therefore vindicating the viability of Islamic finance not solely as an investment possibility however conjointly its impact on client satisfaction possibility.
Moreover, the analysis highlights the constructing of Islamic money product through sharia law rules. The analysis conjointly underlines the accord of market participants behind central regulative standards to reinforce stable and continual growth and development of the Islamic financial set-up.
Finally this analysis tries to look at Islamic Finance and Its Impact on client Satisfaction in Islamic Finance trade. The scope of the study was restricted to the shoppers of Islamic banks and conjointly vital because of a rising tendency of Islamic banking performance altogether over the planet.
In the lightweight of the findings, many concrete recommendations are created for the advance of Islamic finance system also quality service and client satisfaction conjointly. The analysis would be strengthening the promoting strategy also as service quality of the Islamic Bank. there’s high potential for Islamic finance trade.
It is suggested that the Islamic finance trade standardize the promoting ethic and supply the standard service to their customers.
CONTENTS
Page
Abstract …………………………………………………………………………………….. I
Certificate of Approval ……………………………………………………………………. II
Acknowledgements …………………………………………………………………………. III
List of Tables ……………………………………………………………………………….. VI
Chapter One — Introduction …………………………………………………………………01
1.1 Background ………………………………………………………………………………. ..01
1.2 Statement of Problem …….………………………………………………………………. .02
1.3 Research Questions ……..……………………………………………………………….. ..02
1.4 Justification ……..……………………………………………………………………….. ..03
1.5 Purpose of Study ……..…………………………………………………………………. …03
1.6 Scope of Study ……..………………………………………………………… ………… ..03
1.7 Hypothesis …….………………………………………………………………………… .04
1.7.1 Independent and Dependent Variables .…….……………..………………………. .04
1.8 Delimitations ……..,……………………………………………………………………… .04
1.9 Key terms ………………………………………………………………………………… .05
Chapter Two — Literature Review ………………………………………………………………………… …06
2.1 The concept of Halal and Haram in Islam ………………………………………………………………..06
2.2 Principles of Islamic finance ………………………………………………………………………………….07
2.2.1 Interest (Riba) …….……………………………………………………………………………………… 07
2.2.2 Gharar ……………………………………………………………………………………………………. 07
2.2.3 Maysir …………………………………………………………………………………………………….. 08
2.3 Islamic finance products …………………………………………………………………………………….. 08
2.3.1 Partnership based mode of financing ………………………………………………………………. 09
2.3.2 Trade based modes of financing ………………………………………………………………….. 10
2.3.3 Rental based modes of financing……………………………………………………………………… 12
2.4 Derivatives ………………………………………………………………………………………………………….. 13
Chapter Three — Methodology ……………………………………………………………………………….15
3.1 Research Methodology …………………..…………………………………………………15
3.2 Research approach ……………….…………………………………………………………16
3.3 Research Method …………….…………………………………………………………….17
3.4 Research variables …………………………………………………………………………18
3.4.1 Sample selection ……………………………………………………….……………..18
3.4.2 Data collection ………………….……………………………………………………18
3.4.3 Research instrument ……………………………………………………………..…..19
IV
Page
Chapter 4 Interpretation of Results / Findings………………………………………………21
4.1 Results ………………………………………………………………………………………21
4.2 Demographics of the Respondents ………………………………………………………….21
4.3 Descriptive Statistics of the Variables ………….…………………………………………..23
4.4 Hypothesis Testing ………………….……………………………………………………..25
4.5 Regression Model Results …………………..……………………………………………..26
4.5.1 Dimensions of Service Quality and Customer Satisfaction …………………………26
4.5.2 Service Quality and Customer Satisfaction …….…………………………………….27
4.5.3 Service Quality and Islamic Finance or Bank Performance …………………………..28
4.5.4 Customer Satisfaction on Islamic Finance or Bank Performance …….……………..28
Chapter 5 Conclusion, Implications and Suggestions ….…………………………………..30
5.1 Conclusion ……………….…………………………………………………………………30
5.2 Suggestions …………………………………………………………………………………31
5.3 Limitations and Future Research …………………………………………………………..32
5.4 Contribution of the Study …………………………………………………………………..33
5.5 Theoretical and Practical Implications …………………………………………………….33
5.6 Unique Status of the Study ……….………………………………………………………..33
Appendix ………….…………………………………………………………………………..34
Appendix-I Questionnaire …………..……………………………………………………….34
Appendix-I I Definition of Terms ……………………………………………………………40
References …………………………………………………………………………………….41
V
List of Tables
Table Page
Table: 01 Details regarding Branches and Respondents (City wise) 19
Table 4.2.1 Summary of Demographics of the Respondents 21
Table 4.3.1 Skewness and Kurtosis of Constructs/Variables 23
Table 4.3.2 Descriptive Statistics of the Constructs/Variables 24
Table 4.4.1 Independent Samples T-Test for Difference in the Perception of Service
Quality among Male and Female Customers of IB 25
Table 4.4.2 Summary of Correlation between Selected Variables 25
Table 4.5.1.1 Summary of the IBDSQL-IBCS Linear Regression Model
(based on SPSS results) 26
Table 4.5.1.2 Summary of the Multicollinearity Coefficients for
IBDSQL-IBCS Regression Model 27
Table 4.5.2.1 Summary of the IBSQL-IBCS Linear Regression Model (based on SPSS
results) 27
Table 4.5.3.1 Summary of the IBSQL-IBPRF Linear Regression Model (based on SPSS
results) 28
Table 4.5.4.1 Summary of the IBSC-IBPRF Linear Regression Model(based on SPSS results) 28
VI
Chapter One
Introduction
1.1 Background
Islamic Finance possesses associate increasing attention all round the monetary world in recent years, particularly in the point of view of world monetary crisis beginning in late 2000s. international monetary crisis have caused the downfall and casualties of well-known and sure standard money establishments (CFIs) everywhere the globe like Lehman‘s Brothers and UBS, that reciprocally have raised the interest of the final public on Islamic funding conjointly within the different elements of the globe.
Islamic funding system has since its institution in Seventies been increasing its principles through the complete world, however in the point of view of world monetary crisis it’s intimate with a integer rate with worldwide assets near one trillion (IMF, WP/11/156). Though Islamic funding is one amongst the quickest growing segments within the monetary world it’s still in its infancy stage, at concerning one p.c of the world banking industry. When put next to the standard financial set-up it actually faces several challenges. The foremost necessary challenge it’s facing now could be the actual fact that it operates in economies driven by interest, that isn’t compliant with Islamic banking principles.
Moreover, the expansion and therefore the development of Islamic merchandise and services across the Islamic financial set-up has meant that the criticisms have increased touching on product structures and therefore the scope with that these merchandise and services adhere to elementary Islamic beliefs (El-Gamal, 2006, El-Hawary et al., 2004).
On the opposite hand, so as for Islamic funding to become another within the world‘s financial set-up there needs to be introduced regulative measures removing the obstacles to the event of Islamic funding or Islamic banking, like financial organization support, taxes and public policy.
This kind of regulative measures that are taken by State Bank of Pakistan has shown that it’s attainable for Islamic funding to control and grow its activities in such economies. During this relation, my preliminary analysis suggests that Islamic finance has huge potential for additional enlargement once together with non-Muslims as target cluster.
On the opposite hand I even have, in my analysis, many faced several ambiguities concerning Islamic funding from prestigious researchers within the monetary world. El-Gamal et al. (2015) as an example have finished that Islamic finance merely seeks to copy the functions of standard monetary instruments and is primarily a sort of rent-seeking legal arbitrage (IMF, WP/11/156).
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So being a Muslim myself and a finance student, the ambiguities and also the higher than Mentioned issues that face the expansion of Islamic finance or Islamic banking within the current world driven me to analysis additional during this field particularly in Pakistan. The aim of this analysis is to urge insight into Islamic funding, its opportunities, its challenges, and to search out out whether or not Islamic finance is another to the standard banking or simply a replication of the standard system by providing client satisfaction.
1.2 Statement of Problem
This analysis examines Islamic finance trade and the way the service quality and also the performance of Islamic finance have an effect on the customers’ judgments towards satisfaction or its impact on customer’s satisfaction.
The current trend within the Islamic finance trade is like that the demand for Islamic product square measure increasing and there square measure additional product on the roads than before. Customers have completely different opinions concerning Islamic finance product. the various factors that influence Islamic finance and its impact on client satisfaction vary from person to person. Some Islamic product users square measure Religion-conscious whereas others is also Value-conscious within the society. Some might take into account Quality as a very important issue while not compromising on different things whereas some might not essentially be hard to please Quality within the society.
1.3 Research Questions
1: However will Islamic finance or Islamic banking operate within the trendy money spectrum?
This analysis presents a traditional read of Islamic banking and finance within the trendy economy. Primarily we’ve to grasp the central tenets of Islamic banking and finance. Moreover, on the opposite hand, this analysis conjointly appearance at thesensible and tutorial development of Islamic finance and delves into the expansion of Islamic finance from the medieval to the fashionable times and its impact on client satisfaction.
2: What are the issues and future developments of the regulative standards inside the world Islamic monetary system?
Now the aim of this analysis is to explore the problems encompassing the regulative standards in Islamic finance. So, the literature has indicated that there’s an absence of Uniformity of regulative standards across the world Islamic money hubs. it’sbeen additional argued that this might cause AN uneven enjoying field between Islamic money systems and is harmful to the event of Islamic finance as an entire. Moreover, the employment of Shariah-screens to market the event of Islamic finance in non-Muslim money systems has conjointly come back beneath scrutiny.
3: What are the factors that influence Islamic funding and its impact on client satisfaction?
This analysis has unconcealed 2 necessary factors, that square measure risk management from spiritual facet in Islamic finance trade that makes impact on client satisfaction.
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1.4 Justification
The justification concerning, this analysis was to explore the potential of Islamic finance with maximize the Islamic product market and develop the nice relationship with the purchasers and to reinforce the satisfaction in positive tone.
1.5 Purpose Of Study
The analysis examines the link among Islamic funding and customers’ preference of service quality, their feelings of satisfaction and performance of Islamic banks in Pakistan. currently a days Islamic funding system looks to be growing quickly throughout previous couple of years and has proven its potential to figure as a compatible and parallel different system for providing monetary services.
This analysis analyzes the perception of services quality of product offered by Islamic funding with mediating impact of client satisfaction on Islamic bank performance. The competition has been increasing among Islamic finance trade and standard banks to capture new customers also on retain existing customers in each sectors of banking system (Islamic funding and standard banking.
It conjointly needs a study to live the impact of service quality on client satisfaction towards Islamic finance or Islamic bank performance. This study aims to propose and check a model of SQL, Cs and PRF by analyzing Islamic finance performance and its impact on client satisfaction in Pakistan. The most objectives of the study square measure as under:
• First: to search out the distinction within the perception of service quality among bank customers on the premise of gender in Pakistan.
• Second: to search out out the link between service qualities of product offered by Islamic funding and customers satisfaction in Pakistan.
• Third: to grasp however client satisfaction affects the performance of the banks in Pakistan.
• Fourth: To determine Company and individual shopper perspective towards Islamic funding so as to judge its success in Pakistan. it’s conjointly essential to determine the interest of potential purchasers for brand new product. If the potential marketplace for Islamic funding is deficient to justify investment, the banks would possibly need to develop the merchandise additional so as to form it additional enticing for his or her purchasers, equivalent to Islamic automobile finance Schemes etc.
1.6 Scope of Study
Besides the importance of this sort of study on this subject, there have been many following limitations of the appliance of this study;
First because of the restricted amount of your time and little sample size in survey form. Results might not be indicative for the target respondents at giant or macro basis.
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Second some respondents, UN agency have restricted data of Islamic funding or no data concerning the monetary modes of typical and Islamic banking, conjointly answered the queries; thence the replies of some questions is also supported their own imagination or thoughts. Therefore, during this study the results concerning Islamic funding ought to be taken solely as indicative and perceptive instead of conclusive.
1.7 Hypothesis
The hypotheses of the analysis can confirm the parameters of the analysis queries and also the strategies to be used in testing the hypotheses should be relevant for each the analysis queries and also the analysis hypotheses. Below square measure analysis hypotheses:
• First: The socio-economic structure and pietism of the Muslims communities play a major role within the level of economic exclusion.
• Second: Do individuals like Shari’s-compliant finance to standard finance below traditional circumstances in their daily business activities?
• Third: however the service quality of Islamic finance affects the customer’s perspective towards satisfaction and conjointly its impact on bank performance.
• Fourth: Islamic funding managers should take into account the necessary components of service quality to develop ways for quality improvement (Hung et al., 2003).
• Fifth: The great service qualities facilitate to achieve the competitive advantage for long client relationship (Zeithmal et al. 2000).
1.7.1 Independent and Dependent Variable
Independent Variables
• Riba or Interest free Profit (Sharing of profit on the premise of Shari’a-compliant).
• Quality of Service. • Awareness.
Dependant Variables
• Switch to Islamic Finance or Standard Bank. • Client Satisfaction.
• Recommendation to different customers.
1.8 Delimitations
Islamic finance may be an emergent business compared to the standard monetary industry; thus there are various challenges and opportunities connected to its future development and progress. Initial of all this analysis has been targeted on the challenges and opportunities that are of significant importance for the institution and future growth of Islamic finance within the current world, therefore, different specific is its impact on client satisfaction that is secondary importance would be mentioned during this paper.
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As Islamic money trade tries to realize a stronger foothold within the world each with the capital and cash markets, the main target of this thesis is on Islamic finance trade as an entire and not on a specific market. Though, it ought to be noted, that there are immense numbers and kinds of product provided by Islamic money establishments within the Muslim countries, as within the standard system. However because of the scale and limit of this thesis, solely those products are centered on that square measure of direct interest and have potential for growth within the western world in close to future. What is more, it’ll be an excessive amount of for this thesis to say all potential markets for the Islamic finance within the world.
1.9 Key terms
Islamic Finance trade industry, Islamic banking business, interest, Riba, Shari’a-compliant, Impact and Client’s Satisfaction.
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Chapter Two
Literature Review
This part of the analysis is reviewing the Islamic finance, client satisfaction in Islamic finance, principles of Islamic finance and also the definitions of its product. Then the theories behind the Islamic finance are reviewed. The most a part of this chapter is predicated on books that square measure mentioned within the List of References.
2.1 The concept of Halal and Haram in Islam
The idea of Halal (lawful/permissible) and Haram (unlawful/impermissible) was introduced by the faith of Islam and this can beafter all the muse of Islamic finance. Each Halal and Haram are employed by Muslims throughout the planet and touching on something that’s thought-about permissible and lawful beneath faith, and what’s impermissible and punishable per shariah severally.
For many Non-Muslims the 2 words area unit associated with food and beverages that a Muslim is allowed or prohibited in line with Islam. However, for Muslims these words will be found in each facet of their life and it applies to everything from speech, dress code, the manner they behave, to their manner and dietary.
The higher than mentioned all social and moral idea reigns supreme conjointly within the monotheism finance and economy. Halal includes a protracted list of legal and allowable business activities, and Haram includes a protracted list of out and inadmissible business activities. On the opposite hand this Halal and Haram list isn’t complete as a result of Muslim students in several countries have some variations within the interpretation of what’s allowed and what’s out, particularly once a replacement product comes into the market particularly in industry. Several of the IFIs have created their own jurisprudence boards1 that problems completely different opinion on new merchandise out there within the market, that add considerably to the variations in interpretations of what’s Halal and what’s Haram. a number of these general activities that Muslims don’t seem to be allowed to take a position in area unit mentioned below:
• Alcohol, cinema (immoral), gambling, pork product, smut, tobacco and after all Riba (interest).
Actually, these prohibited activities aren’t invariably prohibited. as an example investment in alcohol activities isn’t allowed, however on the opposite aspect once identical alcohol is employed for the protection of life, like alcohol-based antiseptics, it’s allowed. Another example states that in one case the finance of a significant luxury edifice was allowed wherever the casino wasim permissible, however the sale of alcohol at intervals the edifice was allowed to non-Muslims as a result of it had been the deemed necessary for its economic viability and as long because it wasn’t oversubscribed to Muslims (not allowed) (Novethic, WP, 2009).
———————————————————————————-
1 sharia law boards square measure comprised of freelance consultants (mostly Islamic lecturers and economists). areelaborate on within the following chapters
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2.2 Principles of Islamic finance
As it is apparent famous from its name, the Islamic finance system compared to traditional finance system is principally relating to the faith of Islam. The principles of Islamic finance square measure supported 3 main factors that are mentioned within the religious text and measure a very important a part of Shariah2 and Islamic jurisprudence. They’re Riba, Gharar and Maysir that are explained intimately below.
2.2.1 Interest (Riba)
In Islam it’s not allowed to either receive or pay any form of interest on transactions involving cash or any business dealing. This prohibition primarily implies that the fixing prior to of a positive come back on a loan or any investment, as an award for waiting, isn’t permissible by Sharia law.
This prohibition has not been confined to Islam. Per Visser (2009, p. 39), supported passages from the Bible, the Christian Church at numerous times took a robust stand against hard to please and paying interest in any form
of business activities.
Also within the Old Testament, Jews were impermissible to demand interest on loans or investment from their own however they might charge interest on loans given to foreigners. Perhaps, best definition of Riba is given by Iqbal and Molyneux:
In its basic that means, Riba may be outlined as something (big or small), medium of exchange or non-pecuniary, in way over the principal in a very loan that has got to be paid by the receiver to the loaner at the side of the principal as a condition, (stipulated or by custom), of the loan or for AN extension in its maturity. per a accord of Islamic jurists it’s identical that means and import because the up to date idea of interest. (Iqbal and Molyneux, 2005, p. 9)
2.2.2 Gharar
Gharar translated directly from Arabic it merely means that uncertainty or risk. Gharar is additionally as necessary in Islamic finance as Riba. Compared to Riba, Gharar is tougher to outline clearly in money transactions particularly in Islamic finance. Thus it’s one in every of the foremost tough tasks for the consultants in sharia law boards in several IFIs to agree upon once there measure new product obtainable within the Islamic money markets.
——————————————–
2 Islamic law – the basic spiritual idea of Islam, particularly its law, systemized throughout the 2d and third centuries of the Muslim era capable 8th-9th centuries AD. (Encyclopedia Britannica)
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In this relation, Iqbal and Molyneux (2005, p. 14) state that, “jurists build a distinction between 2 varieties of Gharar: Gharar ahish (substantial) and Gharar yasir (trivial). the primary kind is prohibited whereas the second is tolerated since this might be ineluctable while not inflicting substantial harm to 1 of the parties. In several cases, it’s merely out of the question to reveal all data (not as a result of the vendor needs to cover something, however as a result of it’s within the nature of the product). the client has got to trust the seller”. Its Gharar yasir (trivial) that generally causes issues for sharia law boards to agree upon. to stop Gharar in business transactions, the complete implications of this group action should be clearly famous to catching parties. Indifferent words there should not be ―asymmetric information‖ between parties as a result of it breaches the principle of shariah. Elgamal (2006, p. 58) states that, Gharar translated conceptually by faculty member Mustafa Al-Zarqaa means that “trading in risk, that cannot be defined”. He additional offers USA samples of naked choices, money futures, and derivatives that aren’t backed by tangible and verifiable assets.
2.2.3 Maysir
Maysir is closely relating to Gharar. In some papers concerning Islamic finance or Islamic banking these 2 principles square measure used interchangeably although there’s a main distinction between these 2 principles. Wherever in Gharar the most focus is on uncertainty (Risk), Maysir, translated from Arabic ―gambling‖, focuses on and prohibits transactions that square measure supported one side’s gain at the price of the opposite.
Conventional banking product equivalent to life assurance because of one side’s gain square measure prohibited in Islamic finance because it comes beneath Maysir. Once gambling, the player pays an explicit quantity of cash within the hope that he can gain a lot of larger quantity reciprocally, equally the standard life assurance policy wherever the assured hopes for an opportunity to form a gain.
The 3 principles that have mentioned higher than measure the most principles of Islamic finance. However, there square measure some additional general rules beneath that money transactions has become void in Islamic finance.
This could be a contract that involves immorality, that involves unlawfulness against public policy and that foundation or substance is unlawful or banned, or the other contract or agreement that is directly or indirectly is contrary to the divine principles of sharia law.
2.3 Islamic finance products
A large range of product square measure obtainable in Islamic finance or Islamic banking system and also the range is growing as demand for additional Islamic compliant product grow throughout the planet particularly in Islamic countries like in Pakistan. Generally, Islamic mercantile law is predicated on 3 modes that function the fundamental building blocks for different additional advanced money product.
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These 3 modes measure partnership based mostly, trade based mostly, and rental based mostly modes of Islamic finance. Nearly all Islamic finance products have come back beneath these 3 modes. The uses of every mode measures mitten by the aim and size of transactions, however all of them measure directly supported principle of Riba prohibition. One issue to recollect is that, as mentioned earlier, as a results of the distinction in interpretation not all of recent product square measure universally acceptable. The 3 mentioned modes square measure lined in details below.
2.3.1 Partnership based mode of financing
The Partnership based mostly or Profit-and-Loss-Sharing (PLS) modes suggests AN equitable sharing of risks and profits between the parties concerned in a very money group action or business, and embody Mudarabah, Musharakah and different hybrid product. in theory, Mudarabah and Musharakah square measure the foremost fascinating sorts of Islamic finance or Islamic banking.
2.3.1.1Mudarabah
Mudarabah is AN agreement between a loaner (Islamic bank), UN agency acts as AN capitalist, and a receiver, whereby the receiver will mobilize the borrowed quantity for his endeavor or the other money use. If profits square measure created they’re going to be shared between the loaner and receiver per the reciprocally united ratios. Within the case of loss the loaner shares the losses in proportion to his contribution. Elazrag Hussein (2010) offers an honest example;
“an Islamic bank lends cash to a shopper to finance a manufactory, reciprocally that the bank can get a such that share of the factory‟s internet profits per annum for a chosen amount. This share of the profits provides for compensation of the principal and a profit for the bank to expire to its depositors. ought to the manufactory lose cash, the bank, its depositors and also the borrowers all collectively absorb the losses”.3
2.3.1.2 Musharakah
Musharakah is in its basic a business partnership or venture between 2 parties wherever one party can be a bank and also the different party its client. it’s affected for a specific amount sort of a few months, year or over a year. Each parties square measure united on an explicit share of the profit to lean to every party. The profit of the bank should not exceed the share of its investment within the Musharakah. The losses, if incurred, are divided supported strict proportion to the equity participation quantitative relation, i.e. to the capital contributed by every party. As an example, if the bank invests sixty five and try and the client thirty Five, they have to share the loss within the same quantitative relation.
“All parties, together with the bank, have the correct to participate within the management of the project, however equally, all parties have the choice to waive such right. All parties agree through negotiation on the quantitative relation of distribution of the profits generated from the project, if any. This quantitative relation needn’t coincide with the quantitative relation of participation within the finance of the project”. (Venardos 2005, p. 76).
—————————————–
3 Elasrag, Hussein, Global Financial Crisis and Islamic Finance (April 17, 2010). http://ssrn.com/abstract=1591563
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Musharakah is employed by Islamic money establishments for quality and/or property finance, capital finance, and etc. Each Mudarabah and Musharakah square measure closely connected product. Mudarabah differs from Musharakah within the means that solely bank is that the capitalist here, whereas in Musharakah all parties invest within the project. In Mudarabah management is that the right of the capitalist, whereas on the opposite aspect in Musharakah all partners will manage the project supported a pre-specified agreement. And at last, in Mudarabah the client doesn’t bear losses if incurred, whereas in Musharakah profits and losses square measure shared supported the share of the investment.
2.3.2 Trade based modes of financing
Trade {based|based mostly|primarily based mostly} modes of Islamic finance became obtainable within the market a lot of later than partnership based mode, however its product gained dominance among different product terribly quickly and quickly.
Because it targeted a far larger cluster of investors, each personal and business customers, and it is also safer for each parties to take a position during this mode of Islamic finance, compared to partnership based mostly mode.
2.3.2.1 Murabaha Finance
Murabaha is additionally AN agreement between a Islamic bank and its client. The client requests the Islamic bank to buy or import commodities on his/her behalf, with a promise to shop for them from the bank at damage and gross margin of the bank, and to be paid on delayed installments.
One of the foremost used sorts of Murabaha by Islamic banking customers is home finance. Murabaha can be named because the locomotive of Islamic finance as a result of it had been when the introduction of Murabaha that Islamic banking assets grew at double digits.
But there square measure numbers of critics among outstanding students criticizing Murabaha„s compliance with sharia law. As Usmani states, “It ought to ne’er be unnoticed that originally, Murabaha isn’t a mode of finance.
It is solely a tool to flee from „interest‟ and not a perfect instrument for effecting the important economic objectives of Islam. Therefore, this instrument ought to be used as a impermanent step taken within the method of Islamization of the economy. And its use ought to be restricted solely to those cases wherever Mudarabah and Musharakah aren’t practicable.” (Usmani 1998, p. 104). 12
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This statement may be confirmed by watching a retardant that Murabaha contains. the matter is that the customer’s promise to shop for the commodities from Islamic bank thus once the bank has bought it, cannot be binding since this might be a consent that neither aspect is tributary right away to perform. the answer to the current drawback is that sharia law boards has accompany, is permitting banks to require collateral against losses incurred from a customer’s breach of promise.
2.3.2.2 Salam Finance
As it has mentioned before, sharia law doesn’t allow merchandising what you are doing not own however Salam is exempt from this condition.
In Salam, as long because the artifact is such that by each quality and amount and at full payment at spot, it’s allowed to sell it in a very given future date.
The seller is duty-bound to own the artifact by the tip of contract. If the vendor doesn’t have the artifact in hand at the time of execution of the contract, he/she should exist within the market.
Salam is analogous to forward contracts in typical financial set-up with the distinction that in Salam the whole quantity should be paid once language contract.
Salam is employed by IFIs in agricultural finance, pre-shipment export finance, and project finance. Iqbal and Molyneux (2005, p. 25), have explicit four basic rules that govern Salam:
1. The value ought to be paid fully at the time of the contract.
2. Product whose quality or amount cannot be determined by specification cannot be oversubscribed through the contract of Salam. AN example is precious stones.
3. Product may be oversubscribed solely by specifying the attributes. They cannot be particularized to a given farm, manufactory or space.
4. The precise date and place of delivery should even be such that.
There also are 3 major risks connected with the employment of Salam, as mentioned by Venardos (2006, p. 77), that per him reduces the Salam’s worth as a finance vehicle.
1. The danger of default by merchant that might simply partly resolved by getting some type of security from the vendor.
2. The banks ought to liquidate the products when delivery, AN inconvenience created additional serious by the Islamic legal rule or principles that a Salam client cannot sell the expected product before truly occupation of them. However this can be conjointly resolved by sharia law boards, UN agency permits Islamic banks to sell {the product the products} with conditions that the new contract is unconnected to the primary one (buying goods from seller), which the products square measure of precisely the same description, quantitatively and qualitatively, and with identical day of the month.
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3. the necessities of sharia law that if at the time of delivery the vendor will neither turn out the products nor get them elsewhere, the client has solely 2 choices: either withdraw his supply, or look forward to the products to become obtainable later, with no compensation permissible for the delay. In either case, the client loses all or a lot of the make the most of the employment of his cash or finance.
2.3.3 Rental based modes of financing
The Rental based mostly modes of finance have existed since the start of Islam. it had been used largely in relation with agricultural product. Ijarah are the sole kind utilized in this mode, however with time and also the development of recent product money establishments have further different additional sophisticated product beneath this mode.
The main plan of this mode is that the establishment or Islamic bank purchases a quality for its client and so hands it over to him/her on rental basis. this could be AN operational quality, wherever IFI act as sponsor of the quality or money quality, and wherever the client deals directly with the provider that the possession titles remains with the IFI till it’s transferred to the client.
The two most used product in rental based mostly mode of finance square measure Ijarah and decreasing Musharakah.
2.3.3.1 Ijarah finance
Ijarah is way love leasing agreement in typical financial set-up, however with a distinction that Ijarah doesn’t involve interest bearing contracts and that they ought to be Shariah-compliant. once translated from Arabic, Ijarah means that to produce one thing on rent. Venardos (2006, p. 170) outline Ijarah as;
“a contract beneath that the bank leases instrumentation to a client for a hire fee. it’s pre-agreed that at the tip of the leaseamount the client can get the instrumentation at AN united value from the bank, with the rental fees already paid being a part of the price”.
Ijarah is that the most used form of product, not solely among the rental based mostly mode product however conjointly among all product provided by IFIs, once it’s involved the acquisition of assets for businesses.
Ijarah have typically been employed by personal customers for finance commodity like homes and vehicles. However recently it’s gained quality among business customers in relation with project and transportation finance.
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Ijarah may be used for nearly everything that would be hired, however some bound things that’s prohibited in sharia law and some others like fuel, food and etc. aren’t enclosed in Ijarah.
2.3.3.2 Diminishing Musharakah finance
As with Musharakah, decreasing Musharakah may be a business partnership with the distinction that in decreasing Musharakah, at the tip of partnership, the one half becomes the complete owner of the quality in a very preset mechanism specified, once the contract is signed.
The transfer of the possession may be determined by a leasing agreement wherever the renter purchases the possession on a pro-rata basis through periodical lease payments. Iqbal and Molyneux (2005, p. 22) describe decreasing Musharakah as a contract between a financier (the bank) ANd a beneficiary during which the 2 comply with enter into a partnership to have an quality, however on condition that the financier can bit by bit sell his share to the beneficiary at AN united value, And in accordance with an united schedule.
Diminishing Musharakah is progressively being employed in sectors like housing and property, project finance, and construction. Decreasing Musharakah takes completely different shapes per the form of the transactions. A general rule is that once a client needs to shop for an artifact he/she approaches the IFI that agrees to hitch into partnership.
The client has got to pay a minimum of 10-20 % of the value, per IFIs needs, and also the rest is paid by the IFI. The share of IFI is then divided into units that the client has secure to buy one when another in a very much predefined schedule. Throughout this method the IFI gains on rent claimed per its proportion of share.
2.4 Derivatives
CFI derivatives embody decision and place choices, futures, forwards, and swaps and square measure used for hedging, arbitrage, and speculation. From the sharia law purpose of read most of the derivatives provided by CFIs square measure deemed to be Haram i.e. prohibited for IFIs as a result of these varieties of transactions visit the commodities which may not be in seller’s possession.
IFIs ostensibly permit derivatives for the needs of hedging and arbitrage, however interdict their use for speculation or gambling. As mentioned before, Islam prohibits Gharar and Maysir (gambling and speculation).
However, the necessity for a mechanism that would facilitate IFIs customers to manage supererogatory risks has prompted Islamic jurists and students to come back up with some standardized liquidity and risks management product, directly supported the commonly accepted Islamic finance modes.
A number of product square measure just like typical money product, Forward or futures contracts (a combination of Salam and Murabaha), decision (Arbun) and place choices, total come back or currency swaps and etc., however utterly at intervals ANIslamic framework.
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As there square measure numbers of various derivatives grow in Islamic finance, the criticism is additionally growing fromcompletely different elements of the planet by Islamic jurists and students contestation, that these varieties of product aren’tfully compliance with sharia law. Jobst (2007) States that;
“Shariah students differ with the actual fact that futures ANd choices square measure valued largely by respect to the sale of a non-existent quality or an quality not within the possession of the vendor, that negates the sharia law. sharia law principles, however, needs creditors (or protection sellers) to really own the reference quality at the beginning of a group action.”
Anybody UN agency is at home with the foundations of sharia law will see that the thought behind these derivatives goes against the terribly pillars of Islam.
Therefore the creation and development of such product square measure, one in every of the foremost difficult tasks for Islamic finance practitioners or for Islamic banking practitioners. the scale of the Islamic spinoff market isn’t famous however is sort of tiny and derivatives square measure a lot of less wide obtainable to IFIs than to CFIs (Visser 2009).
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