Islamic Banking in Financial Development Assignment Sample

• Subject Name : Accounting and Finance

Role of Islamic Banking in Financial Development within the UK

Introduction

In the current finance sections in the UK, Islamic finance has taken a significant role, and its impact looks integral in the stability of the financial growth strides in the UK. Economic growth in any economy is based on the rate at which financial growth is recorded in a given country. As such, legal and financial systems are two facets which form the core mechanisms that determine the state of the economy.

Facts about the effect of Islamic banking on the UK's financial development have not yet been analyzed. This can be attributed to data limitation and lack of enough literature facts. Some facts about Islamic banking seem significant to economic growth, while others can be viewed as drawbacks. This implies that there exists a role(s) that ought to be played by Islamic banking to attain a financially developed economy in the UK. Such implications make this research worth to be undertaken.

Matters of legal origin have been the core determinants of financial and economic development. However, Islamic banking is based on Sharia Law which is implemented separately by institutions in every country where it operates. The purpose of this study is to fill in the literature gap that stipulates the ultimate role played by Islamic banking in enhancing the UK's financial development statistics.

Research Background

To accentuate the roles of Islamic banking in the UK's financial development, it is vital to understand the origin of Islamic banking in countries which are dominated by Muslims and the existing disparities with conventional banks. Mzee (2016) alludes that the modern Islamic banking system is based on the archaic colonial regimes, which preferably utilized banking institutions to financially support their interests in exploring economic sectors such as agriculture, mining and manufacturing.

Even though the existing banking system in Islamic countries was majorly for public sectorial uplifting, several Muslims excluded themselves voluntarily due to their religious beliefs (Alamgir, 2016). Due to the non-fulfillment of their banking needs, some of them inefficiently utilized their savings, thus creating a minor multiplying power for their money. Ultimately, this raised the liquidity issue.

Contemporarily, many Islamic banks have strived to avail products that are compliant with Sharia law. Such products are governed by the philosophy that no one should profit from someone else's losses. Hence, this has prohibited Riba (Interest). Based on Islamic beliefs, Riba is considered as the greatest sin above eating pork, drinking alcohol and committing adultery. In conventional banking, risks are directly transferred to banks by depositors, and they are entitled to gain returns regardless of whether the banks gained earning based on the assets. More so, borrowers retain all risks since they are required to pay back the principle amount as well as the accrued interests regardless of project success.

Islamic banks differ in how to regard their investors and borrowers. The investors and the Islamic banks both share the risks as well as the returns. The returns are based on the performance of the intended project, and such is not guaranteed. As such, it is paid through Hiba, which is an unguaranteed gift. Asset-based model is what is emphasized by Islamic finance in risk-sharing, and this is in contrast with conventional banking which is majorly debt-based hence focusing on risk transfer (Ahmed et al., 2017).

Another aspect of Islamic banking is equity participation (Mudaraba and Musharakah). They also forbid default credit swaps. It also regards profit sharing as an incomplete risk transfer since the banks theoretical bears the entire risk while investors only suffer time and effort wasted. If a borrower's projects go unsuccessful, he/she is not obligated to pay back the loan, but the bank bears the entire profit loss risk. However, retaining of returns varies with different Islamic banks. Not all Islamic banks operate in a pure non-profit model hence profit allocation between banks and an individual is dependent on the existing bank norms and the project's level of riskiness. This exposes them to direct risks, especially regarding investors rather than debt holders (Santosso et al., 2016). Based on the impending risks, Islamic banks seem to be super selective loan processing and strict in project monitoring.

Due to these divergent exercises by Islamic banks, their adequacy ratios are less leveraged and have small investment portfolios as well as fewer amounts held in the form of deposits. As such, its looks contrasting to associate Islamic banks with UK's financial development but then, their availability in the UK economy seems to imply that they have specific roles that they play either to positively or negatively affect the financial development statistics.

Research Aim

Since the 2007/2008 financial crisis in the UK, Islamic banking has been a great deal in the growth of Islamic banking in the UK. However, the existing literature only focuses on the level of growth of financial institutions, especially on how UK' banks integrate with other Islamic countries to finally strengthen the existing business relationship. However, no studies have focused on identifying the exact roles played by Islamic banks towards the UK's financial development. This study will aim at determining the roles played by Islamic banking in the UK's financial development discourse.

Research Objectives

1. To find out the roles played by Islamic banking on the UK's financial development discourse

2. To find out the implications of the rise in Islamic banking in the UK after the 2007/2008 economic crisis

3. To find out the relationship between Islamic banking and conventional banking in the UK

Research Significance

The UK economy has both Islamic and conventional banks. The existing literature stipulates the roles played by conventional banks towards UK's financial development, but little to no information exists that provides a precise cut-out on the roles played by Islamic banks in the UK's financial development constituents. Therefore, this study will address the existing literature gap by drawing both legal and general implications created by the Islamic banking environment in the UK.

Research Structure

The first chapter will address the background information that covers Islamic banking both in the UK and other Islamic countries. It will also explore the differences that exist between Islamic banking and conventional banking. Objectives will also be developed as well as the research aim and the significance of the research. Chapter two will go deep into literature in order to support the existence of a literature gap that ought to be fulfilled by this study. Chapter three will entails the research methodologies that will be implemented as the researcher searches for valid data as well as literature materials which will help in addressing the research objectives. Chapter four will display the findings based on what the researcher will find out, and chapter five will discuss the conclusions drawn from the research findings and how the objectives were achieved.

References

Ahmed, I., Akhtar, M., Ahmed, I., & Aziz, S. (2017). Practices of Islamic Banking in the Light of Islamic Ethics: A Critical Review. International Journal of Economics, Management and Accounting, 25(3), 465-490.

Alamgir, M. (2016). An analysis of Islamic banking activities in Bangladesh: Issues and challenges. Thoughts on Economics, 25(03), 29-58.

Mzee, M. M. (2016). The legislative challenges of Islamic banking in Tanzania. JL Pol'y & Globalization, 45, 131.

Santoso, T., Rum, I., & Patria, K. Z. (2016, October). Islamic and conventional banks stability: a comparative analysis. In International Conference, Integrated Microfinance Management for Sustainable Community Development (IMM 2016). Atlantis Press.

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