EXECUTIVE SUMMARY
This dissertation is for analyzing the Islamic banking affects on the UK financial crisis, and for checking if the country is operating with the Islamic banking operations then what will happen to the country financial crisis either this effects to the UK finance or it improves financial activities. Islamic banking shows that ethic and funding can be connected to supply the society. Islamic banking is a savings and financing perception which expands internationally. Now a day People are flattering more attentive of the Islamic banks. Islamic bank is fully different from conventional banking system in the majority of the characteristics. Islamic banking religious conviction is very important for operating financial operations. There are different connections to political associations and these political associations and different narrations have been predisposed the achievement of the Islamic banking structure in the different countries where the Islamic banking system maneuvers.
As an alternative of organism supported on enthusiasm Islamic banks are offering different categories of accounts and an assortment of financing alternatives but all with the Islamic law only. I was identified in this dissertation that there is a lack of interest for handling over the different funds flow to different banks and to different financial institutions that authorizes in various companies affianced in unprincipled socially unfavorable activities. Several organizations work to achieve international standardization and harmony to make banking activities more transparent and attractive. The accomplishment of coordination as well as performance of the banks is essential for the future of Islamic banking. The idea of Islamic banking contains much more than its prohibition of interest. For serving the society Islamic banking is following the ethical values and providing interest free banking for the people. When Islamic banking with its moral values first appeared first, it was pleasured as a utopian reverie by the financial surroundings in the world.
The approaches are changing progressively and in the last few years the importance neutral conventional banking has begun to difficulty the principles of an increasing number of people. Islamic banking is not very populated in western countries; the revival of Islamic economic system has now become a point central attention in Islamic world. The UK economic growth may affected by the Islamic banking principles. Islamic banking disallows interest on money but doesn’t prohibit all gains on capital. Islamic banking is based on risk sharing, owning and management of physical goods, participation in the process of trading, leasing and manufacture contracts using various Islamic approaches of finance. Islamic principles simply require that performance of capital should also be measured while gratifying the capital. The different structures of dealings acceptable by Islam is at the time the Holy Quran was exposed joint ventures supported on the distribution of risks, profits and requirements of services throughout trading both currency and recognition and leasing activities are operated through the Islamic banking operations. Islamic banking was based on different Islamic economic systems, and is not controlled to Muslims only.
The main intention of Islam restriction is wellbeing of the whole humankind. The depositors are embedded to be capital provider and profits of the Islamic banks are circulated at the judgment of the bank managements. But the Islamic banks follow the concept of Mudaraba (profit sharing) based on investors capitalist relationship. Islamic banks consider depositors as entrepreneur. The profits generated through this relationship are divided between the two parties as per agreed ratio. This dissertation is analyzing the effect of the Islamic banking on the UK financial crisis, through the analysis of Islamic banking by differentiating with conventional banking operations. This dissertation concentrates on the methods of the Islamic banking, different approaches of banking, risk associated with the Islamic banking approach, benefits of the proposed system. This dissertation analysis should identify the status of UK if they follow Islamic banking operations. Sharia banking is fast growing and main flow banks are preliminary to offer Islamic accounts. Its scheme of shared risks and profits could offer a representation for the financial services of the future extraordinary report.
No economy is protected to financial crises, no matter how much investors and leaders try to prove to themselves. There are two different aspects in sharia model like joint ownership and profit sharing, but Islamic financiers disagree stressing on these aspects. The main relationship between the bank and the customer is mainly based on distribution risk and sharing the different rewards from financing and investments. The continuation of interest free banking system in UK will remove many difficulties occurring financial operations. In Islamic banking system the depositors are well thought-out as the lenders of the bank, since a Muslim lender cannot accept any interest, he lends with no interest but with agreement that his capital will be returned full. Interest free banking is disturbed with different group of people. Shareholder provides the financing and then shares profits and absorbs loss. It is the accountability of the industrialist to present a good project proposal. This dissertation analyzes different areas for analyzing the financial crisis of UK if they follow Islamic financing activities.
INTRODUCTION
Now a day the most discussed issue is almost certainly economic crisis all over the world. There are so many issues happening in the world in the perspective of economical crises. Recently we get to hear about fall in shares, decrease in growth of company’s economy, cut downs in jobs, new company’s in administration; the overall world’s economy is distributed in a shell. UK is suffering in financial crises for quite some time now. Over the preceding two decades two most significant facts come into view if we are looking at inside the banking and finance industries. The main increasing complication of financial systems in the development and the globalization tendency has made the banking and financial environment and running through more than challenging. Banking industries are facing different types of risks from the market. Different types of risks included security of the system, deception, the extension of e-commerce, system failure risks, and many other considerable risks such as; the increasing use of outsourcing preparation, and new risk alleviation like credit derivatives and securitization. Islamic banking is financing and investment models which expand worldwide.
Now a day People are becoming more conscious of the Islamic banking and financial system. Islamic banking system is different from conventional banking system in various aspects of banking operations performing in various sectors. The main implementation of Islamic banking is prejudiced by the different connections to politics and histories in various countries where the system is operating. Islamic banks are based on Islamic law (Shariah), it follows Islamic rules and transactions. Sharia disallows the payment or acceptance of interest for the lending and accepting of money. The continuation of interest free banking system in UK will remove many difficulties occurring financial operations. There are two different aspects in sharia model like joint ownership and profit sharing, but Islamic financiers disagree stressing on these aspects. A number of techniques and innovative concepts are introduced in the early stages of Islamic banking operations like, bills of exchange, the forms of partnership (mufawada) such as limited partnership called mudaraba, and there are some earliest forms of capital called al-mal, and capital accumulation called namal-mal. Islamic banking has the same principle as a conventional banking excepting that it operates in accordance with the rules. There are of some common terms used in Islamic banking Ijarah (leasing), Mudharabah (profits haring), Wadiah (safekeeping), Murabahah (cost plus), musharakah (joint venture).
The fundamental principle of Islamic banking is the contribution of profit and loss and the prohibition. This dissertation is for analyzing the financial crisis of the UK Islamic banking effects on the UK financial crisis. The Islamic banking and the finance sector built on the information of Islamic economic thought. Islamic banking is providing interest free commercial banking. Islamic banks face number of challenges, like issues related to macro operation of Islamic banking system. Valuations of bank assets, credit creation and monitory policy, financial stability, ownership of banks, and issues related to micro operations like increased cost of information, control over cost of funds, mark-up financing, utilization of interest rate for fixing profit margin, and financial social concerns.
This dissertation mainly focuses on the effects of the Islamic banking operations on the UK financial crisis. Islamic banking is an instrument for the enlargement of an Islamic economic order. The present financial crisis has two main effects in the UK. First the banks have less willing to lend money, driving up the price of borrowing. The main purpose of this dissertation is to present financial structure for Islamic financial crisis for UK market. This dissertation is to identify various aspects of the Islamic banking with respect to the conventional banking approach. This dissertation is for analysing different crisis in the UK financial aspects and different approaches of the financial crisis.
Lending and investigating are treated differently; in the Islamic banking loans are interest free based but carry a service charge. This dissertation is based on extensive literature review and a personal interview with a professional with in an Islamic bank in London. Islamic bank is different from conventional banking in more aspects. As an alternative to support on interest for investments and for loans Islamic banks offer different kinds of accounts and a variety of financing and banking alternatives all conforming to the Islamic law. To work according to Sharia is basic for the banks and their different actions those are humiliated by an unexpected Religious Supervisory Board. The functioning of the Islamic banking system varies to various extents between Islamic countries. Several organizations work to accomplish international consistency and agreement to make the banking performance more clear as crystal and attractive.
The accomplishment of harmonisation as well as the performance of the banks is essential for the expectations of Islamic banking. The present financial crisis has had two main effects in UK. Primarily, the banking systems have turned into less willing to lend money, motivating up the price of scrounging. Secondly some of the financial institutions have been confounded most importantly for the private finance initiative industries. Islamic banking system wallops steadiness among flexibility and supervision. The advertisers of Islamic banking system experienced that credit could not take place in the financial Islamic communications, because this system operates based on joint venture between the client and the banks. There is social obligation surrounded by the Islamic banking.
AIMS & OBJECTIVES:
The main aim of this research is for analysing the financial crisis of UK, if they are following Islamic banking operations, this includes the following operations.
GOALS RELATED TO MACRO OPERATIONS OF ISLAMIC BANKING IN UK:
HANDLING CREDIT CARD FORMATION AND MONITORY POLICY:
The universal responsiveness is most of the traditional procedural implementation of the central bank are superfluous under Islamic banking system. These implementations include minimum cash store requirements, liquidity requirements and general credit maximums on different lending actions of the Islamic banking system. Monitory policies under Islamic banking system are distributing as a somewhat cheering role to money. Equating goals of monitory policy in Islamic banking to those of the free marketplace economies would not be fair since there is an important difference in importance of two systems to economic principles and socio-economic impartiality. Monitory policy under Islamic banking allocates a somewhat inactive role to money. There is a returning importance in Islamic banking literature on 100 percent preserve requirements. This authorizes the central bank a direct control of bank a straight control of money stock. One solution for these uncertainties is nationalization of commercial banks, which has already occurred in UK banking system.
MANAGEMENT OF FINANCIAL STRENGTH OF THE BANKING SYSTEM:
In the nonexistence of deposited insurance the benefit of each depositor depends on the achievement of these depositors. It is supposed that the depositors in Islamic banks, due to dread of capital or profit losses in the event of having no insurance experience, would not stay behind with the Islamic banks. The benefit of each depositor depends on the different actions of other depositors in the banking system. The specification of deposit insurance has concentrated on the problem of financial frights. Lack of insurance coverage is to be considered as a problem for Islamic banking system. It is acknowledged that the depositors in Islamic banking system, due to apprehension of capital and profit sufferers in the event of having no insurance reporting. It does not require the precondition of deposit insurance.
FINDING THE OWNERSHIP OF THE BANKS:
The ownership apprehension of Islamic banks relates mainly to the distributional force on the society. Particularly, credit formation power of commercial banks with limited preserve ratios has been the point of intentional. Generally the most Commercial banking systems in UK are indispensable to maintain limited treasury. On the other hand all commercial banking systems in UK are state owned.
EVALUATION OF CAPITAL MARKETPLACE AND FINANCIAL INSTRUMENTS:
Islamic banks functioning under conventional banking framework in UK lacks capital market and instruments for venture. Availability of Islamic capital market and instruments help enlargement of these banks. Enlargement of Islamic capital market and financial instruments also helps generating the environment for management financing.
LEGAL PROTECTION:
The conventional Islamic banking function has need of legal protection. A systematic evaluation of all applicable regulations having a posture on banking businesses is needed for this issues. Laws are relating to the companies, investment and legal actions need to be appraised and reformulated to suit the prerequisite of the well-organized functioning of Islamic banks. It is not satisfactory that company law maintains to talk about different kinds of bonds and different types of interests while ignoring contribution activities and earnings.
ISSUES RELATING TO MICRO OPERATION OF ISLAMIC BANKING SYSTEM IN UK:
MONITORING INCREASED COST OF INFORMATION:
The monitoring price as well as the cost of lettering and implementing contracts would be higher in the interest based conventional banking systems. This is with musharaka, the bank investments, and the working capital of a business pleasing a position in the economy. In financing a administration company is produced which floats a flexible protection. The bank may fully investment a project within the scope of its agreement. With musharaka, the bank finances, and the working capital of a business endeavor taking equity position in the economy. The advanced cost of information could be main delay in the effective accomplishment of the PLS system.
CONTROL OVER COSTS OF FUNDS:
Islamic bank is interest-based free bank and its profit subject to the cost of funds as it is in a agreement to know in progress. The depositors are paid a sector of the bank’s proceeds the volume of which is really indecisive. As Islamic bank is operating with provides interest free based approach it is differentiated from the conventional banking approaches as conventional banking environment provides interest and it exploits profit subject to the cost of funds as it is in a situation to know in advance. Ideally Islamic banking provides to calculate their rate of return on PLS deposits once in a while. The usual practice is that the deposits are biased to replicate differences in their development. In spite of that individual banks are permissible to slightly deviate from the anticipated rate of return.
MARKUP FINANCING IN THE BANKING ENVIRONMENT:
Eventual main objective of Islamic banking system speculation oriented long term sponsorship. There is extensive concern that little dissimilarity can be originated between mark up, knowledgeable by Islamic banking systems and conventional banking systems. Mark up was observed by the banks as a contrivance to give a hand the transition to Islamic banking system without disconcerting the system. Because the final goal and most important is Islamic banking is investment oriented long term economics, the transition from mark up to evenhandedness investment would also demand a greater increase between different types of rates of lot of returns to the banks and to their different depositors.
The authentic substitution of different types of interests mainly in the Islamic financial system is the appearance of profit or loss sharing along with qardal hasanah, while the other techniques like Murabahah, ijara wa iqtina, and bai-muajal, ijara, cannot be of corresponding to some different implications in achieving Islamic socio economic objectives of the system. The characteristic that makes the interest based system inequitable is that the contributor of capital finances is assured a fixed return while all the menace is natural by the user of these capital resources. Equality demands that the source of capital finances should share the risk with the capitalists if they wish to produce profit.
CONCENTRATING ON DISPROPORTIONATE RESORT TO THE MURABAHAH MODE:
Islamic banks influence murabahah transaction in two stages. The frequent analysis against Islamic banks, which is applicable in many counts, is that it takes source to disproportionate use of Murabahah mode in financing. Yet it is not a contravention of Shari’ah as long as the murabahah agreement is accurate from Shari’ah view point and is free from intentional fraud.
The opposition is from two groups of people, the first group believes Murabahah to be the same as prearranged rate of return. But this is not right; the Murabahah is dissimilar from interest based approach. The client has a right to change his brain and the bank runs the possibility of losing the money it has endowed in this particular transaction.
USE OF INTEREST RATE FOR FIXING THE PROFIT MARGIN IN MURABAHAH SALES:
Still Islamic banks have to avoid more than the established interest rate or utilizing the clients through clerical methods as engaged by some banks. It is also assessed that Islamic banks operate interest rate as a standard for setting up the profit margin in the Mudarabah sales. To be reasonable there is no recognized method of avoiding the suspected link up as long as Islamic banks coexist with conventional banks.
FINANCING SOCIAL CONCERNS:
The Islamic banking operations are typically instigate to be paying concentration in enlarging credit services to embedded commercial organizations which often obtain credit facilities from both conventional banking system and Islamic banking system without authentic promise or an effort to free them from the proscribed way of finance. Islamic banks are indicted of following the identical path of line as follow by the conventional banking system as regarding to the social financial characteristics. These banking systems are frequently derive to be paying attention in enlarging credit conveniences to well established profitable organizations which frequently get embrace of credit services to well establishment commercial organizations which often obtain credit facilities from both conservative approaches and Islamic banks devoid of real undertakings or endeavor to free them from the disqualified possessions of finance.
DETECTION OF POSITIVE RESPONSES:
It is recognized information that the fashionable state is always in have need of funds and possessions put into operation of useful projects, Islamic bank not succeed to suitable high profit from high-return projects since the holders of these projects have a preference of borrowing from conservative banks where the cost of scrounging revolves out to be subordinate. That means, only the schemes with charges of return equivalent to or below the marketplace rate of interest are missing with the Islamic banks. Islamic banks are not accomplished to authorize on the ventures having rates of return below the presented rate of interest thereby precautionary their capability to operate investment opportunity to the level of their conventional accompaniment. This expresses to preventing the application of profit loss sharing forms such as Mudaraba and Musharaka. Islamic banking systems at more conditions, exchange over to other advances of financing such as Murabahah is useful for lending money.
FAILURE OF ISLAMIC BANKS TO ESTABLISH COOPERATION AMONG THEMSELVES:
Islamic banks are responsible for their necessities of progressiveness to one another, a state of relationships to get in the way the accomplishment of mutual collaboration surrounded by them. In spite of good objectives, Islamic banks are answerable for their lack of non-judgmental attitude to one another. This is in spite of the determined accomplishments of the Islamic Development Bank to transport them nearer to one another and merge their stands.
RESEARCH QUESTIONS
In analyzing the effect of Islamic banking on UK financial crisis, there may arise various questions to understand the Islamic banking approaches and as well as the UK financial crisis. Before observing UK financial crisis, if they follows Islamic banking there should be a need to understand what is Islamic banking?, how they reflecting on financial crisis?, major modes of Islamic banking and finance?, can Islamic banking play any role in economic development of UK?, and what is the Islamic bank global scenario? These research questions should be evaluated for understanding proposed system effectively.
RESEARCH QUESTION ONE: WHAT IS ISLAMIC BANKING?
Islamic banking cam be defined as a banking in system by means of the attitude and evaluation system of Islam and governs, in accumulation to the conventional good authority and risk management regulations, by the ethics put down by Islamic Shariah. Islamic banking provides interest free banking operations for loans as well as for investments, but charges only some service charge. Interest free banking is a constricted conception indicating a number of banking mechanisms or procedures, which keep away from interest. Islamic banking is the most universally is expected not only to avoid interest based dealings prohibited in the Islamic Shariah system but also for avoiding unprincipled practices and contribute uncompromisingly in achieving the targets and different objectives of an Islamic economy.
RESEARCH QUESTION TWO: HOW ISLAMIC BANKING REFLECTS ON FINANCIAL CRISIS?
Islamic banking eliminates interest but it does not proscribe all gains on capital. It is only the raise programmed or obligatory in excess of the principal of a loan that is prohibited. Islamic ethics simply require that presentation of capital should also be measured while rewarding the capital. The prevention of a risk free return and authorization of trading, as preserve in the Verse 2:274 of the Holy Quran, creates the financial actions in an Islamic system real asset-backed with ability to foundation value addition. Generally Islamic banking systems are based on possibility sharing, personalizing and management of various substantial possessions, contribution in the process of operating different operations, agreement and production dealings using a variety of Islamic banking modes of finance. Islamic banking system compact with different asset supervision for the purpose of income development. The Islamic banking systems will have to carefully handle the inimitable risks concerned in management of various assets by attachment to best presentation of commercial governance. The different forms of businesses permissible by Islam was open to the elements integrated joint ventures sustained on distribution of risks & profits and requirement of services through trade, both currency and recognition, and the most leasing behaviors. Along with the opportunity of profit, the legal accountability of risk of loss on capital breaks up with the capital itself; no other concerns can be made to accept the weight of the risk of loss. Financial communications, in order to be satisfactory should be interrelated with different goods and services or benefits. At macro level this characteristic of Islamic banking and finance system can be accepting in creating better guideline in conduct of financial and economic policies. In addition to trading, Islam banking system permits leasing of assets and getting rentals adjacent to the assets taken by the resident.
RESEARCH QUESTION THREE: WHAT ARE MAJOR MODES OF ISLAMIC BANKING AND FINANCE IN UK?
Following are the main modes of Islamic banking and finance:
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- MURABAHAH
Exactly it means a sale on mutually decided profit. Precisely, it is an agreement of sale in which the seller announces his cost and profit. Islamic banks have implemented this as a mode of financing.
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- IJARAH
Ijarah is an agreement of a recognized and projected one against a specific and lawful return or deliberation for the service or return for the benefit planned to be taken, or for the endeavor or work proposed to be finished.
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- IJARAH-WAL-IQTINA
An agreement under which an Islamic bank supplies equipment, building or other assets to the client adjacent to an agreed rental together with a independent responsibility by the banking system or the client that at the end of lease period, the ownership in the advantage would be transported to the leaseholder.
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- MUSAWAMAH
Musawamah is a widespread and customary category of sale in which price of the product to be traded is disquisitions between merchant and the buyer without any orientation to the price paid or cost incurred by the former.
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- ISTISNA
It is a contractual conformity for industrialized goods and merchandise, for allowing cash imbursement in advance and for future delivery, future payment and future delivery.
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- BAI MUAJJAL
Accurately it means a recognition transaction. Strictly, it is a financing technique for approving by Islamic banking system that acquires the different forms of Murabaha and Muajjal.
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- MUDARABAH
This is also one form of joint venture where only one party provides the funds for operating business operations while the another party presents expertise and management. Then the concluding is referred to as the Mudaraba.
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- MUSHARAKAH
Musharakah means a connection documented under an agreement by the mutual authorization of the parties for sharing of profits and losses in the joint dealings in operating their business operations.
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- BAI SALAM
Salam means an conformity in which advance compensation is made for goods to be delivered afterwards. The retailers take for granted to supply some particular goods to the buyer at a prospect date in replacement of an advance price fully remunerated at the time of agreement.
RESEARCH QUESTION FOUR: CAN ISLAMIC BANKING PLAY ANY ROLE IN ECONOMIC DEVELOPMENT OF UK?
Islamic banking system while running within the scaffold of Shariah and can carry out a fundamental task of resource draft, the Islamic banking system is populated through Interest free approach and their efficient allocation their resources on the basis of both PLS like, Musharaka and Mudaraba and non-PLS like, trading and leasing based classes of different modes and strengthening the payment systems for making a payment considerably to economic growth and development of an organization. There are different sharing modes those can be useful for short term, medium term and long-term business enterprise financing, introduction financing, pre shipment send overseas financing, operational capital financing and financing of all single transactions. In order to guarantee maximum responsibility of Islamic finance in enlargement of the financial system it would be indispensable to create an atmosphere that could encourage financiers to allocate more resources for Musharakah or Mudarabah based financing of industrious units, particularly for small enterprises.
The non-PLS techniques, as satisfactory in the Islamic Shariah, not only accompaniment the PLS modes, but also make available the flexibility of preference to get together the needs of dissimilar subdivisions and economic agents in the society. Trade based performances like Murabaha with less significant risk and enhanced liquidity options have numerous advantages. Different procedures may not be as industrious in sinking income differences and manufacture of investment merchandise as different participatory methods. Ijarah interconnected financing that would require Islamic banking systems to obtain and continue the possessions and afterwards organize them according to Shariah regulations, require the banks to connect in performance beyond financial intermediation and can be very much causal to the arrangement of fixed assets, medium term and long-term savings. On the foundation of the above discussion it can be said that make available and command of capital would persevere in an interest free conditions with supplementary compensation of greater supply of possibility based capital along with more knowledgeable allocation of resources and self-motivated role of banks and financial institutions as obligatory in asset based Islamic presumption of finance.
Islamic banking system can not only transmit on without interest but also could be supportive in accomplishing the intention of development with distributive evenhandedness by increasing the supply of risk capital in the economy, make probable capital configuration and improvement of fixed assets and real sector company behaviors. It is also make available inspiration to improve development as the seller would spare no enterprise in producing, at least the magnitude needed for declaration of the loan taken by him as advance price of the merchandise. It would smooth the progress of savers to communicate their savings to speculation openings without waiting, for occurrence, until the manufacturing time of agricultural products or the time when they essentially require business goods and without being obligatory to waste their savings on disbursement.
Islamic banking system might assign in fund management and collection management through a number of advantage organization and leasing, trading companionship. Such company’s entities can carry on in the financial system on their own or can be an indispensable part of some big conglomerate or subsidiaries, as in the case of Universal Banking in Europe. Different banking systems would manage Investors techniques to congregate collectively possessions on Mudarabah establishment and to some amount on organization basis, and use
