A Review of the Determinants of Demand for Islamic Retail Banking in Ireland

Tables Contents

Acknowledgement

Abstract

List of Figures

List of Tables

Chapter One
1.Introduction
1.1 Background
1.2 The Research Question
1.3 Research Objectives
1.4 Research Methodology
1.5 Chapter Structure

Chapter Two
2 Literature Review
2.1 Introduction
2.2 The Foundations of Islamic Banking
2.3 Features of Islamic finance
2.4 Islamic retail banking Vs Conventional retail banking
2.5 Islamic Retail Banking Products
2.5.1 Funding Operations: -
2.5.2 Islamic Modes of Finance
2.6 Islamic Retail Banking, Different Territories
2.6.1 Muslims in Ireland
2.6.2 Demand for Shariah Compliant Products
2.6.3 Concerns for the industry
2.7 Standards and Reporting of Shariah Products
2.8 Summary

Chapter Three
3. Study Design and Methodology
3.1 Introduction: -
3.2 Rational of Method: -
4 | P a g e
3.3 Sampling Framework: -
3.4 Data Collection Tools: -
3.4.1 Questionnaire
3.5 Research Structure
3.6 Ethics and Research
3.6 Research Reliability
3.7 Research Validity
3.8 Research limitations
3.9 Summary

Chapter four
4. Findings and Discussions
4.1 Introduction
4.2 Findings
4.3 Personal Characteristics - Muslim Sample
4.3.1 Gender
4.3.2 Age
4.3.3 Marital Status
4.3.4 Nationality
4.3.5 Education
4.3.6 Occupation
4.3.7 Annual Income
4.4 Specific Questions - Muslim Sample
4.4.1 Banking Choices
4.4.2 Reasons to Bank Conventionally
4.4.3 Awareness about Islamic Banking
4.4.4 Switching to Islamic banking
4.4.5 Attractions to Islamic finance
4.4.6 Financial Needs
4.4.7 Concerns about Islamic finance
4.4.8 Switching Costs
4.4.9 Statements of Agreeing/Disagreeing
4.5 Personal Characteristics Non-Muslim Sample
4.5.1 Gender
4.5.2 Age
4.5.3 Marital Status
4.5.4 Nationality
4.5.5 Education
4.5.6 Annual Income
4.6 Specific Questions Non-Muslim
4.6.1 Banking Needs
4.6.2 Banking Issues
4.6.3 Types of Issues
4.6.5 Switching to Islamic banks
4.6.6 Statement of Agreeing/Disagreeing
4.3 Discussions
4.3.1 Introduction
4.3.2 Individual Characteristics
4.3.2.1 Gender
4.3.2.2 Age/ Marital Status
4.3.2.3 Education/ Annual Income
4.3.3 Financial and banking Needs
4.3.3.1 Demand for Islamic Banking
4.3.3.2 Conventional Vs Islamic
4.3.4 Issues and Concerns about Islamic banking
4.3.5 Non-Muslim Sample
4.3.6 Conclusion

Chapter Five
5. Conclusions and Recommendations
5.1 Introduction
5.2 Conclusions
5.2.1 Study Conclusions
5.3 Recommendations
5.3.1 Recommendations for the Muslims community
5.3.2 Recommendations for the local authorities
5.4 Limitations and Further Study Recommendations

List of Figures

1. Chart 4.1 Respondents’ Gender

2. Chart 4.2 Respondents’ Age

3. Chart 4.3 Respondents’ Marital Status

4. Chart 4.4 Respondents’ Nationalities

5. Chart 4.5 Respondents’ Education Levels

6. Chart 4.6 Respondents’ Occupations

7. Chart 4.7 Respondents’ Incomes

8. Chart 4.8 Banks choices

9. Chart 4.9 Reasons to bank with Traditional banks

10. Chart 4.10 Awareness about Islamic Banking

11. Chart 4.11 Switching to Islamic banks

12. Chart 4.12 Attraction to Islamic banks

13. Chart 4.13 Financial Needs

14. Chart 4.14 Concerns about Islamic banks

15. Chart 4.15 Costs

16. Chart 4.16 Gender-Non Muslim

17. Chart 4.17 Age-Non Muslim

18. Chart 4.18 Marital Status-Non Muslim

19. Chart 4.19 Nationality-Non Muslim

20. Chart 4.20 Education-Non Muslim

21. Chart 4.21 Annual Income-Non Muslim

22. Chart 4.22 Banking Needs

23. Chart 4.23 Banking Issues

24. Chart 4.24 Types of Issues with Banks

25. Chart 4.25 Switching to Islamic Banks

List of Tables

1. Table 2.1 the phases of development of Islamic finance and banking

2. Table 2.2 Breakdown of Islamic Financial Assets

3. Table 4.1 Total of handed out Surveys

4. Table 4.2 Statement of Issues regarding Islamic retail banking (Islamic Background)

5. Table 4.3 Statement of Issues regarding Islamic retail banking (Non-Muslims)

6. Table 4.4 Ages and Marital Status

7. Table 4.5 Educational levels and Annual Income

8. Table 4.6 Occupations vs. Annual Income

9. Table 4.7 demand for Islamic banking

10. Table 4.8 Attractions to Islamic Banking

11. Table 4.9 Awareness and Switching to Islamic banks

12. Table 4.10 Conventional Vs Islamic

13. Table 4.11 Financial Needs Vs Marital Status

Acknowledgement

As we move our steps in the academic life, we must stop and have a look back to the time we spent at the IPA with our lecturers who have given us so much knowledge that helped in our progress.

So before we move on we must offer our deepest gratitude and appreciations to all the teaching and Administration staff at IPA.

I would like to thanks my supervisor Anne O ’ Callaghan for her support, guidance and encouragement which has made this research possible

To Amnaa, Liela and Lojain my little family for their continuous patience and support

To My late father for everything, my Mother, brothers and sisters Many thanks to all

Abstract

Despite the financial downturn, Islamic banks are in rapid growth with about 250 institutions (commercial banks and investment firms and insurance) spread in about 75 countries and hold a capital of at least 200 billion U.S. dollars with an average growth estimated around15% to 20% annually.

The financial authorities in Ireland have started to consider this raising industry and as starting point, wholesales products were introduced in Ireland with amendments in acts and regulations to cater for such introduction.

The Muslim community in Ireland has reached a record number of people living and working in Ireland, and this trends comes with some demand for Islamic retail banking and/or windows within traditional banks.

This study using the qualitative method researched the determinants of demand for Islamic retail banking in Ireland among the Muslim community as well as other people who are interested in ethical and green banking.

Chapter One

1. Introduction

1.1 Background

Islamic finance and banking systems have become an essential part of the international financial system. However, Islamic finance remains small compared to the international financial system. Although it is in early stages, Islamic finance and banking has grown very rapidly in the past decades, growing and expanding at 15-20% annually that is more than double as compared to the growth rate of conventional banks. As well as making Islamic banks move from being a local phenomenon to become a global industry spreading not only in Muslim countries but also worldwide. Established conventional banks like Citibank, HSBC, Barclays. started to provide Shariah compliant products through specialised branches i.e. windows within the current bank’s structures.

Although Islamic finance is growing and expanding rapidly, the fact remains that ‘The provision and use of financial services and products that conform to Islamic religious principles pose unique challenges for the identification, measurement, monitoring, and control of underlying risks. Effective and efficient risk management in Islamic financial institutions has assumed particular importance as they endeavour to cope with the challenges of globalisation. That requires the development of not only more suitable regulatory framework, but also new-financial instruments and institutional arrangements to provide an enabling operational environment for Islamic finance’ (Sundararajan & Errico, 2002).

The essence of Islamic finance is that all the underline financial transactions should be in accordance to and in compliance with the beliefs of Islam. The term Shariah compliant is often used by researchers to describe the products provided by Islamic Banks. Shariah is an Arabic word means what God prescribed to his servants in regards to everything surrounding their lives and the daily activities, ranging from worshiping to conduct commercial activities. The Middle East was the birthplace for Islamic finance and banking system and then the practice gained worldwide spread to South East Asia and North Africa. That expansion has followed with western countries adapting the idea of Shariah compliant system.

In Ireland according to census 2011, (www.cso.ie) there are 48,130 Muslim living and working in Ireland. That number compiles about 1.06% of the whole population. 18,223 or 37.9% are Irish national which is another indication that the Muslim community is established well into the community at large. The 2011 census proved that the number of Muslims living in Ireland represents a 51% increase over the figures from 2006 census that showed there were around 32,500 Muslims living in Ireland, (www.cso.ie).

1.2 The Research Question

The paper’s aim was to analyse the market demand for Islamic retail banking products and is there any scope for some elements of banking products? Additionally, what are the financial implications of lacking Islamic banks on the Muslim community?

In an attempt to cover these issues and to arrive at possible answers, the following questions will be addressed

What is Islamic finance in general?

What are the components of Islamic retail banking?

What are the financial needs of the Muslim community?

To what extent there is a demand for Islamic retail banking products in Ireland?

What are the Shariah complaint products that are under demand by the Muslim community?

What are the social and economic impacts of these banking products on the community?

In contrast, Islamic financial system in not free of problems relating to its credibility, regulatory, enforceability and being fundamentally out sync with its spiritual and ethical mandate, (O.Agha 2012). One could argue that, even-though Islamic finance is advertised as being ethical and green, there are still some issue surrounding this raising industry. In this regards, questions like the following would need answers: -

What are the issues in regards to regulations and supervision of Islamic finance?

Does the Muslim community have any doubts about the practicality of Islamic banks? Is it just a change of names?

1.3 Research Objectives

This research has few general and specific aims and objectives. The following points include these objectives

Examining the financial and economic issues of the Muslim community in Ireland regarding their day to day banking activities i.e. current and saving accounts, as well as homes and cars plans.

To find out about the demand for such services and what are the types of Islamic banking products that are in demand?

To establish a sense of the community’s understandings of the phenomenon and how it differs from traditional banking and what makes it a priority.

1.4 Research Methodology

The paper approached the study using the descriptive method of analysis by carrying out secondary data collection form available resources through desk research. For primary data collection, two questionnaires were designed and distributed to the sample in question. The first survey was given to people with an Islamic background, and the second one was to sense the demand among people from other religious backgrounds.

1.5 Chapter Structure

The research will consist of five chapters as follow: -

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Chapter 1 Introduction; the introduction chapter contains descriptions of the objectives of the research and the questions, rationale of carrying out the study, the methods used to gather the research information.

Chapter 2 Literature Review; this section contains the literature review which is an evaluation on the literature available together with the research objectives based on the literature.

Chapter 3 Methodology; this chapter includes the research method used in preference to other methods and the reasoning behinds such selection. As well as an explanation about the designing of questionnaires as a research instrument.

Chapter 4 Finding and Discussions; This chapter will contain the results of the questionnaires, as well as detailed finding and conclusion.

Chapter 5 Conclusions; in this final chapter a conclusion based on the research questions and the discussion chapter as well as any possible suggestions for further research.

Chapter Two

2 Literature Review

2.1 Introduction

This chapter of literature reviews explains the rules and practices of Islamic retail banking. with detailed approaches to various types and theoretical issues in regard to Islamic retail banking, the readers would have a basic understanding of the Ideas behind the industry.

Islamic banking has become in recent years a modern industry that attracted the attention of many international banks and financial institutions in the global financial system due to its tremendous growth. This growing phenomenon being witnessed by the impact of the oil boom that has swept the region, especially the Gulf area.

2.2 The Foundations of Islamic Banking

According to M. Elgamal (2006) “the expression Islamic finance suggests two competing forces at work. The noun “finance” suggests that Islamic financial markets and institutions deal with the allocation of financial credit and risk. Thus, Islamic finance must be similar to other forms of finance. Whereas, the adjective “Islamic” suggests some fundamental differences between Islamic finance and its counterpart conventional finance." The organisation of Islamic Conference’s definitions of Islamic banking stands as follow “an economic body whose statutes, rules and procedures expressly state its commitment to the principles of Shariah and to the banning of the receipt and payment of interest on any of its operations,"(Hassan, 1999). Islamic finance as defined ranges from the very narrow interest free banking to the very broad financial operation conducted by a vast number of Muslims, (I. Warde 2000). “Unhealthy human instincts are exploited to make money through immoral and injurious products. This attitude has allowed a number of practices that cause imbalances in the society. Interest, gambling, speculative transactions tend to concentrate wealth in the hands of the few” M. Usamni (1998). It is clear from the above statements that the Islamic financial system and retail banking is not only Islamic or a distinct banking toward particular groups, but it is a system that provides more ethical and moral concepts of financial and funding issues.

The starting time of the Islamic banks and their current forms originated in the sixties that saw the birth of the first savings bank in Mitt Gamar in Egypt. On a Later stage, the Organization of Islamic Conference, OIC, established the Islamic Development Bank in 1975 as a bank to contribute to the growth of Islamic states. In the mid-seventies began the movement of forming private Islamic banks in United Arab Emirates and Saudi Arabia, and then spread to include Sudan, Qatar, Bahrain, Kuwait and others. According to the latest statistics, two-thirds of Islamic banks located in the Middle East and the rest in Asia and North Africa, (M.D.Bakar et al. 2011).

The indication is that; Islamic finance was a region based. In other words, it was first designed to cater for the population living around the Middle East and South East Asia. However, with new trends of globalization and peoples' movement, it has become a worldwide phenomenon. Table

2.1 below indicates that since the 1990s, western banks have entered the area of Islamic finance.

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Table 2.1 Shows the phases of development of Islamic finance and banking, (M.D.Bakar et al., 2011)

Since the 90’s to the present day Islamic banks have become more sophisticated in their operations and mechanisms to meet the growing demand for Islamic banking products and meet the great competition with conventional banks. Islamic banks are still in a rapid growth with about 250 institutions (commercial banks, investment and insurance firms) spread in about 75 countries and hold capital of at least 200 billion U.S. dollars with an average growth estimated at 15% annually, (Islamic financial services board IFSB 2013).

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Table 2.2 Breakdown of Islamic Financial Assets ($ Billion 2012), Source: - (Islamic financial services board IFSB 2013)

The table shows that around $59.8 billion or 4.7% of Islamic banking assets based outside the Middle East and South East Asia where most Muslims live. An indication that the Islamic banking industry is picking up and gaining some market shares outside its traditional markets.

2.3 Features of Islamic finance

Islamic finance in its simplest meaning means that all financial transactions must comply with Shariah principles and rules that derived from the Quran and the teachings of Prophet Mohammed.

There are some features of Islamic finance that include: - (M.D.Bakar et al., 2011).

Interest or usury is prohibited (Riba): - this one essential feature that makes Islamic finance differs from conventional. The prohibition of interest is evidence in the holy book of Quran. “The interest that you give in order to increase the wealth of the people does not increase in the sight of Allah, and the Zakat (due charity) that you pay in order to win Allah’s approval, its payers do indeed increase their wealth” (Surah Al-Rome 39). The justifications among scholars about interest prohibition is that, money is a medium of exchange rather than a commodity for exchange and that money itself is considered to have no intrinsic value, (S Jaffer 2005). So for Islamic finance to avoid this, different ways were introduced to meet the financial needs of society, i.e. profit and risk sharing, in which earned profits must be from real economic activities.

Avoidance of uncertainty (Gharar): - Islam forbids risk exaggeration to gain more benefits in a quick and easy way. However, taking risks in real investment activities and financing real trading activities, is always approved by Islam long as the parties involved will take a considerable research into the matter and the risk surrounding it and then the ability to get expected returns. Islamic financing of consumer goods must be under consideration for avoiding uncertainty and to make sure that the borrower can return the money to the lender under agreed conditions, i.e. timeline, S. S. Ali et al. (2007). Trading in unethical businesses: - Manufacturing alcohol, Pork products and pornography prohibited activities, as well as profit earned, is deemed unlawful and unethical.

The Islamic financial industry is constituted by Shariah principles that must adhere to. The prohibition of Interest, uncertainty and unethical trading requires investors to not only consider maximising their wealth, but must adhere to Shariah rules.

2.4 Islamic retail banking Vs Conventional retail banking

The western philosophy (capitalism) in regards to politics and economics matters is always to separate religions from such activities. Edana R (2011) argued that “for some commentators, the unique calibration of Islamic finance, which attempt to fulfil religious precepts and to uphold the ethical principles of Islamic law, stands in contrast to the basic philosophy of non-Islamic economies." Although the Islamic system of financing is distinct from the conventional in many respects, in that it must adhere to Islamic teaching, rules and principles. Both Islamic and conventional financial systems share a common ground in achieving the same economic benefit to the society, providing the same products such as current accounts, deposit accounts, house financing. However, some fundamental differences exist in terms of objectives and practices, (M. D. Bakar et al., 2011). This uniqueness gives Islamic banks advantages over its conventional counterparts by giving back some ownership rights to its customers. The basic idea of Islamic banking is to create an economic system that not only directed to make profits, but also caters for the person's welfare by equally distribute wealth among its communities to eliminate poverty and increases investment opportunities and socioeconomic justice.

Another important characteristic of Islamic banking system is that it is based on asset-backed financing, which means that, profit is only made when selling something with value. In conventional systems, banks deal with monetary papers only. The depositors and investors get interest on their investments and saving, while the capital seekers like borrowers pays interest charges for the loans advanced to them. The difference between the charged and paid interest is the bank’s profit.

As of today, there are a large number of financial institutions that dealing with the principles of Shariah law that’s include Banks, branches, banking windows, Islamic funding organisations, investment firms and insurance companies. Several big European banks like, BNP, Deutsche bank, Credit Suisse, Lioyds TSB, HSBC, etc. occupy the forefront of the list of banks that involved in Islamic finance. The services of these leading EU banks are geared to attract funds from the Middle East and Asian countries, but up to now failed to cater mainly for Muslim living in the EU, compared to the number of Muslims who are in Europe.

2.5 Islamic Retail Banking Products

Retail banking products for Islamic banks are typically offered, in the same way, as conventional banks according to Natalie S (2009), there are ATMs, credit cards, debit cards, chequebook, etc.

2.5.1 Funding Operations: -

Most banking systems, conventional, Islamic, retail or corporate systems have to adapt some funding operations. Islamic banks have four types of accounts: -

1. Current Accounts: - Current accounts allow the clients to receive and pay funds, and it is a basic banking requirement for retail and corporate clients alike. Also know as a demand deposit account, it fulfils the transactions motives of depositors. Qard Alhassan is interest-free loans that were used to be given to people for charitable purposes such as wedding preparations and building homes.

2. Saving Accounts: - are offered to customers wishing to have safe custody of their funds, to save money and to earn some returns from their saving. Usually, customers who avail of this service have two reasons; firstly, they seek precaution and secondly looking to earn some returns. Wadiah Saving Accounts are safe-custody contract that implies a depositor-custodian relationship. Simply, it is a contract of putting a fund or asset under the safe custody of another party. Mudarabah Savings Accounts: in these types the depositor referred to as a capital provider and the bank as the entrepreneur. Then, according to profit sharing ratio (PSR), the profit obtained from the investment activities will be shared between the two parties. The Mudarabah savings account has two forms: - Mudarabah Mutlagah without conditions and restriction Mudarabah Muqayyadah with condition and restriction Conditions and restrictions are pre-agreed by both parties to limit some aspects such as the types of businesses to invest the fund in and the terms and ratios of profit and loss sharing.

3. Investment Accounts: - Investment accounts are innovative products that change the relationship between the customer and the bank from lender-borrower into partnership banking where the customer plays an investor role. The aim of this transformation was to change the way profits paid to customers. Instead of paying interest as in conventional banks, a dividend will be paid to customers on the profit sharing basis. This approach forces the bank to share the profits earned from investing customers’ funds. There are two types of investment accounts that an Islamic bank can provide to its customers: - Restricted investment: - it is also called Mudarabah Muqayyadah. Under this approach, the customer restricts the types of businesses the bank can invest their funds in. The restrictions must agree in advance of investing the customer's fund. The restriction could be in terms of how, where and for what purpose funds are to be invested. Unrestricted investment: - also called Mudarabah Mutlagah. Here the fund holders will authorise the bank to invest their money in any business venture without any restrictions. The funds are pooled with shareholder’s funds and any deposits used by the bank.

4. Special investment accounts: These accounts operate under the principle of Mudharaba, and these are directed to larger investors and institutions. The significant difference between investment and special investment accounts is that the former is used in any investment venture, and the latter will be used in a specified huge project or investment venture carried out by the bank. The maturity and distribution of the profits are separately negotiated for each special investment account (Algauod & Lewis, 2001).

2.5.2 Islamic Modes of Finance

The financial instruments in Islamic banking based on Shariah and do not involve any interest. These devices are called modes of financing in the literature of Islamic banking. The primary modes of financing are also called sharing modes as they are based on the principle of profit and loss sharing (PLS). The sharing modes earn profit and return which are not fixed, and they also share the risk of loss according to the agreed share of the banks and customers. There are two types of partnerships: full partnership and a non-voting partnership. The first one is Musharaka, and the second one is called Mudharaba (Algauod & Lewis, 2001).

The Islamic banking system also operates another mode of finance called the sales mode. In the sale mode, the banks purchase real goods, equipments and commodities from the open markets and then sell them at an agreed mark-up price to the customers. The difference between the cash price in the market and the credit price to be paid in the future in instalments creates profitability for the bank. It is based on the principle of Murabaha, (Saeed, 2001).

The last mode of financing is called the leasing mode, which is based on the Ijhara principle where the bank acquires an asset and advances it to the customer, and the rental money is the profit of the finance that agreed beforehand. So, in fact, all the financial instruments are based on four major principles of Islamic Shariah and new derivatives and products are based on any possible combinations of any of these fundamental principles, (Saeed, 2001)

2.6 Islamic Retail Banking, Different Territories

2.6.1 Muslims in Ireland

In the 1990s, the ‘Celtic Tiger’ economy arrived on Irish shores, bringing economic growth, prosperity and employment. With prosperity and economic growth, the tide in immigration patterns changed. Nowhere is this development and diversity witnessed more clearly than among the Irish Muslim community, (Kieran Flynn 2006).

The information from the Central Statistic Office in Ireland shows that there are 48,130 Muslim living and working in Ireland in 2011. That number comprises about 1.06% of the entire population. Of that number, 18,223 or 37.9% are Irish national which is another indication that the Muslim community is well established in the whole community, (www.cso.ie).The 2011 census showed that the number of Muslims living in Ireland represents a 51% increase over the figures from the 2006 census which shows there were around 32,500 Muslims living in Ireland, (www.cso.ie).

2.6.2 Demand for Shariah Compliant Products

As Muslims are no different to Non-Muslims in their needs and demands for banking services, Islamic banks, as well as conventional banks, offer Shariah products that similar to the ones provided to ordinary customers.

With the growing Muslim community in Ireland, demand for banking products and services compliant with Shariah principles is possibly rising. As of today, no financial institution in the Irish banking sector offers any such services, and the financial authorities are considering the potential demands. In two different reports from the department of finance, there some suggestions there is a demand for Islamic retail banking. In a report of the finance Act, 2010, the department of finance noted that “while there have been some indications that Muslims’ community would like to see Islamic mortgages offered by banks, there is no evidence of any strong demand for retail financial products." On a later stage, the department issued another note on Islamic finance with some good news for the concerned parties’ i.e. Muslim community. The note stated that the community in Ireland has “indicated a demand for Shariah compliant products” (Dept of Finance 2010).

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