Why Islamic Banks can be a better alternative not only for Muslims but also for non-Muslim customers and users.
Literature review
Introduction: Need for Islamic banks:
Islamic banking is renowned worldwide for its unique ideas as non-interesting banking, the system mainly abides by all the Islamic principles and tries to follow all the rules and regulations of Islamic economics. There are two significant principles of this system the banking system shares all the profit and loss and the process of the collection of all the payments by the lenders or vendors in the economy. The law forces to stop unlawful activities like collecting interest, uncertainty, and gambling. The interest is known as the riba which is strictly prohibited in Islamic laws because the law believes that Allah has permitted to do the trade which must be equal for all. The Islamic banking system has taken the national policy for all Muslims and it follows the dual banking structure for Muslims in the Muslim country. The banking systems have opened separate banking divisions for Muslims with different branches. The growth of the Islamic banking system has increased day by day with the networking growth and the growth has been spread all over the world by spreading the new branches, deposits, increasing the cap funds, and sources (Zafar & Sulaiman, 2019, p.205). By understanding the customer choices determinants, Islamic banks across the US can be able to expand and increase their market share to attract both Muslim and non-Muslim citizens. Meanwhile, to understand and explain the preference of the customer bank, two different kinds of theories have been used by past researchers which are Fishbein and Ajzen’s theory of reasoned action and Ajzen’s theory of planned behaviour. According to these theories, the process of decision-making has a crucial role in delivering consumer knowledge and preference about the product or service.
Literature Review: Characteristics:
The main characteristic of this banking system is that they do not transact on a credit basis which means the interest is not the medium by which they can borrow or lend from the bank or to the public. The follows the principle of bearing risk and everything can be returned by participating in its profit or loss in the economy. The relationship between the banking system and the customer is not between the creditor and the banker but the relationship is based on trust and participation in risks towards the rewards. There are two segregations in Islamic banking that the system strictly follows no mixing the profit earned by own funds in capital plus the current account balance with the profit earned by the investor’s funds by the profit loss sharing basis. The process starts to correct all the banking transactions correctly for the investors and also for the economy. When the Islamic bank tries to operate the resources for the investors always offers the resources to participation or the form of Islamic contract, known as al-Mudharabahthat, because the system does not employ the resources for production purposes directly. The activities which the Islamic banking system follows are that the investor buys goods that must be needed by their customers and sells goods by earning the profits against the cash or the deferred payment basis (Ali & Oudat, 2021, p.24).
The banking systems have various activities for which this system is known as the multipurpose bank the systems have played the role of commercial banks, developmental banks as well as investment banks. The bank has two types of operations in the short-term they play the role of commercial banks and in the long-term, they play the role of non-commercial banks.
The Islamic bank also plays the role of developing the community by mobilizing the financial resources in the economy. It is also not the sole objective of the investor rule but the bank always tries to help the community to increase the capital finance mobility in the economy. The banking system strictly follows Islamic principles where the money can be utilized and invested in the economy and conform to all the rules and regulations of the law. It has been noticed that the ratio of income to expenditure is increasing in the Islamic banking system so the great news is that the system is doing good to increase profits in the banking sectors (Algabryet al. 2020). Based on past theories and research, conventional or commercial banks only play the role of exchange and have a great store of value for their customers. However, on the other hand, according to Ajzen, Islamic banking is not a commodity instead also treated as a medium of exchange. Commercial banks charge interest rates based on customers’ deposits, however, Islamic banking earns profits through goods and services trading. Therefore, with various past research, it is clear that Islamic banking is a great solution for both Muslim and non-Muslim communities.
Issues and research gap
The major issue with Islamic banking as shown in various types of research is that this banking system had difficulty and had been struggling to devise the practices of Sharirah in conformity. In his study, it was identified that one bank depositor had authorized his bank to invest the money in projects whereas another depositor said that he would choose the project to be financed by him (Norman & Hiron, 2020). Therefore, through his research, it had been confirmed that in terms of project investing, the conventional banks had received 9 to 20% more profit and competition than the Islamic banks. He further identified that new modes of financing i.e. Islamic finance are considered less flexible than the conventional banking systems even for Muslims.
Commercial banks give the capital funds to the investors assuring the pre-determined interest rates to the investors whereas Islamic banks promote the risk-sharing funds to the investors to create risk-sharing rewards in the economy (Tarique& Mohammed, 2021).
Some financial instruments of the Islamic banks:
- Mudarabah: It is the venture reserve controlled by one single organization to give funds to the investors in the economy. The term applies to the bank store for arriving the enterprising movement in the sector to raise capital funds in the economy.
- Murabaha: The term is based on Islamic law which covers decency by giving capital funds to the investors or dealing with money-related exchange sharing that must be genuine and decent.
- Mushrakah: It is the understanding of the organization that relates to the rules and regulations by arranging the worldwide business that contributes capital and benefits to the economy.
- Salam: It includes the deal of contract that leads to buying products for future transactions on traded goods and services in the economy. Refers to the cash merchant that can be used for the development of the economy.
- Takaful: It gives protection to the sharing purpose.
- Ijarah: It involves the contract restriction that leads to creating the intrinsic values for the exchange that occur in a predefined period and creates the risk-sharing assets in the economy which return as the use of the old thoughts (Shabbir & Rehman, 2019).
Furthermore, irrespective of popularity of the Islamic banking, there are still many non-Muslims worldwide in countries such as the US, the UK, Pakistan, etc. who are still not known about the traditions and culture of Islamic banking. They are unaware of the interest-free charges for the transactions they make with Islamic banking concepts. Therefore, they must shift to an Islamic banking system for more monetary benefits.
Recommendation for future research
The literature review of this study aims to examine whether the system of Islamic banking or finance can be a better alternative for non-Muslims or not. However, with the sample rule characteristics, few limitations have been acknowledged. Therefore, for future researchers, it is recommended that more deep analyses should be proposed by considering other various geographical locations.
References:
Algabry, L., Alhabshi, S. M., Soualhi, Y., &Alaeddin, O. (2020). Conceptual framework of internal Sharīʿah audit effectiveness factors in Islamic banks. ISRA International Journal of Islamic Finance.
Ali, B. J., &Oudat, M. S. (2021). ACCOUNTING INFORMATION SYSTEM AND FINANCIAL SUSTAINABILITY OF COMMERCIAL AND ISLAMIC BANKS: A REVIEW OF THE LITERATURE. Journal of Management Information & Decision Sciences, 24(5).
Shabbir, M. S., & Rehman, A. (2019). Layers of misconceptions about Islamic banking: Are Islamic banks threats, challenges, and opportunities for investors? Journal of Islamic Marketing.
Tarique, K. M., Islam, R., & Mohammed, M. O. (2021). Developing and validating the components of the Maqasid al-Shari’ah-based performance measurement model for Islamic banks. International Journal of Islamic and Middle Eastern Finance and Management.
Zafar, M. B., &Sulaiman, A. A. (2019). Corporate social responsibility and Islamic banks: a systematic literature review. Management Review Quarterly, 69(2), 159-206.
Nomran, N. M., & Haron, R. (2020). A systematic literature review on Sharī’ah governance mechanism and firm performance in Islamic banking. Islamic Economic Studies.
