Islamic Banking in Non Muslim Countries

GROWTH AND MARKET SHARE OF ISLAMIC

BANKING IN NON-MUSLIMS COUNTRIES

A REPORT

SUBMITTED TO DEPARTMENT OF BUSINESS ADMINISTRATION

FEDERAL URDU UNIVERSITY KARACHI

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR

THE DEGREE OF MASTER IN BUSINESS ADMINISTRATION

BY M U H A M M A D M U N E E B K H A N

Enrolment No: MBA/E/760/10 Seat no: 1008563

SUBMITTED TO SIR Abdul Aziz

DEPARTMENT OF BUSINESS ADMINISTRATION FEDERAL URDU UNIVERSITY, KARACHI.

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Table of contents

S E R I A L TITTLE OF CONTENTS PAGE

N O NO

Executive summary --

1.0 Introduction 01

1.2.1 Verses prohibited interest in the holly Quran 04

1.3 Historical background 06

1.3.1 When interest free banking remained an idea 06

1.3.2 When interest free banking become reality 07

1.4 Statement of the problem 08

1.5 Objective of the study 09

1.6 Hypothesis of the study 10

1.7 Significance of the study 11

1.8 Scope and limitation of study 12

1.9 Definition of term 12

C HAP TER NO 2

2.0 Factors which appeals Muslims and non Muslims 13

towards Islamic banking in non Muslims countries

2.1 Religious factors 15

2.1.1 Interest free banking 15

2.1.2 Banking system based on Islamic tenets 16

2.1.3 Limpidity and trust 16

Acknowledgement -

CHAPTER NO 1

Interest free banking 1.2 03

2.2.1 Financial stability of IB,s in recent economic crises 17 2.2.2 Reputation of Islamic banking 18

2.2.3 Islamic banking emerging as a new industry 18

Saturation of conventional banking market

2.2.7 Asset based financing

Personal and psychological factors

Neighbors and family has a stronger influence on

customer decision Situational factors

2.5.4 Friendly staff 23

2.2.4 Islamic banking versatile product 18

2.2.4.1 Islamic banking vs conventional banking products 18

2.2.5 Concept of partnership by sharing profit and loss 20

2.2.6

International standard and consistency in

accounting rules of IB

Awareness of IB

Advice of friends

2.3.1

2.3.2

2.3.3

21

22

2.3.4

2.4

22

23

2.5.1 Free chequing services

2.5.2 Adequate drive in services 23

2.5.3 Accurate bank statement

CHAPTER NO 3

CHAPTER NO 4

4.0 Methodology 39

4.1 Research design 39

Sources of data 40

Method of data collection 40

4.2

4.3

Analytical procedures 41 4.4

CHAPTER NO 5

5.0 Data analysis and discussion 42

5.1 Empirical analysis 49

CHAPTER NO 6

6.0 Conclusion 66

CHAPTER NO 7

7.0 Graphs and tables 69

CHAPTER NO 8

8.0 References 75

TABLES

TA BLE LI ST O F TA BLE PAGE

NO NO

TABLE 2.1 Islamic Banking Vs Conventional Banking Products 18

51 53

Regression analysis summary output 53

ANOVA 54

United states population and Islamic banking growth

rate

56

Correlation 58

Regr ession Analysis Summary Output 60

ANOVA 59

TABLE5. 11 Correlation

TABLE5. 12

TABLE5.13 ANOVA 64

TABLE 5.1

TABLE 5.2

TABLE 5.3

TABLE 5.4

TABLE 5.5 TABLE 5.6

TABLE 5.7

TABLE 5.8

TABLE 5.9

63

Muslims Population In Non Muslims Countries (In

2009 Est.)

England population and Islamic banking growth rate

Correlation

TABLE5.10 Japan population and Islamic banking growth rate 61

GRAPHS

Graph 5.5 Japan population and Islamic banking growth rate 62

Graph 5.6 Scatter diagram 62

Graph 7.2 Islamic banking growth rate of UK 70

Graph 7.4 Islamic banking growth rate of USA 72

Graph 7.6 Islamic banking growth rate of Japan 74

Graph 5.1 England population and Islamic banking growth rate 52

L I S T O F G R A P H S

GRAPH

NO

PAGE

NO

Graph 5.2 Scatter diagram

United states population and Islamic banking growth rate 57

Graph 5.4 Scatter diagram

Graph 7.1 Population of UK 69

Graph 7.3 Population of USA

71

Graph 7.5 Islamic banking growth rate of Japan

73

A K N O W L E D G E M E N T

All praise to almighty ALLAH, who deserve all, praise alone. It�s only his blessing which enabled us to reach this apex level of knowledge. Or help us for finalizing this thesis. From the beginning it was clear to us�this is not about us or what we can do, rather this is about what God wants from us to do and how He will enable us to do it.

This thesis owes its existence to the help, support, and inspiration of many people. In the first place, we would like to express our sincere appreciation and gratitude to our teacher Mr. Abdul Aziz for his support and encouragement during the thesis's work. His help, guidelines and acknowledgement lead us to make it possible. He has provided for an optimum working environment. His uncompromising quest for excellence significantly shapes everyone.

we are tempted to individually thank all of our friends but as the list might be long and for fear we might omit someone, we will simply and genuinely say: Thank you to you allfor your love, care and trust For their constant presence and care and instant moral support. we cannot finish without acknowledging how eternally grateful and we are to The One, The Everlasting, The All Determiner, The Trustee, The Dependable and The Protecting Friend that guides us, teaches us to be patient and to never give up.

IS LAM IC BAN KI NG IN NO N MUS LIM COUN TR IES

E X E C U T I V E S U M M A R Y

Interest is the back bone of conventional banking without which they never

subsist whereas it is not in the case of Islamic banking. Islamic banking is exceedingly

swelling not only in Muslims but also in non Muslims countries. As the people get

awareness of Islamic banking system they abundantly come towards Islamic banks.

This study focuses on the growth and market share of Islamic banking in non Muslims

countries where a preponderance Muslim population is living. This study also

highlights the Muslims population growth rate and its relation with growth rate of

Islamic banking in non Muslims countries furthermore its help to find out ratiocinate

of its rapid growth in these countries. It also focuses to find out the factors which have

prominently stabilized Islamic banking even in the crisis specifically in those

countries. Also find out the factor allure the people towards the Islamic banking. The

primary step for entering in any non Muslim country for an Islamic bank is a thorough

research about the Muslims population in that particular country and analyzing the

trend of population. They must studies the population statistics of Muslims in the

country of interest.

The factors of invigorating growth determine by generation of hypothesis that

there are one main factor enlisted due to which the growth and market share

increasing in non Muslims countries day by day.

The factor is growth of Muslims population in non Muslims countries. But

that is not only single factor there are many other factor which contribute in enhancing

the growth rate of IB in non Muslims countries. In our study all others factor remained

constant. These factors may be religious, socio economic, situational, service and

other personal and physiological factor. These factors are further classified. This basal

research study is descriptive type and exploration of the study had propelled out

through different secondary sources. Main source of data accumulation was Literature

reviews, Books, web browsing, News paper and Articles on Islamic banking. The

study capacitates us to understand the growth and marketing share of Islamic banking

in non Muslims countries. Finally this study enables us to find out the relation

between population growth rate and

IS LAM IC BAN KI NG IN NO N MUS LIM COUN TR IES

growth rate of IB and factors which contribute in enhancing growth rate of IB in non

Muslims countries.

With the help of correlation we find out that in UK, USA and Japan there is

positive relationship between Muslim population and Islamic banking growth, if

other factors remained constant which might be effect on the growth rate of Islamic

banking industry.

The results of regression analysis show the impact of Muslim population in

growth rate and with the help of derived equation we are able to forecast the growth

rate of Islamic banking in that particulars country but remained other all factors

constant which might effect on the growth rate of Islamic banking.

The actual impact on other factor could not be found because of limitation of

the sources and time. The researcher not able to reach or interact with the customer of

Islamic banks in non Muslim countries so the other factor would not measure there

magnitude in contributing to growth is not known due to the above reason.

The value of t stat is greater than 1.96 in all cases. In all countries t value

greater than 1.96 shows the acceptation of hypothesis.

The results may vary because there are many impregnable factors which have

a profound impact on the growth rate of Islamic banking in non Muslims countries

and these factors conduce strongly in enhancing the growth rate of IB in non Muslims

countries. In our study all these factors which have substantive influence in the

growth rate of IB remains constant.

IS LAM IC BAN K IN G IN NO N MU S L IM CO U N T R IE S

1

Chapter 1

1. INTRODUCTION

Islamic banking is a banking system that is based on the principles or rules of

Islamic law (also known as Sharia, or Shariah) and guided by Islamic economics. A

banking system observed the principles lay down by Islamic Shariah. The Islamic laws

also called Shariah Islamiliah. That is the system which is consistent with Islamic law.

As the name of Islamic banking comes, the concept of interest free banking comes into

minds of people. Mostly people explain Islamic banking as an interest free banking

only but interest free banking is the narrow concept. Islamic banking is not based only

on the prohibitions of the interest but it also based on the fair ethical practices. Islamic

banking the most general term is expected not only to avoid interest based transactions

prohibited in the Islamic Shariah, but also to avoid unethical practices and participle

activity in achieving the goals.

Islamic law or principles simply require that performance of capital should also be

considered which rewarding the capital interest is called RIBA in QURAN.

The prohibitions of a risk free return( interest/ RIBA) and permission of trading

as enshrined in the verse 2;275 of the holly QURAN makes the financial activities in

an Islamic setup real and backed with ability to case value additional objective of an

Islamic economy.

There are two basic principles behind Islamic banking are the sharing of profit

and loss significantly the prohibition of the collection payment of interest. Collecting

interest, writing about interest, calculating interest is not permitted under Islamic law.

In the recent time invigorating growth in Islamic banking has been observed in Muslim

and non-Muslim countries. The Islamic baking industry is now worth at that time

almost an estimated US$ 1 trillions and is widely considered to be one of the fastest

growing sectors in the world of finance. Even in the recent global economic crisis

Islamic banking shows the stability & strength. Islamic banking give positive impact

on global economic even in crises, that thanks to strict regulations administered by

Islamic law or Shariah. (Blank, jonah, 1998).


2

Islamic banking has also been defined by the state bank of Pakistan as,

�It is an Islamic economic system is harmony with Islamic ethics and value

guided by good governance & risk management rules fully laid down by Islamic law�

Islamic banking strictly based on Islamic tenets and Islamic economics rules

lay down by Islamic Shariah. Any unethical practice & unethical activity get the

banking system out of Islamic banking or it will not considered as a part of Islamic

banking.

Islamic banking has grown by 10-15 percent per year over past decade. There

are currently more then 300 Islamic financial institutions spread over 51 countries and

over the past decade the Islamic banking industry showing the rapid growth and many

new financial institutions are growing very fast. Islamic banking industry has enjoying

the growth rate of 10-15 percent per year. That trend is expected to continue. (Sole,

Juan, 2007).

According to study 100 largest Islamic banks has reported on annual growth

rate of 26.7 percent. The market share of Islamic banking is also expected to increase

by 15% annually. (source find).

In non Muslim countries the recent example of the rapid growth of Islamic

banking can be elaborated by the fact that in the United States mainly in California,

New York, & Michigan, Islamic finance has also grown rapidly. According to

estimation there are six million Muslims in the united states & about one third of the

1.8 million households desire Islamic financing, especially for home mortgages, US$

300 million revenue was generated by Islamic financial institution by Islamic

financing in gore & approximately $ 450 million in 2005. Including $300 million is

Islamic mortgages (Norris Kim, 2005).

According to one prediction that if the Islamic bank grow with the same rapid

speed they will control 40-50 percent of all Muslim saving in the world by 2009/10,

while the population of the Muslim in 200 calculated 1.4 billion. (zaher &

hassan,2001).


3

Islamic banking has undergone an emanation in size & significance in an

orotund number of countries throughout the world (sundaravajan & Luca Errico

2002).

A rapid growth of Islamic banking operation has been observed in recent time

not only in different countries but also in different areas of finance (E-Gamal, 2006).

The rapid growth of Islamic banking can imagine with the fact that the growth

in the Islamic banking is 20 percent annually over the past few years to an estimated

$500 billion. That show that Islamic financial are need top Sharia scholars &

competition for top Sharia scholars with financial knowledge is stiff. There are 150

scholars who are globally accepted in the finance world said by Rashid siddiqui,

director of the Dow Jones Islamic market index �about 20 of them are the

rock-and-roll, stars.

Islamic scholars are becoming consultants for world class players like deutsche

bank which started Sharia complaint metal fund credit Suisse. (Power Carla, 2007).

When the name of Islamic banking come the concept of interest free banking

come into the minds of people. Interest is prohibited strictly in QURAN.

1.2 Interest Free Banking

Interest is the back bone of conventional banking system with and which they

never survive or their main source of revenue is interest. While in Islamic banking

system �interest (RIBA)�is harram & completely banned. While in Islamic banking

system �interest (RIBA)�is harram & completely banned. The literal meaning of

interest or Al-RIBA as it is used in the Arabic language means to excess or increase. In

the Islamic terminology interest means effortless profit or that profit which comes free

from compensation or that extra earning obtained that is free of exchange. Hazrat Shah

Waliullah Dehlvi a great scholar and leader has given a very concise and precise

definition of interest. He says,


4

"Riba` is a loan with the condition that the borrower will return to the lender

more than and better than the quantity borrowed."

Islamic banking means the institutions that provide the people both individual

and businessman various financial products in conformity to Islamic religious

practices. In Islamic dogma any sort of either payment and receipt of interest (RIBA) at

a fixed or predetermined rate is prohibit.

There is also prohibition of financing the capital in gambling business alcohol

trade and pork. (Vishal dugar, 2007).

Islamic banking is strictly based of the Shariah rules which are described by the

HOLLY QURAN. In conventional banking system interest use as a tool to attract more

customers but in Islamic banking interest is strictly prohibited. The prohibition of

interest (RIBA) is come in different places in the holly QURAN.

1.2.1 Verses Prohibited Interest In the Holly

Quran

~ Those who eat Riba (usury) will not stand (on the Day of Resurrection)

except like the standing of a person beaten by Shaitan (Satan) leading him to

insanity. That is because they say: "Trading is only like Riba (usury)," whereas

Allah has permitted trading and forbidden Riba (usury). So whosoever receives an

admonition from his Lord and stops eating Riba (usury) shall not be punished for

the past; his case is for Allah (to judge); but whoever returns (to Riba (usury)),

such are the dwellers of the Fire -they will

abide therein.

(Al-Baqara,Chapter#2,Verse#275)

Allah will destroy Riba (usury) and will give increase for Sadaqat

(deeds of charity, alms, etc.) And Allah likes not the disbelievers, sinners.

(Al-Baqara, Chapter #2, Verse #276)


5

� Those who believe, and do deeds of righteousness, and establish

regular prayers and regular charity, will have their reward with their Lord: on

them shall be no fear, nor shall they grieve.


� you who believe! Be afraid of Allah and give up what remains (due to

you) from Riba (usury) (from now onward), if you are (really) believers. (Al-Baqara,

Chapter #2, Verse #278

� If ye do it not, Take notice of war from God and His Apostle: But if ye

turn back, ye shall have your capital sums: Deal not unjustly, and ye shall not be dealt

with unjustly.


� If the debtor is in a dificulty, grant him time till it is easy for him to

repay. But if ye remit it by way of charity, that is best for you if ye only knew.


� And fear the Day when ye shall be brought back to God. Then shall

every soul be paid what it earned, and none shall be dealt with unjustly. (Al-Baqara,

Chapter #2, Verse #281)

� O you who believe! Eat not Riba (usury) doubled and multiplied,

but fear Allah that you may be successful.

( Aal-e-Imran, Chapter #3, Verse #130)

� And their taking of Riba (usury) though they were forbidden from

taking it and their devouring of mens substance wrongfully (bribery, etc.). And We


6

have prepared for the disbelievers among them a painful torment.

( An-Nisa, Chapter #4, Verse #161)

1.3 HISTORICAL BACKGROUND

With the passage of time as the world become developed more & more the

socio economic forces demanding more involved in national economic & financial

activities. People need the banks & avoiding the interaction with the banks became

impossible. So people rapidly interact with banks to fulfill their business or personal

day to day needs. Different banks established in a very short time of Spain and many

foreign banks operated in different countries. With in short period the network of

banking system expanded through out the world. They are interest based banks.

Different individuals & businessman need to make transactions with these

bank if they like or not. People tremendously comes towards banks & making a huge

transaction with these local & interest based foreign banks the issue of interest is rise.

This state of affairs drew the attention & concern of Muslim intellectuals become

interest (RIBA) is haram in Islam. Then the story of interest free or Islamic banking

starts. Shortly describe the origin of Islamic banking and the people who contribute

most of their efforts.

According to (Ghafoor, Abdul A.L.M, 1995) the history of interest free banking

divided into two parts.

First part: when interest free banking remained an idea.

Second part: when interest free banking becomes reality.

1.3.1 When Interest Free Banking Remained an

Idea

As the popular saying is that necessity is the mother of inventions so in the similar

means when the idea of interest free banking seems to be very recent origin. The

earliest reorganizations of baking system based on profit & loss sharing rather then


7

interest is found in anwar qureshi (1946), naiem siddiqi (1948) and Mahmud Ahmed

(1952) in late forties the emphasis on profit & loss sharing more elaborated exposition

given then by mawdudi in 1950. (Siddiqi, Muhammad Najatullah 1961).

Muhammad hamidullah�s 1994, 1995, 1957 and 1962 writes abundantly about

the evil of interest in the commercial bank & proposed the concept of mudarahabha

profit & loss sharing.

After that working in the next two decade interest free banking became popular

& attracted more attentions and working on interest free banking is start more

potentially.

Another sophisticated set of works emerged in the late sixties and early

seventies by Abdullah al-araby (1967), najatullah siddiqi (1961, 1969) all najjar (1971

&) Baqir al sadr (1961-1974) were the main contributors.

After the great contributions of scholars & Muslim economists in early

seventies may institutional involvement has been seen. The involvement gives the

result that confers of the finance minister of the Islamic countries held in Karachi 1970.

An Egyptian study 1972 shows that first international conference on Islamic

economics in MECCA in 1976. There conferees very helpful & with the involvement

of institutions & governments led to application of theory to practice and result is

originated in the form of first interest bank. The Islamic developed bank an

inter-governmental bank established in 1975, was born due to there involvement &

efforts. (Ghafoor, Abdul A.L.M, 1995).

1.3.2 When Interest Free Banking Become

Reality

Previous step show the working & efforts happening on the interest free banking. And

known in this step interest free banking become a reality and may interest free banks

established in the result of effort describe in previous step. This idea changes into

reality with the existence of first Islamic bank. Dubai Islamic bank was set up in 1975

by a group of business man from different countries. It was first private sector interest

free bank. Later on two more Islamic banks founded in 1977 under


8

the name of Faisal Islamic bank in Egypt & Sudan. (Ghafoor, Abdul A.L.M, 1995).

But the first Islamic banking practice was undertaken in Egypt owed to Ahmed

EI Najjar who took blooming step a establishing a profit & loss sharing saving bank. In

the Egyptian town of Mit Ghamr in 1963. At the end of 1969 there were nine such

banks in country (ready 1981).

These banks engaged in profit & loss sharing business not engaged in interest

based transactions (siddiqui 1988).

The first saving bank Mit-Ghamr in Egypt established in 1963 was very

popular & proposed initially and then closed down for various reasons (Wilson, 1984).

Same interest free Islamic banks have tried before on small scale but never

survived one banking Malaysia in mid forties & another in Pakistan in late fifteen

never survived.

After ten years since the establishment of the first private sector bank in Dubai

which was said to be interest free bank more than 50 interest free banks have come into

being. But all of there are in Muslim countries. There are some in Western Europe as

well In Denmark, Luxembourg, Switzerland and UK. Most of the banks established in

1983(11) and 1984(13) respectively. The numbers have become declined considerably

in the following years (Ahmed, Ausaf, 1 994).

So with the above reference we imagine that Islamic banking is growing very

rapidly not only in Muslim countries but also in non Muslim countries.

1.4 Statement of the Problem

Islamic banking is a weather new phenomenon the recent crises of

conventional banking system increased the needs on stable economic system or

banking system.

Islamic banking system is gaining both importance and growth in world. In

Islamic world it is growing with a rapid pace and annual market share is shooting all

the time but the point of interest is lies in the fact that Islamic banking is also growing

with prominent rate in non Muslim countries. Therefore our study focuses


9

on the growth on Islamic banking in non Muslim countries. Our problem statement is

that to

�Investigate the relation between population growth in non Muslim countries

and the growth rate of Islamic banking �

Our study will also highlight the certain other potential factor contributing in

growth rate of Islamic banking.

1.5 Objective of the Study

The main objective of study is to explore the growth and making share of

Islamic banking in non Muslim countries. The purpose of study also elaborated the

reason of rapid growth of Islamic banking in non Muslim countries or in other words it

describes the factors which motivate the people to adopt Islamic banking. The main

factor which we analyze in this study is growth of Islamic banking due to the growth of

Muslims population in these countries.

There are many other factors which urging the people towards Islamic banking

but the study found the relationship between the Islamic banking growth rate and

Muslims population. These factors may include religious factors, crux economic factor,

personal and psychological factor, situational factor and service factors. But the main

objective of the study is to highlight the main appealing factor which urged the people

of non Muslim countries towards Islamic banking. And meanwhile this study gives the

level of relation of two variables Islamic banking growth and Muslims population in

these countries.

Our objective of study focus on

1. To find out the growth of Islamic banking in non Muslim countries.

2. To find out the reason of rapid growth of Islamic banking in non Muslim countries.

3. To find out the marketing share of Islamic banking in non Muslim countries.


10

4. Highlight the attractiveness of IB in non Muslim countries.

5. The study helps us also to find out the Islamic banking consistent growth and

stability in the recent economic crises or the factors which have prominently

stabilized Islamic banking even in crises.

6. This study also elaborated the level of acceptance of Shariah regarding

Islamic banking in non Muslim countries.

7. Study will provide us a better understanding of IB.

8. Find out the trend or relation between the Muslim population growth and

Islamic banking growth. And elaborated that there is any relation between

them if relation exits than it is positive or not.

The objective of study to broad this study not only enable us to find the factors

which motivate the people of non Muslim countries towards Islamic banking. The

study not only elaborated the factor regarding the Muslim customer but also elaborate

the factors which given sufficient consideration by non Muslim countries or the factors

which motivate the non Muslim customers.

1.6 Hypothesis of the Study

The factors of invigorating growth determine by generation of hypothesis that

there are one main factor enlisted due to which the growth and market share increasing

in non Muslims countries day by day.

The factor is increasing the population of Muslims in non Muslims countries.

There are many other factors which motivate people to opt Islamic banking. These

factors disunite into religious, socio economic and other personal and physiological,

situational and service factors.

These factors are further classified. The religious motivating factors may be:

Interest free banking, banking system based on Islamic tenets, limpidity & trust,

existing of Shariah advisory board. The crux economic factors which motivate the

peoples towards Islamic banking or a reason of rapid growth of


11

Islamic banking are: financial stability of IB�s in recent economic crisis, Market

reputation of Islamic Banking which is a new trend in the market, Islamic Banking

emerging as a new industry, Asset based financing, Saturation of conventional banking

market, concept of partner by profit and loss sharing basis. The personal and

psychological factors may include, long term confidence of people because of

international standard and consistency in accounting rules of IB, a lot much awareness

of IB, advice of friends, neighbors and family members has a stronger influence on

customer decision. The situational factor may include, convenient location, waiting

line, depositing and withdrawing money, long transaction and etc. The service factor

may include free chequing services, adequate drive in services, accurate bank

statement and friendly staff.

Hypothesis prove that increasing Muslims population in these countries

increase the growth and market share of Islamic banking in non Muslims countries or

not.

Ho {Rapid growth is being observed of adopting IB in non Muslims countries

due to increasing Muslims population in these countries or not} OR

Ho {preponderance Muslim population plays significant role in the rapid

growth and increasing market share of IB in non Muslims countries or not} And

alternative hypothesis is

H1 {Rapid growth is being not observed of IB in non Muslims countries due to

increasing Muslims population in these countries}

OR

H1 {preponderance Muslim population not plays significant role in the rapid

growth and increasing market share of IB in non Muslims countries}

1.7 Significance of the Study

This study is very for significant for checking or analyzing the growth trend in

Islamic banking industry. Although Islamic banking industry consistently growing.

But this study has importance with respect to growth of IB in non Muslim


12

countries. The result of study may contribute to find out the trend that due to increase

in Muslims population the Islamic banking also increase but there are certain others

motivating factors which motivate the people towards the Islamic banking. The study

also gives a list of motivating factors with the level of significance.

The Islamic banks of non Muslim country also the IB industry of Muslim

countries get benefit from this study to implement or improve the factors which

motivating more the people towards Islamic banking . With the help of study analyze

that which factor motivates the people towards Islamic banking. The significance of

study is that we get informed about the growth rate is IB in non Muslim countries and

market share of IB in non Muslim countries. The significance of study is that with the

help of regression analysis we able to predict the growth rate of Islamic banking with

respect to population growth. The study able us to easily analyze the future trend of IB

in any non Muslim countries.

1.8 Scope and Limitation of Study

The study covers the few non Muslim countries and analysis the growth rate

and market share of Islamic banking in these countries. The limitation of study is that

this study only analyzes the trend of Islamic banking growth rate and population

growth rate of previous three to five years. The limitation of study is also that there is

many other factors which contributing in the growth rate of IB.

The main weakness of this study is that we are not able to find the ranking of

these other factors which contributing in rapid growth of IB in these countries because

No interaction has been made with customers or people of non Muslim countries.

Secondary data get sufficient information about growth rate and market share of IB in

non Muslim countries. Due to no interaction with the customers & people of non

Muslim countries, given conclusion about the ranking of motivational factor is only

based on literature review so it may be vary.

1.9 Definition of Term

IB refers to Islamic banking, IB,s refers to Islamic banking system. RIBA refers to interest, HARRAM refers to prohibit in Islam,


13

Chapter 2

2.0 FACTORS WHICH APPEALS

MUSLIMS AND NON MUSLIMS

TOWARDS ISLAMIC BANKING IN NON

MUSLIMS COUNTRIES.

Islamic banking industry is in recent time growing very fast. The importance

of Islamic banking has no ignorance in this era; Islamic banking industry grows with

rapid pace. There are different factors to opt Islamic banking some factor discuss here

which appeals the Muslim and non Muslim people towards the Islamic banking. These

factors may include religious factor, socio economic factor, personal and

psychological, service and situational factors and many others.

They are further classifying into different categories.

1. The religious motivating factors may be interest free banking, banking

system based on Islamic tenets, limpidity and trust, existing of Shariah

advisory board.

2. The crux economic factors which motivate the people towards Islamic

banking or a reason of a rapid growth of Islamic banking are financial

stability of IB�s in recent economic crises, market reputation of Islamic

banking which is a new trend in the market, Islamic banking emerging

as a new industry, Islamic banking


14

versatile product, concept of partnership by sharing profit and loss,

saturation of conventional banking market and asset based financing.

3. The personal and psychological factors may include, long term

confidence of people because of international standard and consistency

in accounting rules of IB, a lot much awareness of IB, advice of friends,

neighbors and family members has a stronger influence on customer

decision.

4. The situational factor may include, convenient location, waiting line,

depositing and withdrawing money, long transaction and etc.

5. The service factor may include free chequing services, adequate drive

in services, accurate bank statement and friendly staff.

How ever the first one is more concern with Muslim while the other one with

both the Muslims and non Muslims. But according to recent study by (erol and

el-bdour, 1989) indicated that Muslim patronized Islamic banks not so much because

of the religious factor, but more because of the return they would receive from their

investment

(Eat al, 1990) says that the customer in Islamic countries also did not different

between the conventional and Islamic banking services which they offer.

The two factor analyze by (regall, 1980) are service factor and situational

factor but his study stated that both factors not shown the importance in influencing the

customer behavior in his or her selection of a bank.

There are different studies which carried out to analyze the behavior of

customer that which factors appeals the both Muslim and non Muslim customer�s not

only Islamic banking but also towards conventional banking.

In Singapore (Anderson at al, 1976) and (tan and chua, 1986) finds that some

person choose the bank on advice of friends, neighbors and family members has a

stronger influence on customer decision compare with other variable in selecting

financial institutions. These factors realize in the category of personal and

psychological factors. In the similar manner (laroche et al, 1986) found certain


15

factors which is related to service factors. They were investigating these factors on the

experiment on 140 Canadian households. They found that the primary choice was

friendliness of staff followed by ours of operation, size of waiting line, convenience of

location, efficiency of personal speed of processing item, parking facilities and

accessibility, availability of credit bilingualism of staff and interest on savings.

(Javalgi et al, 1989) conducted a study in the USA using analytical hierarchy

process to determine the bank selection criteria and reported that following are the

important factors which motivated the people to select bank include safety of one

funds to be the main factor followed by paying highest interest rates on saving,

location, reputation, availability of loans, low interest rates on loan, ease of qualifying

for current account by maintaining a minimum balance and lastly list the Saturday

banking.

2.1 RELIGIOUS FACTORS

Religious factor may include the following factors.

2.1.1 Interest free banking

2.1.2 Banking system based on Islamic tenets

2.1.2 Limpidity and trust

2.1.4 Existing of Shariah advisory board

2.1.1 Interest Free Banking

Interest free banking is the most important religious factor. Some time when

the name of Islamic banking comes the concept of interest free banking comes into the

minds of peoples. Most of Islamic bank use interest free banking as a main theme to

promote their banks. Interest is called RIBA in HOLLY QURAN. The literal meaning

of interest or Al-RIBA as it is used in the Arabic language means to excess or increase.

In the Islamic terminology interest means effortless profit or that profit which comes

free from compensation or that extra earning obtained that is free of exchange. Hazrat

Shah Waliullah Dehlvi a great scholar and leader has given a very concise and precise

definition of interest. He says,


16

"Riba` is a loan with the condition that the borrower will return to the lender

more than and better than the quantity borrowed."

So interest free banking is prohibited in Islam. Islamic banking offers different

products based on profit and loss sharing.

2.1.2 Banking System Based On Islamic Tenets

This factor also belongs to religious factor. Banking system based on Islamic

tenets refers to the system which is based on Islamic laws and rules. The people are

motivated to opt Islamic banking because the Islamic banking system based on Islamic

rules.

2.1.3 Limpidity and Trust

Islamic banking system is clear and unambiguous banking system which

attracts the people to opt this financial system. People also have faith and conviction

on Islam which is a distinct reason for them to adopt Islamic banking system. This

point is also related to previous one, the people limpidity and trust is very high because

the Islamic banking system is based on Islamic tenets, here limpidity refers to

transparency in all the functions of Islamic banking and trust refers to confidence of

people on Islamic banking. Due to transparency in the function of Islamic banking

trust built on Islamic banking and people motivate towards IB.

2.1.4 Shariah Advisory Board

The Shariah board is a key element of the structure of an Islamic financial

institution, carrying the responsibility of ensuring that all products and services

offered by that institution are fully compliant with the principles of Shariah law.

Shariah Advisory Board provides advise and guidance on prudential

regulations, guidelines, modes of financing, and model agreements for Islamic

industry, but the central bank issues instructions though in case of differences in

perspectives on Shariah matters the advisory boards notified by central bank is


17

final; Shariah Advisor, meeting central bank fit and proper criteria, approve products

and give guidance on legal and tax matters etc.; and a mechanism for Shariah Audit

System which inspects the Shariah compliance of all bank operations. Shariah

Advisory Board has Shariah scholars but also industry representatives.

Shariah advisory board consists of different Islamic scholars which provide the

guidelines to bank and help them in making their functions smooth and according to

Islamic rules. People confidence built because of Shariah advisory board because

mostly it consist on popular religious scholars

2.2 ECONOMIC FACTORS

Economic factor may include following factors.

2.2.1 financial stability of IB�s in recent economic crises

2.2.1.1 market reputation of Islamic banking which is a new trend in the market

2.2.2 Islamic banking emerging as a new industry

2.2.3 Islamic banking versatile product

2.2.4 concept of partnership by sharing profit and loss

2.2.5 saturation of conventional banking market

2.2.6 asset based financing

2.2.1 Financial Stability of IB�S In Recent

Economic Crises

World is facing the blossoming economic crises in the recent time. Many

banks industries and institution are going to bankrupt because of recent economic

crises but Islamic banking shows a great strength in facing these crisis. Islamic

banking industry not only faces these crises by strength but also support the world

economy to some extent. Due to this stability the people confidence edifice on Islamic

banking and the rapidly come towards IB system


18

2.2.2 Reputation of Islamic Banking

Another factor which motivates or appeals the people towards IB is Islamic

banking reputation. At that time Islamic bank shows great strength, stability and

consistency. Islamic banking industry grows at the rate of 15 to 20 percent per annum.

In last 5 years more than 50 new Islamic institutions established due to high reputation

of IB people opt the Islamic banking.

2.2.3 Islamic Banking Emerging As a New

Industry

Now in this era Islamic banking become emerging as a new industry with the

asset of more than US$ 1 trillion. The worth, reputation of IB and its stability in crisis

not only compel the individual to switch from conventional banking but also compel

the investor to come towards IB.

2.2.4 Islamic Banking Versatile Product

Islamic banks have variety of versatile product they have alternative of each and

every product of conventional banking products. IB products are more attractive then

the conventional banking products and they also claim that these products are

according to Islamic principles due to this reason more people opt Islamic banking.

Following are the list which gives us the idea that Islamic banking have

versatile product and each product become a alternative of conventional banking

product so people have no need to go towards conventional banking.

2.2.4.1 Islamic Banking Vs Conventional

Banking Products

(Table 2.1)

particulars Conventional banking Islamic banking

Rate of return Interest Wadiah (token/appreciation)

Lending rate BLR IFR (Islamic financial rate)


19

conclusion Both banking system have the same rate, regardless the term used.

particulars Conventional banking Islamic banking

Deposit

account

Saving accounts Wadiah account

(safe keeping)

Mudharabah

account

(profit sharing)

Return interest Hibah � token or

gift in monetary

term

Profit sharing based in

IPR (indicative profit

rate)

conclusion All 3 types of saving account have the similar rate of return (interest

rate, hibah) i.e. they all �pay� the same

Particulars Conventional banking Islamic banking

Investment account Fixed deposit account Mudharabah account

(profit sharing)

Return interest Profit sharing based in IPR

(indicative profit rate)

conclusion Both type of investment account have the similar rate of return i.e.

they all �pay� the same


Mortgage Fixed rate Fixed rate

(leasing arrangement)

Return Variable rate Bai bithaman ajil

(deferred payment sale)


20

conclusion Generally the cost of loan under both the banking system is very

similar, however, unlike conventional loan, additional payment to

Islamic mortgage will not resulted in lowering the total loan cost-

the loan already fixed.


Personal loan Interest rate Bai al-inah

(sell and buy back)

2.2.5 Concept of Partnership by Sharing Profit

And Loss

In Islamic banking interest is completely banned so most of product are

Islamic banking based on a profit and loss sharing due to profit and loss sharing

concept the sense of partnership occurs and more people are attracted towards IB.

2.2.6 Saturation of Conventional Banking

Market

Every product has its peak time after that time they become decline with the

passage of time. In the similar manner the conventional banking market is fully

saturated or overcrowded. Due to saturation of conventional banking market people

were confused to choose the bank. Due to this reason many people divert towards IB.

Because it is emerges as a new industry.

2.2.7 Asset Based Financing

Assets based financing the secure moo0d of financing. in which loans are

secured by the guarantee of assets. A specialized method of providing structured

working capital and term loans that are secured by accounts receivable, inventory,

machinery, equipment and/or real estate. This type of funding is great for startup

companies, refinancing existing loans, financing growth, mergers and acquisitions.


21

2.3 PERSONAL AND PSYCHOLOGICAL FACTORS

Personal and psychological factors may include the following aspects.

2.3.1 Long term confidence of people because of international standard and consistency in accounting rules of IB

2.3.2 A lot much awareness of IB 2.3.3

Advice of friends

2.3.4 Neighbors and family members have a stronger influence on customer decision.

2.3.1 International Standard and Consistency in

Accounting Rules of IB

Islamic banking industry has consistent international standard and also having

consistency in accounting rules. Due to this reason people confidence built on IB.

There are two institutions which regulate the policies of IB and maintain the

international standard in their rules and procedure. Then institution working on

international level & keeping up to date the rules & procedure of accounting & other.

Institutions include

1. The accounting & auditing organization for Islamic financial institution

(AAOIFI) which issues internationally recognized Shariah standard on

accounting, auditing& governance issues.

2. The Islamic financial service board (IFSB) which issues standards for the

effective supervision & regulation of Islamic financial institution.

2.3.2 Awareness of IB

Islamic banking now a day is very quite common. At that time most of people

unaware about the operation, function and procedure of IB. IB promote themselves by

launching the awareness program on TV and by using other media. As a people with

IB they never hesitate in selecting IB as their bank


22

2.3.3 Advice of Friends

Another most important personal factor is the advice of the friends. Most of the

people select their bank on advice friends when some person wants to open account

most of time they get advice from friends.

2.3.4 Neighbors and Family Has a Stronger

Influence on Customer Decision

Another personal factor which influences the customer is the advice from

neighbors and family. They are stronger influence on customer decision then the

advice of friends. This is also an important factor of selecting a bank.

2.4 SITUATIONAL FACTORS

Situational factor includes the following things.

2.4.1 Convenient location

2.4.2 Waiting line

2.4.3 Depositing and withdrawing money

2.4.4 Long transaction and etc.

2.4.1 Convenient Location

Most of peoples select the bank due to its convenient location irrespective of

that it is Islamic or conventional bank. Convenient location refers to bank in that place

where customer approach every time easily without facing difficulties.

2.4.2 Waiting Line

Waiting line refers to that the bank is never overcrowded, having a long

waiting line for clearing a cheque paying utility bills or for the other operational

activities


23

2.4.3 Depositing and Withdrawing Money

Another situational factor is that people select a bank where easy deposit and

withdrawing service is available without any charges.

2.4.4 Loan Transactions

Loan transactions refers to that, people select that bank which easily

guaranteed the loan with low rate of interest.

2.5 SERVICE FACTORS

Service factor may include the following factor.

2.5.1 Free chequing services

2.5.2 Adequate drive in services

2.5.3 Accurate bank statement

2.5.4 Friendly staff.

2.5.1 Free Chequing Services

People give preference to that bank which offer free chequing service without

deducting any amount while clearing the cheque.

2.5.2 Adequate Drive in Services

The bank which gives the adequate sophisticated and proper services people

prefer that bank.

2.5.3 Accurate Bank Statement

Accurate bank statement refers to that, bank issue the statement having no

error.

2.5.4 Friendly Staff

Most of the people attract towards banks because of its friendly staff. The

customers get the family environment


24

Chapter 3

3.0 LITERATURE REVIEW

Islamic banking industry is now growing very rapidly in recent decade. Islamic

banking system not only gains importance in Muslim countries but also in non Muslim

countries.

When any Islamic banks decide to operate in any non Muslims country they

must analyze the population statistics of that particular country. If there is

preponderance Muslims population in that country than Islamic banks take decision to

enter in that country. They also analyze the different trends of Muslims population in

particular country that the population of Muslims is increasing in that focused country

day by day or declining due to any reason such as Muslims migrate from that country

to other.(Sole,jaun,2007)

(Sole juan, 2007)stated that the Islamic banking not only expanding in Muslim

countries or countries where Muslim in majority in population but also in other

countries where Muslims are in minority such as united kingdom & Japan similarly

more non Muslim countries like India Kyrgyz republic and Syria have recently

guaranteed licenser for Islamic banking activities.

(Schmith scott, 2005) elaborated that Islamic banking grows with the rate of 15

to 20 percent. In last five years Islamic banking industry having estimated $270

billions assets controlled by more then 300 Islamic banks in various

countries.(Schmith, scott, 2005) studied & find that the largest markets for Islamic

finance, included turkey, Indonesia, Saudi Arabia united states of America and France,

the growing market which grow very rapidly in recent years are Malaysia, Bahrain the

united Arab emirates, Indonesia and Pakistan. That is very positive sign for Islamic

banking sector that some estimate suggesting that within eight to ten years Islamic

banks save the half the saving of 15 billions Muslims.

(Mustak parker, 2004) stated that Islamic banks attract towards Britain because

the preponderance population of Muslims living in the Europe and it is gradually

increasing so it is a green signal for Islamic banking industry to operate in UK.(Ali

Jasim, 2008) the member of Bahrain parliament stated that the Islamic


25

banking sector is very large. As of Jan, 2008 300 Islamic financial institutions operated

in 75 countries managing some 500 billion.

(Wallace by Klaus-peter Gushurst, Ivan de souzo, vanilla, 2009) said that the

primary step for entering in any non Muslim country for an Islamic bank is a thorough

research about the Muslims population in that particular country and analyzing the

trend of population. They must studies the population statistics of Muslims in the

country of interest. And also elaborated that one of the fastest growing industry in two

global financial services industry is Islamic banking they have strong demand on both

the individual & corporate sides. Now in recent time the total value of Islamic assets

now reached US$500 Billion & the numbers of institutions offering the Islamic

finance services are multiplying with the passage of time only in last three years more

then 50 new Islamic financial institutions have opened offering Islamic financial

services.

(Ali Jasim, 2008) stated that Islamic banking have growing demand in non

Muslim countries. They gave the example of United Kingdom. The Islamic bank of

Britain (IBB) established in 2004 offers various financial products complained with

Sharia. They further suggested that UK government is contemplating issuing Sukuk &

inform that, for the facility of Muslim community France is seeking to get a share of

Islamic finance.

(Phillips Melanie 2009) suggest that The primary step for entering in any non

Muslim country for an Islamic bank is a thorough research about the Muslims

population in that particular country and analyzing the trend of population. They must

studies the population statistics of Muslims in the country of interest. Britain�s Islamic

banking sector is now bigger than that of Pakistan report by international services

London. The study stated that among all the western countries UK has the largest

number of banks for Muslims. United Kingdom now at that time has fully Sharia

compliant or in other words full flagged Islamic banks. Providing various kind of

product which prohibit interest payments and investment in alcohol or gambling firms

in accordance with Sharia law and there are many others leading institutions who open

Islamic window or subsidiary firm for Muslim clients. The number of institutions 17 in

which include Barclays, RBS and Lloyds banking group

(K Grose Thomas, 2008) elaborated that the rapid boom of Islamic banking is

providing a crescent shaped silver of good news for the city, London�s


26

beleaguered financial district. Thomas K Grove suggested that London become the

main hub of Islamic banking outside the Middle East. Development in Islamic banking

sector is encouraged by the Britain�s labor government which laid out the welcome

mat to Sharia- compliant banks several years ago. They think that this is the way of

serving the Muslims population or it�s the right the Muslims to do there financial

transaction according to their religious prospective. Mckanzie the director of

economics at international financial services London stated that government see it as

another way to draw business to London to bring investor to the UK.

(K Grose Thomas, 2008) reported that the blue ocean is one of many European

companies which take the benefits from a surrey in Islamic financing that pushing

Sharia compliant banking into mainstream & extending in appeal to non Muslim. The

author gives the reason that the Islamic sector growth come at a time when western

banking system caught is liquidity crisis Blue Ocean took comfort in fact that BLME

drawn on the petrodollars surplus of Persian Gulf oil producers the chief financial

officers Tariq Aslam say �the liquidity was there� the editor of Islamic banker.

(Mushtaq Parker 2006).

(Norris Kim 2005) give a comprehensive views that in the United States,

particularly in California, New York, and Michigan. Islamic finance has grown very

rapidly. In United States estimated sex million Muslim out of six million about 1.8

million household desire Islamic financing especially for home mortgages. They also

elaborated that as the Muslims population increases the demand for Islamic banking

increase side by side.

The rapid growth of Islamic finance has helped to diversify markets &

institutional structure. Mostly diversify the market & institutions structure in oil rich

Muslim countries but also in countries with large Muslim minorities. Islamic banks

banking system operate in various Muslims countries which adopted new Islamic

Sharia principles ( Iran, Pakistan & Sudan) with both Islamic & conventional banks in

developed countries side by side with conventional banks (Karbhari, Yusuf, Naser,

Kamal & Shahi Zerria).

(Sole, Juan, 2007) suggested that there are certain factor which enhance the

growth rate of IB in non Muslims countries. The rapid expansion of the Islamic finance

industry that was started in 1970 was not accompanied by creation of internationally

recognized accounting rule of initial stage but gradually their new products.


27

The rapid expansion of Islamic banking started for 1970. People confidence

edifice on Islamic banking because of its own international recognized accounting

rules. After the establishment of two internationally recognized institution the growth

of Islamic banking became more fast.

Following are the name of institutes.

1. The accounting & auditing organization for Islamic financial institution

(AAOIFI) which issues internationally recognized Shariah standard on

accounting, auditing& governance issues.

2. The Islamic financial service board (IFSB) which issues standards for the

effective supervision & regulation of Islamic financial institution (Sole, Juan,

2007).

Islamic banking industry is growing rapidly because many multilateral

institutions have been recently created to provide assistance to government &

supervisory agencies to help them understand Islamic banking & issue standard & best

practice guidelines for the industry. The institution includes IMF, IFSB, AAOIFI &

Islamic development bank. In addition the authorities should engage in industry to

provide guide line & assistance to industry for the sake of its promotion (Sole, Juan,

2007).

(Ali jasim, 2008) in his article suggested three challenges for the Islamic banking in

non Muslims countries. These challenges includes

1. Developing short term product to absorbs demand to help develop a

secondary market.

2. Lack of Sharia scholars with knowledge of conventional and Islamic finance.

3. Third challenge deals with ensuring available of qualified human resource

meeting the requirement of as ever growing industry.


28

These are the obstacles of fastest growing Islamic banking industry.

Like ali jasim (Wallece by Klaus peter, gushurst ivan de souza, venessa, 2009)

also stated the challenge facing by the Islamic financial institutions. These challenges

may be Lack of product differentiation the inherent complexity of Islamic banking

operations and observe of universal standard governing what initiatives are admissible

under Islamic law or Sharia.

One another author describe some challenges to Islamic banking industry.

They suggested that Islamic financial market establish its position to several markets.

In a short period of time Islamic banking grow in several markets. But its expedition

spread growth ultimately its character�s will depend on how it confronts several key

challenges including, The general acceptance of Islamic finance, regulatory &

soundness compatibility obstacles to innovations & other important burrier as such as

edifies economics of scale & training professionals in intricacies of Islamic financial

product. (Ainly M, 2007).(Greenless Donald, 2005) the oil prices also effect on the

product or growth of Islamic banking more recently a second resurgence in oil prices

an increase in variety of Sharia compliant product.

The estimation was made by Thomas k Grose (2008) that Islamic banking

sector is growing at a rate of 10 to 15 % a year and total assets are estimated from 500

billion to trillion boast (K-Grose Thomas, 2008).

(Mustak parker, 2004) identified some interesting global indicators which

underline the dynamism of the current Islamic finance market. They suggested that the

Muslims population is growing very fast is all over the world so for meeting the

demands of these Muslims Islamic banks rapidly expanding in non muslims countries.

In recent time due to demand of Islamic banking in west many of the banking majors

including HSBC, Merrill lynch, citigroup, Morgan Stanly, societe generale and

standard chartered have started a long term association with Islamic banking because

of fulfillment the requirement of their middle east clients.

(Mustak parker, 2004) There are various factors which attract the people

towards the Islamic banking. Islamic banking industry grows rapidly not only in

Muslim countries but also in non Muslim countries. In UK the Islamic banking

industry get a boost when in august 2004. The FSA authority accept the Islamic bank

of Britain (IBB) this authorization make the Islamic bank of Britain the first stand

alone Islamic bank in UK.


29

The writer give an example that experience in Malaysia has shown that Islamic

banking is not only for the Muslims but also for anyone interested in ethical or profit &

loss sharing banking. In Malaysia 70% non Muslim Chinese customers use the Islamic

banking financial services (Mustak parker, 2004)

Mustak parker elaborates the market share of Islamic banking deposits.

1. Islamic banking deposits are 10.4% of total banking sector deposits in 2003.

2. Islamic banking assets are 9.7% of total assets of banking industry.

3. Islamic banking finance are 10.3% of total banking industry finance.

4. In monitory term as compare to 2002 the assets which was RM82, 1 96m

5. Total Islamic banking deposit as compare to 2002 increase by 13% which

were RM60,212M

6. Total Islamic financing increasing 8.24% in 2003 as compare to 2002 which

as RM48.615M (peter muster 2004)

The modern commercial banking system gain importance in Europe especially

in the United Kingdom. The basic philosophical roots of system revolve around the

basic principle of capital certainly for deposits. For implementing there rules the

central bank used its power of supervision & central to make the functioning of banks

smooth. All banks must be following the rules of central bank. Those Islamic bank

which are wishing to operate in a non Muslim countries have many difficulties in

following there rules. These difficulties in operating non Muslim countries may be

certainly of capital, return, supervisions & central & tax regulation. (Rad, 1991).

The conventional banks give guarantee the capital and rule of return, which is

Islamic banking system working on the principle of profit & loss sharing & cannot

give any fixed rule of return on deposits. Mostly Islamic banks never give a guarantee

of capital either, because if there is loss facing by the bank they distribute and deduct

the capital.


30

(Sir Leigh Pemberton, 1991) the governor of the bank of England told the Arab

banker�s association in London that,

� If allowing who essentially difered banking system to operate in parallel it is

important not to risk misleading & confusing the general public.

� A central feature of the banking system of the United Kingdom as enshrined in

the legal framework is capital certainty for depositors. It is the most important

feature which distinguished the banking sector from the other segments of the

financial system;

� Islamic banking is a perfectly acceptable mode of financing but it does not

fall within the definition of what constitutes banking in the UK;

� The Bank of England is not legally able to authorise under the Banking Act,

an institution which does not take deposits as defined under that Act;

� The Islamic facilities might be provided within other areas of the financial

system without using a banking name.

In the some manner because of certainty in return on capital some comments

say by (Mr. charls Schotte, 1995) the US Treasury department specialist in regulatory

issues has remarks.

Thum word says in UK.

�There has never been an application for an Islamic establishment to set up

either as a bank or as anything else. So there is no precedent to guide us. Any

institution that wishes to use the word �bank� in its title has to guarantee at least a zero

rate of interest -- and even that might contravene Islamic laws.�

(Steele F, 1984) The other issue arise that the supervision & control by the

central bank because the central bank supervise its schedule bank & control them. This

issue mainly relates to liquidity requirement & adequacy of capital A financial advisor

stated that �the bank of England faces a great difficulty in putting value on the assets of

an Islamic institution under the 1979 act which wanted to operate as a bank in the UK.

The conventional or traditional banking system has much of its fixed assets in fixed

interest instrument and it is very easy to value.


31

The author gives one example which we quoted in his words.

If they are British Government instruments they will have a quoted market

value; and there are recognized methods for valuing traditional banking assets when

they become non-productive. But it is very dificult indeed to value an Islamic asset

such as a share in a joint venture; and the Bank of England would have to send a team

of experienced accountants into every Islamic bank operating in the UK as a bank

under the 1979 Act, to try to put a proper and cautious value on its assets.

As we discuss the growth of Islamic banking the issue of supervision & control

is very important. Because Islamic banking never give a fixed rate of return so one

financial analyst said that.

Even if a method could be found for assessing the risks to calculate the capital

necessary, little comfort could be taken from the profitability which is usually relied

upon to cover day-to-day losses arising from the bank�s business, because a

substantial part of an Islamic bank�s portfolio is venture capital without any

guaranteed return. ( Suratgar D, 1984).

Another most important aspect of operating Islamic bank in non Muslim

country is tax procedure in non Muslim countries because interest is the biggest

income. In addition in trade financing there are little transfers twice one from seller to

bank and then from bank to buyer.

Then due to twice taxation on account decreasing the profit of ventures so in

this regard the director of international Islamic bank Denmark says.

There could be potential dangers for the international system, where the failure

of such an institution could bring with it the failure of other associated institutions, or

of all the Western banking institutions which come closely tied to with such an

operation. (Karsten I, 1982).

(Muhammad ridza) a lawyer stated that there is rising demand for Sharia

compliant investment from an estimated 1.6 billion Muslim world wide and also

estimation shows that the Islamic assets are set to his US 1.4 trillion by 2010� and it is

also estimated that the Islamic financial system will soon be managing


32

approximately 9 percent of world economy� by showing the Muslims population in the

world they shows the potential market size for the Islamic banking industry. (Professor

Abdullah saeed) stated that mostly non Muslim is interested in various form of ethical

investment which provide by the Islamic banking. The Islamic banking market is

growing very rapidly not only in Muslim countries but through out the world. The

author urged that Islamic banking grow rapidly over the past few years and it is

expected to continue to exhibit robust growth for the future. The main reason of growth

of Islamic banking is the retail banking customers who were finding the opportunities

to invest according to their personal beliefs. In many countries government is on the

bank of Islamic banking to provide support such in case of Malaysia. (Booz &

Company)

The writer gives the information that Islamic asset grown very rapidly in the

past five years. The rater of growth is between 15-20% per annum. In this manner

Islamic banking is one of the fastest growing sectors in the global financial services

industry. The growth in Islamic banking industry is not only seed in retail &

commercial alone. But they have been exponential growth in the assets management

sides and he Shariah compliant funds in rapidly increasing in recent years. In the

parallel of that Islamic capital market have showed a wave of innovation over the past

few years. There are many instruments of Islamic banking which have strength in

market but the most notable instrument that has engaged has been sukuk. In the period

2002-2007 US$ 85 billion in funds were raised through sukuk(Booz &

company).Aazim mohiuddin elaborated in his article that Islamic banking industry is

the sector which is least affected by the global financial crisis. Islamic banking

industry faces only little trouble only after this crisis had snowballed into a recession in

developed economic affecting growth prospects of Pakistan & other developing

countries.

According to latest state bank report Islamic banking industry overcome easily

on there problem and know most of the indications are showing a reversion towards

the usual high growth trend. This report also showed some fact & figure that the asset

of Islamic banking in overall banking industry grew from 3.4 in June 2007 to 5.1

percent in June 2009. in term of value these assets increases 97 percent from Rs. 159

billion to Rs 313 billion total deposits jumped 120 percent from Rs 108 billion or 3.1

percent of the banking industry to Rs. 238 billion or 5.2 percent not only this but also

the financing & investment rise from 90 billion to Rs.195


33

billion that show a very rapid growth in finances & investment is about 117 percent.

The financing & investment share of Islamic bank in overall banking industry

is group up from 2.6 to 4.2 percent in last two years.Mohiuddin azim also stated that

there is three factors or things which helped in this rapid growth of Islamic bank.

1. IB had a narrow bone in June 2007. It is said by the dead of large local Islamic

banks.

2. Islamic banking has a man appeal

3. Islamic banking has same inbuilt characteristics that offer a better cushion

against man-made crises.

Among the all above three characteristics the third one is most important and

unique features of Islamic financing do protect banks from the elements of man made

crises in all but evident Mohiuddin Aazim also gives a comprehensive comparative

review of Islamic banking with conventional banks. Top 100 Islamic

Islamic bank

The assets of top 100 Islamic banks Grew 66%. 580 billion in 2008 from 350

billion in 2007.

Conventional banks

The assets of 100 commercial banks in Asia (the region that was not in the

centre of the financial crises) posted only 13.4 percent growths. According to

international media global Islamic banking is set to grow up to 30 percent in 2009.

Dand Vicary Abdullah stated in his article that he is very impressed by some

points of Islamic development bank president Dr. Ahmed

Mohammad Ali address.

Dr. Ahmed Mohamed Ali the president of Islamic development bank in his

address identified that 70% of the Islamic finance industry is commercial banking &

that there was a need to diversify into area like investment banking, venture capital

small and medium sized enterprises and specialist financing. According to his opinion

not to much concentrate only on commercial banking but must


34

diversified. His opinion was or conclusion was �more diversity equals more

sustainability�

In his address the second thing in which they focused on emphasis is the

regulatory and accounting standards of Islamic banking industry. He felt that the

regulatory & accounting standard must be revisited and revised at system level both

macro and micro in order to meet future demands. Dr. ahmed Mohamed ali also

suggested that building integrated stability would provide a firewall against further

systemic shocks.

Thirdly they give suggestion about knowledge service and products. They

knowledge with creativity and innovation and proposed that knowledge based growth

was a key dimension that needed attention for him �Islamic finance equal value

creation�

Lastly he suggested that �innovation equal growth� that is the most important

aspect that if you are innovative then your must grow. You must be innovative or make

innovation in services, product and other function. Then you must grow. He also

cautioned that innovation must create not destroy; value and that new Islamic financial

products must demonstrate both value and efficiency to the market place.

This was indeed food for thought as well as a call to action.

At the end the president of Islamic development bank Dr. Ahmed Mohamed ali

wish that at that time we must take the steps to take the Islamic finance into the next

level.

Islamic banking facing a number of challenges despite of all there challenges

typical of a new and emerging industry, the prospects for growth of Islamic finance are

promising but rests and building an effective system for Islamic finance. (Dr Akhter,

shamshad Dr Akhtar shamshad says that due to increase in interest on Islamic finances.

Raising the investment in Islamic finance and resulted in phenomenal growth in

Islamic finance business. They also said that interest in this discipline has already

extended beyond Muslim and Islamic countries to non-Muslim population and

jurisdictions and non Islamic financial institutions

Further elaborated that the Muslims are attract towards the Islamic banks

because the avoidance of forbidden investment (harram products) interest rule and

speculative structures prohibited in Islamic jurisprudence and Islamic finance

emphasis on equitable financial system.


35

In 14th world Islamic banking conference held in Bahrain 9-10 December

2007. Some silent key drives are elaborated which enhance the efficiency and

competitiveness of Islamic finance include.

1. Financial engineering and innovation.

2. Global financial centers and their regulators support for Islamic finance

industry.

3. Standard governance and prudential regulation and supervisory guidance

with required tweaking regulations to properly identify and assign proper

weights for new and different types of risks associated with the special and

unique characteristics of Islamic finance business.

4. Development and adoption of simple standard and cost affective legal

frameworks for contracts associated with the new and hybrid products.

5. Flexible and practical application and enforcement of Shariah principles and

injections and its acceptability by public.

Dr Akhter Shamshad assets that at that time Islamic finance now seems to be

reality and it is as the way to be institutionalized. Islamic finance have different levels

in different countries not only in Muslims countries but under the western or other non

Muslim world selectively & cautionary positioning to invest in this system. Islamic

finance system has great potential to meet the financial gaps & requirements of

development and society at large and its demand would be robust going beyond

religious grounds. Mean this industry now at that time growing very rapidly

irrespective of religious ground in Muslim but also in non Muslim countries.

Akhtar Shamshad (2007) in closing keynote address in town university,

Washington it is said that Islamic finance is spread across 70 countries and rapidly

expanding in other countries. It has grown to almost a trillion industries. Islamic

finance growing very fast reached an trillion dollar industry but despite all there


36

thing it is still a niche market in the overall global financial industry, but the future of

industry is quite bright because in future they may be fulfill the demand of 1.4 billion

Muslim population.

In the global scenario the level of growth, interest & motivation for industry is

varies. The growth in gulf cooperation council has been exceptional with Bahrain

emerging as main hub adopting and implementing Islamic finance education. Islamic

finance has exceptional growth not only in Muslim countries but also in some western

country they grow very rapidly. Islamic finance is grow rapidly in London that now

provide policy and tax incentives to promote Islamic finance industry to attract funds

from high net worth client. Such kind of motivation & interest seem in many global

banks which are world class players such as HSBC, standard chartered, deutsche bank,

city bank etc. they set special hubs to structure Islamic finance products.

Akhtar Shamshad said in his speech that the motivational and driving factor of

this industry vary across the world. These factors change country by country, nation by

nation. Akhter Shamshad elaborated that what is the thing that build one confidence in

large investment by financial industry across main hubs GCC/Middle east south east

and south Asia, for building once confidence and attracting more people towards

Islamic bank we make infrastructure development in this industry through

1. Issue of holistic banking license or opening of special window or creation of

hubs/ dedicated Islamic asset management funds, private equity fund and

hedge funds. Accompanied by Dow Islamic Index to which all such

transaction subscribe too are large.

2. Secondly most of people unaware from Islamic banking industry & its

versatile product. Develop Shariah knowledge and understanding and

engagement of Shariah advisors and scholars which together and providing

required consensus.

3. Development of Islamic standard which edifices the people confidence on

Islamic banking such as development of Islamic financial supervisory


37

board and according and auditing organization for Islamic institutions

(AAOIFI) and international Islamic financial market (IIFM).

These agencies helped develop and initiate implementation of Islamic

prudential regulatory, according and auditing frame works and inspections and

supervision of financial institutions

These efforts can build the confidence of people and Islamic banking industry

grows with a rapid pace not only in Muslim countries but also in non Muslim

countries.

According to one market survey it is confirm that the potential from retail

housing and project finance and innovation happens in there market is significant and

augurs well for economic and financial services development Islamic banks have

registration double digit growth in retail market. They penetrate very rapidly where

personal banking solution has been structured well and where information technology

is used to offer online ATM and telephone.

It�s often said that Islam is not just a religion, but a way of life and commerce is

a big part of that life. The way many Muslims manage their money is, for them, part of

being a practicing Muslim.

There are over half a million Muslims in Canada, a population which has

increased 128 per cent from 1991-2001 according to Statistics Canada. As a growing

Muslim population is looking for financial solutions that work with their religious

beliefs, Islamic banking is becoming more popular in Western countries. (Nisha Patel

and Jason Satur, 2008).

An estimated 15�20 million of them are Muslims. And while the country�s

population is largely diminishing, Russia�s Muslim population is on the increase. It

has grown by around 40 per cent since 1989, due to high birth rates in the Muslim

community and continued immigration from the Caucasus and Central Asia. Some

analysts project Muslims to become one-fifth of the country�s overall population by

2020.Although the Arab world considers Russia a potentially emerging market with

regard to Islamic finance, there is still a lot of apprehension when it comes to investing

capital in it. �There are many hitches and complications.� (New horizon. Global

perspective on Islamic banking & Insurance, 2007)


38

(Taipai times, 2006)Japan is looking to become the first major industrialized

nation to issue Islamic bonds in hopes of attracting money from oil-rich Muslim

countries, a bank official said yesterday.

Islamic financial practices ban the payment or receipt of interest or any

transactions that include alcoholic beverages or gambling, which are banned by the

Quran.

"The bank is studying the possible issuance of the bond with Malaysia," said

Hiromi Inukai, a spokeswoman of the government-backed Japan Bank for

International Cooperation (JBIC).

In Canada, the Muslim community has been steadily increasing and is

estimated to have reached over 750,000 people in 2007. Despite this growth, there are

very few Canadian financial institutions that offer Sharia-compliant products and

services. (Michael Hsu, 2007)


39

Chapter 4

4.0 METHODOLOGY

The emergence of Islamic banking industry has observed a dramatic shift in the

perception of people towards Islamic banking. Especially in non Muslims countries

Islamic banking seems to have great potential to grow and compete the orthodox

interest based banking. When any Islamic banks decide to operate in any non Muslims

country they must analyze the population statistics of that particular country. If there is


enter in that particular country. This study aimed to finding the relation between two

factors the Muslims population and Islamic banking growth rate in non Muslims

countries by supposing all other factors which have impact on growth rate of IB,

constant. There are many other factors which contribute in growth rate of IB and

urging people to opt Islamic banking in non Muslims countries. The study propelled

out through secondary data resources. The study find the relation between the Muslims

population and growth rate of IB in non Muslims countries by analyzing the last five

years Muslims population trend and growth rate of IB in these countries. Different

Statistical contraption will be applied to interpret the results which show the relation

between them.

4.1 Research Design

The basal research study would be descriptive and co-relational type and

exploration of the study will be propelled through different secondary provenience. In

order to go for the proposed study, data were collected through different sources. In this

study we try to find out the relation between two variable the Muslims population and

growth rate of IB in non Muslims countries. Identify relation between these two

variables by using different statistical tools. In our study we have taken two variable x

and y. where x represent Muslim population in non Muslim countries and y stands for

Islamic banking growth rate. In this study x


40

variable is the population growth is independent variable while the y Islamic banking

growth is dependent variable.

The independent variable x (Muslims population in non Muslims countries) is

in million, and the dependent variable y (Islamic banking growth rate in non Muslims

countries) is in percent.

In order to find out the relation between these two variables we use two

statistical tools the correlation and regression analysis. Correlation represents the

relation between the two variables while regressions express the growth trend with

respect to Muslims population.

4.2 Sources of Data

Our main provenience of data collection is secondary data resources such as

Literature reviews, Books, Web browsing, News papers and Articles about the Islamic

banking growth and Muslims population are also main source of data accumulation,

and reviewing. This data use to educe the information about the rapid growth of

Islamic banking in non Muslims countries. We collect the 5 years Muslims population

and growth rate of Islamic banking in non Muslims countries by different secondary

resources.

4.3 Method of DataCollection/Sampling

Sampling is most important in any kind of research weather it�s qualitative or

quantitative. Our basal study is quantitative type study. Quantitative research seeks

explanatory laws. Quantitative research generates statistics and measures what it

assumes to be a static reality in hopes of developing universal laws.

For data collection the sampling technique use for this study is cluster sampling.

The sampling helps to estimates population parameters. All the non Muslim countries

are our population of study. Out of all the non Muslims countries we choose or 3 non

Muslim countries for study the growth rate and market share of Islamic banking in

these countries. The size of sample is very stubby because in some non Muslims

countries IB�s still unacquainted and in some countries the population of Muslims is

very stunted. Cluster sampling is justified here because homogeneity between the

clusters in term of population characteristics. Population


41

of Muslims community in one non Muslim country shows the similarities with the

Muslim community of other non Muslim country.

In cluster sampling we divide the population in to subgroups which are called

clusters we try to maintain homogeneity between subgroup and heterogeneity within

subgroups. In our study we have divided the Muslim population residing in the non

Muslim countries in to various clusters and selected three of them randomly for the

study. The reason for selecting this sampling is that we have obtained homogeneity

between clusters which have proven to provide us with accurate data.

The cluster sampling is also economic and easy to adopt. Unavailability of data

and limitations of resources led us to select this appropriate type of sampling.

4.4 Analytical Procedures

For analyzing the relation that there is positive or negative relation between the

Muslims population and growth rate of IB in non Muslims countries we use the two

statistical tools correlation and regression.

In our study we have taken two variable x and y. where x represent Muslim

population in non Muslim countries and y stands for Islamic banking growth rate. In

this study x variable is the population growth is independent variable while the y

Islamic banking growth is dependent variable.




Correlation represents the relation between the two variables while regressions

express the growth trend with respect to Muslims population. By finding out the

regression equation we able to forecast the growth rate of IB non Muslims countries if

other factors remain constant.


42

Chapter 5

5.0 DATA ANALYSIS AND

DISCUSSION

Islamic banking industry is blossoming at the rapid rate all over the world. It is

engulfing not Muslims countries but taking also root in non Muslims countries and

appealing Muslims community with profound impact on their socio economic order of

lives. This impact is consequent of many possible factors. As Islamic banking based

on interest free mechanism hence its may appealing to Muslims on the other hand

conventional banking is pillared on interest without which they cannot subsist. Islamic

banking is exceedingly swelling not only in Muslims but also in non Muslims

countries. As the people get awareness of Islamic banking system they abundantly

come towards Islamic banks.

When any Islamic banks decide to operate in any non Muslims country they

must analyze the population statistics of that particular country. If there is


enter in that country. They also analyze the different trends of Muslims population in

particular country that the population of Muslims is increasing in that focused country

day by day or declining due to any reason such as Muslims migrate from that country

to other. After understanding these thing we are able to state that population is

important factor which must be considering by the Islamic banks while they want to

operate in any non Muslim country. There is increasing trend of Muslims population

in the non Muslims countries. Due to which that particular market is very attractive for

the Islamic banking industry.


43

The following table illustrates the potential market size in mainland Europe

and other countries for an Islamic bank, as well as highlights the potential for Islamic

banking in these countries

(Table 5.1)

MUSLIMS POPULATION IN NON MUSLIMS COUNTRIES (in 2009 EST)

COUNTRY TOTAL

POPULATION IN

2009 Est.

MUSLIM

PERCENTAGE

(%) OF TOTAL

POPULATION

PERCENTAGE

(%) OF

WORLD

MUSLIM

POPULATION

ENGLAND 2,527,000 2.7 0.1

USA 2,545,000 0.8 0.2

CANADA 8,97,000 2.0 0

AUSTRALIA 3,65,000 4.2 0

FRANCE 3,554,000 6 0.2

GERMANY 4,026,000 5 0.3

ISRAEL 1,194,000 16.7 0.1

SWEDEN 1,49,000 2 0

DENMARK 88000 2.0 0

CHINA 21,667,000 1..6 1.4

AUSTRIA 353,000 4.2 0

RUSSIA 16,482,000 11.7 1.0

INDIA 160,945,000 13.4 10.3

Source: http://en.wikipedia.org/wiki/List_of_countries_by_Muslim_population

The above population shows that there is sufficient market for Islamic

banking in many non Muslims countries. The exceedingly growing population of

Muslims in non Muslim countries attracts the Islamic banking industry in these

countries. In this study researcher consider that growing population of Muslims in

these countries is the main factor of Islamic banking growth while consider all other

factors constant. This study shows the relation

http://en.wikipedia.org/wiki/List_of_countries_by_Muslim_population


44

between the Islamic banking growth and population growth in non Muslims countries.

Because there are many other factor which motivate the people to opt Islamic banking

and contributing in enhancing the growth rate of IB in these countries.

The literature have shown that there is a gradual increase in the growth rate of

Islamic banking in non Muslims countries on the other hand Muslims population also

experiencing an increase. This incremental in growth rate of Islamic banking could be

due to increase of Muslims population in non Muslims countries.

The rapid growth of Islamic banking in non Muslims countries is suggesting

that Islamic banking system is proving to be an alternative to conventional banking

system. The data shows the strong relation between population growth and growth of

Islamic banking. The literature has also revealed that population is not a single factor

which are involved in enhancing growth rate of IB in non Muslims countries. These

factors could be appealing to Muslim community to a great extent. They also entice the

non Muslims as towards the IB because the stability of IB in recent crises.

The factors which have profound impact on growth rate, other than population

can be classified into five categories. These factors are contributing in the growth rate

of Islamic banking. They also enhance the growth rate of IB in non Muslims countries

as the literature review revealed. There are many other factors which motivate people

to opt Islamic banking. These factors disunite into religious, socio economic and other

personal and physiological, situational and service factors.

These factors are further classified.

1. The religious motivational factors may be interest free banking, banking

system based on Islamic tenets, limpidity and trust, existing of Shariah

advisory board.

2. The crux economic factors which motivate the people towards Islamic banking

or a reason of a rapid growth of Islamic banking are financial stability of IB�s

in recent economic crises, market reputation of Islamic banking which is a new

trend in the market, Islamic banking emerging as a


45

new industry, Islamic banking versatile product, concept of partnership by

sharing profit and loss, saturation of conventional banking market and asset

based financing.

3. The personal and psychological factors may include, long term confidence of

people because of international standard and consistency in accounting rules of

IB, a lot much awareness of IB, advice of friends, neighbors and family

members has a stronger influence on customer decision.

4. The situational factor may include, convenient location, waiting line,

depositing and withdrawing money, long transaction and etc.

5. The service factor may include free chequing services, adequate drive in

services, accurate bank statement and friendly staff.

These are some other factors which also contribute to enhance the growth rate of IB to

some extent. How ever the first one is more concern with Muslims while the other one

with both the Muslims and non Muslims. Due to no interaction made with the

customers and people of non Muslims countries, we are unable to give sufficient

ranking to these factors that which factor is more appealing in motivating the people of

these countries towards IB.

The literature shows that there are five motivational factors in which religious

factor is more appealing for the Muslims customer. The Muslims population is

increasing day by day and they prefer the religion. The religious factor is one of the

important factors which motivate more Muslims towards IB. In religious factor there is

more division of this factor.

As the literature review suggest the most important religious factor is interest

free banking. Because when the name of Islamic banking comes the concept of Interest

free banking comes into the minds of people. Interest is prohibiting in Islam and it is

completely banned. Most of the people in non Muslims countries are more concerned

with religion due to this reason interest free banking is the most important sub factor of

religious factor which is given preference by the Muslims people. On the contrary

interest free banking is the


46

factor which de motivates the non Muslims customers towards IB because they prefer

the interest as the literature suggested.

Non Muslims customers prefer that particular banks which offers the high

interest rate. Interest rate is very important for non Muslims customers and many of the

conventional banks try to compete each other by offering high interest rate. They try to

attract the customer by offering high interest rate. Many conventional banks offer high

interest rate on deposits and minimum interest rates on loan for catching the customer.

But Islamic banking is not granting the fixed rate of interest. Because interest is

prohibit and completely banned. So this factor has two aspects once in the form of

stronger motivator for Muslims in attracting towards Islamic banking while on the

other hand it is the stronger de motivator for the non Muslims customers.

The second sub factor of the religious factor is, banking system based on

Islamic tenets. All of the Islamic banking industry base on Islamic rules and principles.

Due to this factor more people comes towards IB. Because they realize that every

activity and each transaction is based on Islamic tenets.

Third religious factor is limpidity and trust. Islamic banking purely based on

Islamic tenets people have more satisfaction and trust on Islamic banking specially

Muslims customer they feel satisfaction and having trust that Islamic banking must

follows the Islamic Shariah. People have faith and conviction on Islam which is

distinct reason for them to adopt Islamic banking system.

This point is also related with previous sub religious factor, the people

limpidity and trust is very high because the Islamic banking system based on Islamic

tenets.

One of the important religious factors is the existing of Shariah board. They

also are urging the people toward Islamic banking because the Shariah board is key

element in the structure of Islamic banking. The Shariah board consist on top Shariah

scholars a carrying the responsibility of ensuring that all products and services offered

by these institutions are fully complained with the principle of Shariah laws. They

provide advice and guidance as prudential regulation guideline mode of financing and

model agreement for Islamic industry. When these top Shariah scholars become the

member of Islamic bank Shariah board the more people come towards IB because of

people trust on these top Shariah scholars. This is important factor which motivate the

people and this factor also contribute in


47

enhancing the growth rate of IB. due to importance of this factor many world class

players such as royal bank Dutch bank and other who take the assistance of top Shariah

scholars and opening Islamic banking windows for attracting the people as literature

review suggested.

The second motivating factor shows by the literature, which attract the people

towards IB is the crux economic factor. This factor is not only concerned with Muslim

customers but also concerned with the non Muslim customers as well.

One of the economic factors is the financial stability of IB�s in recent economic

crisis. Due to this stability people get the sense that Islamic banking has very strong

muscles and also have very standardized rules and regulations and this sense urge the

people not only Muslim but also the non Muslim towards Islamic banking. The non

Muslims are more concerned with that factors due to this reason that there money is

saved and not loose due to financial crisis at the people fund sink in other financial

institutions due to these recent economic crisis.

The next economic factor is the reputation of Islamic banking. People give

more preference to institute or thing which has goodwill in the minds of people. In

recent era Islamic banking have a sophisticated reputation because it is the new trend

in the market.

One of the economic factor is versatility in the product of Islamic banking

which they are offering. They offer specialized product on the basis of people needs or

by analyzing the needs of people. Islamic banking system has all the substitute product

of those which is offering by conventional banking. Due to this reason Islamic banking

system become proving to a suitable alternative of conventional banking system. One

of the most versatile product of Islamic banking system is that IB offered the leasing of

old cast which are not offering by conventional banking system. This is the unique

product of Islamic banking system, the comparison of Islamic banking system product

with conventional banking product given in chapter 2 named factor which appeal

Muslim and non Muslim towards Islamic banking in non Muslim countries which

shows the Islamic banking product as the strong substitute of each conventional

banking product.

Another economic factor suggested by literature reviews which urge the people

towards Islamic banking system is the sense of partnership by sharing profit and loss.

Some time this factor de motivate the non Muslim customers because they want only

share the profit and not willing to share the loss. The Muslim


48

people motivate because in Islam the business of profit and loss sharing is allowed but

non Muslim just think about the profit they have no concerned with the loss sharing.

Muslim people get the sense of partnership by sharing profit and loss.

The next economic factor due to which the people opt Islamic banking are the

saturation of conventional banking market as the literature shows. In the recent time

there is a large number of conventional bank enter in the market and open their

branches due to this the conventional banking industry become saturated. This

saturation of conventional banking industry divert people towards Islamic banking

because it emerging as a new industry having a high reputation and showing stability

in the recent economic crises. This factor not only appealing Muslim but also non

Muslim customer as well.

Asset based financing is also an economic factor which attract both the Muslim

and non Muslim towards IB and contribute in enhancing the growth rate of Islamic

banking system.

We are trying to prove that Muslim population growth rate plays significant

role in increasing the growth rate of Islamic banking industry. But Islamic banking not

only grows due to this reason there are certain other factor which increase the growth

of Islamic banking industry.

The third factor which plays a significant role is personal and psychological

factor. First personal and psychological factor is long term confidence of people build

on Islamic banking because of its international standard and consistency in accounting

rules. People feel confidence and never hesitate to come towards IB a lot much

awareness created in non Muslims countries about Islamic banking and people get

aware with IB and opt Islamic banking generously.

One of the personal factors involved the advice of friend. People get advice

from friends when they want to choose a bank for opening an account. Not only friends

advice influence the decision of selecting a bank but also neighbors and family

members have a strong influence on customers decision so that factor also contribute

in increasing the growth of IB to some extent.

There are some other situational factors which people consider while choosing

the bank. Situational factor include convenient location some people only consider the

bank which is on convenient location irrespective of banking system whether it is

conventional or Islamic. Some other situational factors may include depositing and

withdrawing money, waiting line and long term transaction some


49

people consider this factor as an important factor. Due to this Islamic banking try to

improve situational factor to attract more people.

Another factor which people consider while selecting the bank is service factor.

Service factor is also important some people leave one bank only due to the reason that

they never provide the good services. Services include free checqing service; adequate

drive in service, accurate bank statement service, family staff and many more, online

fund transfer facility.

These are the factors which also contribute in increasing the growth rate of

Islamic banking irrespective of population growth.

The primary step for entering in any non Muslim country for an Islamic bank is

a thorough research about the Muslims population in that particular country and

analyzing the trend of population. They must study the population statistics of

Muslims in the country of interest.

Our study aimed to finding a relation between population growth of Muslims in

non Muslims countries and growth rate of Islamic banking in these countries remains

other all factor which contribute in growth of IB is constant.

5.1 Empirical Analysis

In our study we selected three non Muslims countries including UK, USA and

Japan. The basal study propelled through by taking the population of Muslims in these

non Muslims countries and the growth rate of Islamic banking in proposed countries,

and focused was to describe and explain the growth rate of Islamic bank in terms of

population growth of Muslim community in these countries. Or in other words find out

the relation between these two, Muslims population in non Muslims countries and

Islamic banking growth rate in proposed countries remaining other factor which

contribute in enhancing the growth rate of IB is constant. Literature review elaborated

that the preliminary step for any Islamic bank for operating in a non Muslim countries

is to analyze the population of Muslims in that focused countries. They study the

various trend of Muslims population in that particular country and also study that at

what proportion the Muslims population increase in that country or that might be

declining due to any reason. After studying these things an Islamic bank enable to enter

in a particular non Muslim country for its


50

operation. In order to prove the hypothesis that there is positive or negative relation

between population growth and growth rate of Islamic banking we dissect the trend of

Muslims population and growth rate of Islamic banking.

In our study we have taken two variable x and y. where x represent Muslim

population in non Muslim countries and y stands for Islamic banking growth rate. In

this study x variable is the population growth is independent variable while the y

Islamic banking growth is dependent variable.




In order to find out the relation between these two variables we use two

statistical tools the correlation and regression analysis. Correlation represents the

relation between the two variables while regressions express the growth trend with

respect to Muslims population.

When two quantities are so related that the fluctuations in the one are is

sympathy with fluctuations in the other, so that an increase or decrease one is found in

connection with increase or decrease of the other (or inversely), the quantities are said

to be correlated and correlation is said to be simple in case of two variables.

In other words correlation measures the degree of interdependence between

two variables.

Correlation may be direct or positive if an increase, or decrease in the values of

one set is associated with increase or decrease of the other set. If the increase or

decrease is associated with decrease or increase of the other and correlation is said to

be inverse or negative.

Regression help us to find out the equation, with the help of that equation we

predict the future growth rate of Islamic banking in that particular country.

T test use for taking the decision that we accept the hypothesis or reject which

we generated.

ENGLAND


52

(Table 5.2)

E NGL A ND

2007 2.327 5.5

The result shows that there is a constant increase in Muslims population and

growth rate of IB. In 2004 the Muslims population in UK was 1.087 million while

Islamic banking growth rate was 1.8%. In 2005 the Muslims population in UK was

2.017 million while Islamic banking growth rate was 2.9%. In 2006 the Muslims

population in UK was 2.142 million while Islamic banking growth rate was 4.2%. In

2007 the Muslims population in UK was 2.327 million while Islamic banking growth

rate was 5.5%. In the next year 2008 the Muslims population in UK was 2.422 million

while Islamic banking growth rate was 7.8%.there is gradual increase in population as

well as in Islamic banking growth rate but this increase in growth rate of IB in not only

due to increase in Muslims population there are certain other factors which we

supposed constant.

2004 1.087

ISLAMIC BANKING

GROWTH RATE

(in %) y

MUSLIMS POPULATION

GROWTH (In Million)

X


53

(Graph 5.1)

The graph shows the Muslims population in million in UK and Islamic

banking growth rate in percent.

SCATTER DIAGRAM

(Graph 5.2)


54

Empirical and mathematical result has shown that there is positive relationship

of 89% between Muslim population and Islamic banking growth in UK if other factor

remained constant which might be effect the growth rate of IB. Correlation shows a

very strong relation ship but this relation may vary because there are many factors

which effects on the growth of IB in non Muslims countries which we assumed

constant.

(Table 5.4)

REGRESSION ANALYSIS SUMMARY OUTPUT

Regression statistics

Multiple R 0.825490911

R Square 0.681435244

Adjusted R Square 0.5 75246992

Standard Error 1.521899521

Observations 5


55

(Table 5.5)

df

ANOVA

ss Ms F Significance F

Regression 1 14.86346555 14.8634655 6.4172376 0.085182984

resiual 3 6.948534455 2.31617815

Total 4 21.812

coefficients Standard error T stat

Intercept -2. 781131489 2.930693707 -0.948966957

X variable

1

3.612371931 1.425996301 2.533226719

In order to find out relation we use regression analyzing technique in which y

is dependent variable which shows growth rate of IB in percentage while the other

variable x is the independent variable which shows the population growth in million.

By using regression we find the equation of Y on X

Y = a + b x

Where:

Y= dependent variable (growth rate of IB in percentage)

X= independent variable (Muslims population growth in million)

a=intercept

b=coefficient of x variable 1

We get by putting values in equation

Y= a + b x

Y= -2.78+3.61 (x)


56

This is the regression equation between these two variable supposed that if

there is 1 (one) million increase in Muslims population and x represents the

population then

Y= -2.78+3.61(x)

Y= -2.78+3.61(1)

Y= -2.78+3.61

Y= 0.83

The results show that if there is 1 (one) million increase in population that the

growth rate is increase by 0.83%. But population growth rate is not the single factor

which contribute in growth rate of IB there are some other factors which also

contribute an impact on growth rate the other factor have proven to have profound

impact on growth rate.





With the help of regression equation we can forecast the growth rate of Islamic

banking in non Muslim countries simply substituting the value of x variable which

represent the Muslim population in million. By putting the value of X (Muslims

population) we forecast the growth rate of IB in UK if other factors remained constant.

This growth rate may vary because of other factor which we are unable to locate.

T test

T test use for taking the decision that we accept the hypothesis or reject which

we generated .The t test shows that the value of t is greater than 1.96.The value of t in

case of UK is 2.53 which is greater than 1.96 so we accept the hypothesis that

preponderance Muslim population plays significant role in the rapid growth and

increasing market share of IB in non Muslims countries.

57

UNITED STATES OF AMERICA


58

(Table 5.6)

UNITED STATE OF AMERICA

YEAR MUSLIMS POPULATION

GROWTH (In Million)

ISLAMIC BANKING

GROWTH RATE (in %)

x y

2004 1.101 1.5

2005 1.502 1.9

2006 1.912 2.6

2007 2.125 4.3

2008 2.345 5.5


growth rate of IB in USA. In 2004 the Muslims population in USA was 1.101 million

while Islamic banking growth rate was 1.5 %. In 2005 the Muslims population in USA

was 1.502 million while Islamic banking growth rate was 1.9%. In 2006 the Muslims

population in USA was 1.912 million while Islamic banking growth rate was 2.6%. In

2007 the Muslims population in USA was 2.125 million while Islamic banking growth

rate was 4.3%. In the next year 2008 the Muslims population in USA was 2.345

million while Islamic banking growth rate was 5.5%.there is gradual increase in

population as well as in Islamic banking growth rate but this increase in growth rate of

IB in not only due to increase in Muslims population there are certain other factors

which we assumed constant.


59

(Graph 5.3)

The graph shows the Muslims population in million in USA and Islamic


SCATTER DIAGRAM

(Graph 5.4)


60

(Table 5.7)

CORRELATION

Column 2 0.925898 1


of 92% between Muslim population and Islamic banking growth in USA if other

factor remained constant. Correlation shows a very strong relation ship but this

relation may vary because there are many factors which effects on the growth of IB in

non Muslims countries which we assumed constant.

(Table 5.8)

REGRESSION ANALYSIS SUMMAR Y OUTPUT


Multiple R 0.. 925898266

R Square 0.85728 7598

Adjusted R Square 0.80971679 7

Standard Error 0.737447892

Observations 5

\

CORRELATION

Column 1

1


61

(Table 5.9)

ANOVA

df ss Ms F Significance F

Regression 1 9.80051182 9.80051182 18.02129

0.02394359

residual 3 1.63148817 0.54382939

Total 4 11.432


Intercept -2.486708693 1.370430208 -1.81454603

X variable

1

3.142297548 0.740208838 4.245149997


is dependent variable which growth rate of IB in percentage while the other variable x

is the independent variable which shows the population growth in million.


Y = a + b x

Where:



a=intercept



Y= a + b x

Y= -2.49 + 3.14 (x)


62


there is 1 (one) million increase in Muslims population and x represents the

population then

Y= -2.49 + 3.14 (x)

Y= -2.49 + 3.14 (1)

Y= -2.49 + 3.14

Y= 0.65

The results show that if there is 1 million increase in population that the growth

rate is increase by 0.65%. But population growth rate is not the single factor which

contribute in growth rate there are some other factors which also contribute an impact

on growth rate the other factor have proven to have profound impact on growth rate.



Islamic banking in non Muslim countries so the other factor would not measure there



banking in non Muslim countries. Simply substituting the value of x variable which


population) we forecast the growth rate of IB in USA if other factors remained

constant. This growth rate may vary because of other factor which we are unable to

locate.

T test

The t test shows that the value of t is greater than 1.96.The value of t in case of

USA is 4.24 which is greater than 1.96 so we accept the hypothesis that preponderance

Muslim population plays significant role in the rapid growth and increasing market

share of IB in non Muslims countries


64

(Table 5.10)

JAPAN

YEAR MUSLIMS POPULATION

GROWTH (In Million)

x

ISLAMIC BANKING

GROWTH RATE (in %)

y

2006 0.78 0.7

2007 0.98 1.6

2008 1.301 3.54

In Japan the Muslim community has been steadily increasing and is estimated

to have reached over 980,000 people in 2007. Despite this growth, there are very few

Japanese financial institutions that offer Sharia-compliant products and services.

In Japan there is no full flagged Islamic bank but the huge amount of

transaction made through Islamic windows and large investment is made by Kuwaiti

investors make the Islamic industry going forward.


growth rate of IB. In 2006 the Muslims population in Japan was 0.78 million while

Islamic banking growth rate was 0.7 %. In 2007 the Muslims population in Japan was

0.98 million while Islamic banking growth rate was 1.6%. In 2008 the Muslims

population in Japan 1.301 million, and Islamic banking growth rate was 3.54%.

There is gradual increase in population as well as in Islamic banking growth

rate but this increase in growth rate of IB in not only due to increase in Muslims

population there are certain other factors which we supposed constant.


65

(Graph 5.5)

The graph shows the Muslims population in million in Japan and Islamic


SCATTER DIAGRAM

(Graph 5.6)


66


of 99% between Muslim population and Islamic banking growth in Japan if other

factor remained constant. Correlation shows a very strong relation ship but this

relation may vary because there are many factors which effects on the growth of IB in

non Muslims countries which we assumed constant.

(Table 5.12)

REGRESSION ANALYSIS SUMMARY OUTPUT


Multiple R 0.997184

R Square 0.9943 76026

Adjusted R Square 0.988752052

Standard Error 0.15392913 1

Observations 3


67

(Table 5.13)

Total 4.213066667


Intercept -3.671884666 0.431787514 -8.503915809

X variable 1 5.506584122 0.41412229 13.29700007


is dependent variable which growth rate of IB in percentage while the other variable x

is the independent variable which shows the population growth in million.


Y = a + b x

Where:



a=intercept



Y= a + b x

Y= -3.67 + 5.5 (x)


68


there is 1 million increase in Muslims population and x represents the population then

Y= -3.67 + 5.5 (x)

Y= -3.67 + 5.5 (1)

Y= -3.67 + 5.5

Y= 1.83

The results show that if there is 1 (one) million increase in population that the

growth rate is increase by 1.83%. But population growth rate is not the single factor

which contribute in growth rate there are some other factors which also contribute an

impact on growth rate the other factor have proven to have profound impact on growth

rate. The may vary due to the impact of other factors which we are unable to find.



Islamic banking in non Muslim countries so the other factor would not measure there



banking in non Muslim countries. Simply substituting the value of x variable which


population) we forecast the growth rate of IB in Japan if other factors remained

constant. This growth rate may vary because of other factor which we are unable to

locate.

T test

The t test shows that the value of t is greater than 1.96.The value of t in case of

Japan is 13.29 which is greater than 1.96 so we accept the hypothesis that

preponderance Muslim population plays significant role in the rapid growth and

increasing market share of IB in non Muslims countries.


69

Chapter 6

6.0 CONCLUSION

The prime interest of our study is to probe the growth rate of Islamic banking in

non Muslim countries. Before join to the area of interest the exploration of study was

made which demonstrate that when ever any Islamic bank intense interest to enter into

a non Muslim country it undertake a thorough research about the Muslim population

and see the potential growth chances of bank there. They analyze the population

statistics of Muslim community in the interested country.

The primary step for entering in any non Muslim country for an Islamic bank is

a thorough research about the Muslims population in that particular country and

analyzing the trend of population. They must studies the population statistics of

Muslims in the country of interest.

Our study aimed at finding the relation between population growth of Muslim

in non Muslim countries and growth rate of Islamic banking for our study we use two

statistical tools to find out the relation between two variables. First Muslim population

in non Muslim countries being the independent variable and second is the growth rate

of Islamic banking as the dependent variable with the help of correlation and

regression analysis. The correlation represents the relation between the two variables

while regression expresses the future prediction and IB growth trend with respect of

Muslims population.

The results have shown that in UK there is positive relationship of 89%

between Muslim population and Islamic banking growth if other factors remained

constant which might be effect on the growth rate of Islamic banking industry. And the

results of regression analysis show that if there are one million increases in Muslim

population of UK than the growth rate is increase by 0.83%.with the help of t test we

are able to predict the future growth rate of Islamic banking in that particular countries

if all others factor remain constant which might effect on growth rate of IB. But

population growth rate is not the single factor contribution


70

in growth rate there are some other factors which also contribute impact on growth rate

the other factor have proven to have profound impact on growth rate.

The results have shown that in USA there is positive relationship of 92%

between Muslim population and Islamic banking growth if other factor remained

constant. And the results of regression analysis show that if there are one million

increases in Muslim population of USA than the growth rate is increase by 0.65%. But

population growth rate is not the single factor contribution in growth rate there are

some other factors which also contribute impact on growth rate the other factor have

proven to have profound impact on growth rate.

At last the results have shown that in Japan there is positive relationship of

99% between Muslim population and Islamic banking growth if other factor remained

constant. And the results of regression analysis show that if there are one million

increases in Muslim population of Japan than the growth rate is increase by 1.83%.

But population growth rate is not the single factor contribution in growth rate there are

some other factors which also contribute impact on growth rate the other factor have

proven to have profound impact on growth rate.





The result shows the positive relation between two variable Muslims

population and Islamic banking growth rate in non Muslims countries. With the help of

regression analysis we analyze the change in growth rate of IB due to change in

Muslims population but the results may vary because there are many strong factors

which have a profound impact on the growth rate of Islamic banking in non Muslims

countries and these factors contribute strongly in enhancing the growth rate of IB in

non Muslims countries. In our study all these factors which have substantial influence

in the growth rate of IB remains constant. The value of t stat is greater than 1.96 in all

cases. In England t stat value 2.53, in USA t stat value 4.24, and in Japan t stat value is

13.29.In all countries t value greater than 1.96 shows the acceptation of hypothesis.

With the help of t stat we accept the hypothesis that Rapid growth is being observed of

adopting IB in non Muslims


71

countries due to increasing Muslims population in these countries if all others factors

remain constant.

At the end we conclude that when any Islamic banks decide to maneuver in any

non Muslims country they must dissect the population statistics of that particular

country. If there is preponderance Muslims population in that country than Islamic

banks take decision to enter in that country. They also sieve through the different

trends of Muslims population in particular country that the population of Muslims is

increasing in that focused country day by day or declining due to any reason.

The results may vary because there are many impregnable factors which have a

profound impact on the growth rate of Islamic banking in non Muslims countries and

these factors conduce strongly in enhancing the growth rate of IB in non Muslims

countries. In our study all these factors which have substantive influence in the growth

rate of IB remains constant.


72

Chapter 7

7.0 GR A P H S

Muslims population growth in UK (in million)

MUSLIMS POPULATION

GROWTH (In Million) X

1.087 2.017 2.142 2.327 2.422

(Graph 7.1)


73

Islamic banking growth rate in UK (in %)

(Graph 7.2)

ISLAMIC BANKING GROWTH RATE (in %)

y

1.8 2.9

4.2 5.5

7.8


74

Muslims population growth in USA (in

million)

MUSLIMS POPULATION

GROWTH (In Million) x

1.101 1.502 1.912 2.125 2.345

(Graph 7.3)


75

Islamic banking growth rate in USA (in %)

(Graph 7.4)


y

1.5

1.9 2.6 4.3

5.5


76

Muslims population growth in Japan (in

million)

MUSLIMS POPULATION

GROWTH (In Million) x

0.78 0.98

1.301 (Graph 7.5)


77

Islamic banking growth rate in Japan (in %)


y

1.6 3.54

(Graph 7.6)


78

Chapter 8

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