Islamic Banking in UK

ABSTRACT

The purpose of this research is to investigate the opportunities of development and growth as well as the main challenges to Islamic banking in the UK. The UK is the hub of Islamic banking and contains importance in Islamic financial sector due to its fast growing Muslim population. Islamic banking is facing some great challenges in the UK because the financial system is more favourable to conventional banking.

Table of Contents

ABSTRACTii

Chapter I1

INTRODUCTION1

THE PROBLEM2

Aims And Objectives4

The Structure Of The Dissertation6

CHAPTER II8

Literature Review8

Introduction of Islamic banking8

Instruments of Islamic Finance12

Profit-and-loss sharing12

Credit instruments16

Leasing operations (ijara)21

Islamic bonds (sukuk) and financial engineering23

The Problem with Interest27

Islamic Banking in UK33

CHAPTER III40

Methodology40

Purpose40

The Paradigms And Methodologies41

Research Design42

Reason for chosing Qualitative Research43

Research Method43

Reason for chosing in-depth Interviews44

Primary Data Collection44

Population Sampling44

Data Sources46

The Primary Data46

The Secondary Data48

Data Collection Procedure48

Telephonic In-depth Interviews48

Data Recording50

Limitation of the Study50

Chapter 452

Results and Discussion52

Islamic Banking in UK52

The growth of Islamic Banking in UK58

Critical Evaluation66

Authorization of the Islamic Bank of Britain73

Risks specific to Islamic finance75

1. Sharia 'arbitrage'75

2. Sharia compliance throughout the product life cycle76

3. Issues for Sharia scholars77

4. Human resources77

5. Contract and documentation risk78

6. Risk of contagion79

Risk management framework79

Basel 2 and risk management83

Chapter 585

Conclusion and Recommendations85

Recommendations88

References92

Chapter I

INTRODUCTION

This chapter provides a brief background of Islamic banking in the World as well as in the UK about its system and practice. The Islamic financial law has long history but Islamic banking and finance industry came into existence with profit and loss sharing investment by Egypt's Mit Ghamr Saving Banks in 1963. After official existence Islamic banking has grown in the area of finance, banking, insurance, mortgage, and assets management business with annual growth rate of 10-15 %. But actual development in Islamic banking is started after 1970 with new investment techniques, strategies and product development (Steward, 2008). Dubai Islamic Bank (DIB) is known as world first Islamic bank it was formed in 1975.

Currently it has 48 branches which great services. DIB offers higher returns than conventional banking system as well they provide auto, home and personal finance products (Platt, 2008).In some countries such as Pakistan, Iran and Sudan all banks are operating according to Islamic financial law but in some other countries such as Bangladesh, Egypt, Indonesia, Jordan and Malaysia Islamic banking services are provided through conventional banking.

There is big movement started in the Western countries especially United Kingdom, Australia and United State (Shanmugam, Perumal and Ridzwa, 2004). In the UK two main high street banks are providing Islamic financial services on competitive basis and Islamic Bank of Britain is fully according to Sha'riah law.

Islamic banking is based on Islamic Sha'riah Law which provides all solutions of financial problems. According to Islamic law interest is totally prohibited in Islam because interest has lot of bad affects on society such as their earning capacity, purchasing power and increase poverty, unequal distribution of wealth and credit crisis in an economy. According to Usmani (2005) the main drawback in interest based system is financier has no concern with money when he gives an interest bearing loan to a ...