Custom «Islamic Banking Arrives at the UK» Essay Paper Sample

This literature review is aims to illustrate the concept, principles and scope of Islamic banking in Europe and the world at large and the opportunities and challenges facing it. Since the institution of Islamic banking in Europe and specifically the UK, it has grown tremendously spreading across Europe in countries like Germany, France, Spain, and Switzerland among others. According to Ali, (2006), all over Europe Islamic banks are establishing branches, offering Sharia compliant financial services. European governments are trying to outdo each other by laying laws embracing this ethics banking.

Islamic banking in the world faces the challenge of expansion internationally while remaining true to Islamic principles. According to Samy and Garas (2000), Islamic financial institutions have witnessed growth recently thus rising to becoming new players in the banking industry. However despite this there is scarcity of theoretical literature on Islamic banking Zahar and Hassan (2001) provides a comparative study on the salient features of Islamic banking supervisory conducted in 15 countries explaining the Lack of regulatory frameworks in Islamic banking. This has caused a great challenge among the Islamic bankers to uniform their standards and also how to police and mandate them on all Islamic financial institutions in the world.

However in the recent years Islamic banking has grown rapidly across the world and it is estimated to be 10-15 per year. Europe has become a leading international financial center for example London has emerged as a growing hub for Islamic banking. The European governments have encouraged the growth of these Islamic banks as they give Europeans relatively large Muslim community, access to financial service consistent with their religious beliefs. (shanmugan and Ridzwa 2004).

The main features of Islamic banking are; the policy of mutual trust, transparency of all transactions and partnership between the bank and the client as it is in accordance with Sharia laws. These banks are different from conventional banks in two ways that is they prohibit interest on all monetary transactions, and they are supervised by a board of Islamic scholars.

According to (Kahan 2008), this economic model has gained popularity as it emphasizes fairness in every transaction being made out of informed decisions. This banking system also promotes and encourages the right of individuals to have a chance to pursue personal economic development, which is done by laying out the distinction of what is right and wrong based on Sharia laws. The strict and explicit prohibition of Riba that is interest described as usury which is substituted for profit and loss sharing as put by the Sharia law has made this banking system very popular, attracting the attention of both the Muslim and non Muslim to its services (Hussy& Hussy1997).

This banking is based on the Islamic law of contract and uncertainties or ambiguities that could lead to conflicts or disputes render the contract void under Sharia laws. According to the Islamic law Islamic jurisprudence consists of rules and principles that must be observed for the transaction to be acceptable in Islamic law and this is governed by the Islamic law of contract (Gammadian and Goswami 2004).

Opportunities and challenges

Islamic banking has enjoyed thrive as it has provided a bridge for different international financial groups. It has created a link between the western world and Eastern world thus presenting an opportunity for growth. However, (Agawal and Yousuf 2002), argue that the economy rationalizes for the superiority of the Islamic financial system over its conventional counterpart. The Internationalization of the Islamic financial system depends on regulators who should develop a modern financial engineering system, for the advancement of Islamic banking.  This would reduce on their dependence on conventional banks, for expertise which would place them on a competitive edge against the conventional banks. Islamic banks should also practice to hedge against the volatility in the international market by developing and advancing the risk management and analysis of tools in the Islamic financial theory and practice.

Competition from conventional banks is also another challenging factor. According to (Dubai 2007) the current market size of the Islamic market is estimated to be 250 billion Euros. The growth and development of this Islamic banking sector in the Europe has thrived particularly in London due to the large market and skill base it provides.  London is well placed to take advantage of these trends due to the known historical reputation of its ability and willingness to innovate and also respond with flexibility of new trends. This coupled with the fact that the UK financial service and industry has a reputed and proven record of developing and enveloping new products, and also a large pool of legal, financial engineering and accounting from which to draw from, makes the perfect environment for any financial service sector to grow with the Islamic banking sector inclusive (Hassan 1999). However this market is also characterized by competition from other conventional banks with some offering these Islamic services alongside their other services through Islamic windows.

European law renders legal jurisdiction which is the already preferred one by many Islamic financial transactions. Consequently this has led to the growth and development of the Islamic banking sector in Europe and in UK in particular. In a bid to accommodate the new and increasing demand for Islamic products there has been the establishment of lines known as the Islamic windows some based in the Europe, the Middle East, and Asia. These windows have contributed in significant ways to the growth and development of Islamic finance because of the institutional global experience in product development (Pressy 2002).However this has been challenged by the lack of uniformity in credit analysis and lack of standardized and relevant accounting and auditing standards.

According to (Chris 2006) the regulatory developments in Europe have been open to the development of Islamic finance for some time. An example of this was seen in a speech delivered by Lord Edward George the governor of the bank of England in a seminar organized by the Islamic foundation where he recognized the growing significance of Islamic banking not only in the Muslim world but also its emergence in the international stage. He also emphasized on the need to put it in the context of London’s tradition characterized by competitive innovation. He pointed out the issue raised in this banking as similar to those of conventional banking. For example liquidity and management concerns. However these problems with time would become more tractable as became better understood by western supervises. This integration of the Islamic banking culture of as early as 1995 into the European financial service culture formed a thriving ground for the Islamic banking culture. However despite this conducive environment Islamic banking in Europe has been faced with the challenge of their tax regime's inability to meet the needs of international products.

This sentiments translated into practice in 2001 in a meeting chaired by Lord George and the representatives of the  city, government and the Muslim community and the FSA whereby they sort to  examine the barriers to  Islamic banking in the  UK, and among the observation were that the Islamic  mortgages attracted double stamp duty in both  the purchasing of property by the bank, and the transfer of it by the bank to the consumer at the end of the mortgage which was one of the  hurdles to be overcome to  allow the development of this banking system (Brown 2005).

Other risks specific to the Islamic finance like arbitrage difference interpretation and the bid to enhance Sharia compliance throughout the product life is a difficult task thus posing a challenge. Sharia compliance is an ongoing process that means that products and services are well monitored unlike in conventional finance which has implications for an Islamic firm’s precedential requirement as well as conduct of business.

According to (Steward 2008) another problem is when a product breaches Sharia compliance rule has the ability to adversely affecting the firm's solvency by converting the asset to a liability on the balance sheet. There is also the characteristic shortage of human resource and then occasionally conflicting opinion of the Sharia scholars who are consulted in case there is a crisis in the interpretation or the provisions of the Sharia teaching also known as fatwa shopping.

However in the heat of a rising conflict where the contract documentation and the enforceability of terms and conditions is dependent on the governing law, in case of a dispute it’s unlikely that the UK court will rule in favor of the Sharia laws. This is a major setback in the development of Islamic banking (Plat 2008).

According to (Bella 2004) despite this shortcoming challenging the development of the Islamic banking  it is favored by Muslims as it is not just a financial service to them but  also  practical living according to their faith.. This has not gone unchallenged though as they are facing shortages in short term investment products as other banks offer them competitive by offering Islamic products and services through Islamic windows in addition to the conventional services they provide. Effective monitoring of compliance to the Sharia laws by an Islamic firm may include reinforcing more remote SSB oversight by use of the internal Sharia audit process and also by developing more knowledge and expertise to be absorbed by the firm. Also there is need for improvement of technology to substitute manual work which increases errors, network and customer complaints (Ainly 2007).

According to (Joana 2005) Islamic banking and finances are a strong industry in the Islamic and western markets but continues to face struggles in the process. Due to religious underpinnings Islamic banking faces a unique set of challenges such as prejudice as the proceeds of these banks are thought by some to further terrorism and used to establish Islamic government around the globe as put by (Fouad & Mohammed 2000). Success of Islamic finance depends on both satisfying the faith and the economies of the industry stakeholders.  Industry stakeholders are invited to share their knowledge between and with each other to improve on communication with the scholars and finance expert so as to ensure the development of these Islamic banking institutions.

In the development of these banks it is of paramount importance that firms realize that Sharia compliance or the adherence to the Sharia laws is a continuous process. This means that the products and services are adequately monitored unlike in conventional banking. This has implications for Islamic firm’s prudential requirement as well as the conduct of business and this place the firm in a competitive edge when accomplished.