Islamic Banks and Investment financing

Introduction

Many Muslims today began to prefer Islamic banking in different areas of the world and they prefer to invest their money in it due to many reasons such as applying Islamic laws that don't apply charging interest systems which makes clients safe and happy related to what they belief in their religion Islam. Islamic banks use different financial instruments based on Shariaa. Islamic banking are common in the Middle East and it has spread also in other areas of the world such as the United Kingdom, Australia, South Africa and the USA.  (Yousef and Aggarwal, 2000). The current paper presents this topic through literature and presents a research proposal in the same area.

Problem statement

Islamic banking and investment financing are important today in many areas of the world as the Islamic banking industry has attracted the attention of many investors around the world as it provides investors with different financial solutions that can help them during crisis and repercussions. It is found that Islamic banking can be good at risk management which raised the interest in this type of finance investment.

Research questions

1. What are the important features that make Islamic banking common?
2. How can Islamic banking be effective for financial investment rather than other banking systems?
3. What type of clients does Islamic banking serve and what is the nature of this service? What type of lending contracts they can make there?
4. What are the challenges facing Islamic banking?
5. How do Islamic banking face the different challenges and risk factors?
6. How will the future of Islamic banking in Oman and in the whole world look like?

Objectives

• Understanding Islamic banking and why it became important in investment financing.
• Analyzing the challenges facing Islamic banking.
• Identifying solutions for those challenges facing Islamic banking and investment financing.
• Predicting the future of Islamic banking and investment financing.

Scope of the study

The study discusses Islamic banking and investment financing internationally and in Oman as well via examples.

Literature review

Islamic banking has been defined by many authors in different ways but it can be referred to as a financial institution that is applying the Islamic Shariah principles on all its rules, status, procedures, operations, activities and investment processes in addition to applying ban to operations related to interest receipt and payment. It is based on the Islamic economy concept and it is trying to apply the value system of Islam. Among the important features Islamic banking depends on is that it depends on profit and loss sharing rather than any other investing finance principle. This means that Islamic banking depends on risk taking as clients are not assured to gain profits but profits reflects the success of the Islamic financial institution as profits means work. Profit and loss sharing means that the traditional banks based on interests are replaced with a financial institution that applies participation in both loss and profit with clients as the interest fixed rate is replaced by a return variable rate that depends on the bank's economic activities. (Bello and Abubakar, 2014)

Islamic banking has specific characteristics that make it preferred by many finance investors such as its being based on the profit and loss sharing system and not depending on interest free or what is called Riba in Islam. The Islamic banking system makes investment such as loans and other investments as advances in conventional sense serve the investors' interests and the interests of the local community under what is called Mudarabah.

Distinguishing Features of Islamic Banking:

Comparing Islamic banking to other banking systems; there can be distinguishing features as follows:

1. Abolition of Interest (Riba) 

As interest is considered as being Riba by Islamic Shariah; it is not supported by Islamic banking services as they are interest free and being replaced by sharing profits and loss.

2. Adherence to public interest

Islamic banks activities depend mainly on presenting interest to the public through the different projects they have to make in the public community as their profits and benefits go to both individual clients and public welfare.

3. Being a multi-purpose bank

Islamic banks will be multi-purpose ones as they mix between being financial institutions for commercial and investment purposes and investment management institutions that establish supportive projects and ventures that help individuals sharing in the bank and others involved in the society.

4. Having better evaluation for the investment demand

Islamic banks have very careful attitude for evaluating the equity oriented finance application as Islamic banks have specific mechanisms for risk sharing which makes them have better evaluation for risk practices and how to be more careful to avoid loss.

5. Working as a development catalyst

Islamic banks depend on profit-loss sharing which makes them have better relationships with entrepreneurs and this adds financial experiences to the institutions which are non-financial and make Islamic banks as a catalyst for financial needs and consults for clients and help them make foe any liquidity shortage by providing them with financial advice through their financial consultants. (Mahmud, 2015)

Islamic banking are effective for financial investment rather than other banking systems as according to Dakhlallah, (2011) Islamic banks are offering different services that  don't depend on Riba practices and it is effective for those interested in following Shariah principles whether individuals or institutions. Islamic banks are facilitating resources allocation by providing different solutions for investment and by establishing different projects that help the individuals and the society as well. The means that Islamic banking profitability of their own projects represents deciding factors for allocating the financial resources and how far they can be developed. Islamic banks are more effective for economy of countries if they are really applying investment through economical projects as this helps a lot in developing economy. Islamic banking can also ensure equitable distribution of resources and income among the participating factors including the bank, the depositors as well as entrepreneurs via its built-in mechanical programs added to other welfare activities that are pursued through Zakah distribution service.

Islamic banks make agreements with their clients to buy them the shares they are going to invest in. They accept all types of clients Muslim and non-Muslim as many non-Muslim require different investments and go for Islamic banking. Clients in Islamic banks are considered partners with an Islamic financial institution (IFI) through Mudarib partnership as parties all share profits and the (IFI) receives a defined profit percentage. 

Islamic banking has many different lending contracts as they have a rent to sale deal or a buy-sale deal and deals involves underlying assets behind them as risk must be shared between lenders and borrowers in order to avoid Riba. There are different types of lending contracts in Islamic banking such as Murabaha that is an Arabic word which means short term trade finance as clients chooses the goods they need the bank to finance in. Another type is Musharika which is a joint enterprise business that the clients and the bank contribute capital in as well as chare profits based on an agreed ratio. Mudaraba is another type of lending contracts that is a partnership between the bank and clients with 100% capital for the bank but profits are shared based on specific ratios. Another type is Ijara where the bank buys the asset the clients need and then makes a joint ownership with the client who rents the asset and pays a rent for the bank to own the asset after a number of paid rents that may increase with time according to the increase in the asset price. (Dakhlallah, 2011)

Challenges face Islamic banks

Islamic banking has been facing different challenges lately and this lead to many efforts exerted by these banks to raise the effectiveness of its finance investment; the challenges may be resulting from comparing them to commercial banks or from facts related to the nature of Islamic banks or perhaps some challenges resulting from the terrorist actions done by some Muslims who are fanatic in fact and don't represent real concept of Islam. This makes Islamic banks suffer and try hard to find solutions. Here there are some challenges faced by Islamic banks and need solutions:

1. Legal support

Islamic banks offer specific business laws and contracts that lack the legal support in courts or in legal dealings as for example; when there are disputes related to Islamic financial institutions at court, they are dealt with in the same way disputes of commercial banks are dealt with and this may lead to different problems related to the contracts and other financial problems related to taxes that deal with contracts of Islamic banks as buying and selling contracts which increases taxes twice. This means that there should be special courts for Islamic banks and their dealings and contracts.

2. Islamic prudential regulations

This refers to the need for having strong supervision over Islamic banks as there are not currently effective Islamic prudential regulations which make the Islamic banking industry make different illegal acts in dealing with customers such as in Ijara as the bank here is the owner who takes advance and some Islamic banks use Ijara as "Rahn" which makes it resemble "Riba" that is forbidden in Islam.

3. Shariah based products

The Shariah based products are those products presented by Islamic banks to clients and they are all the same from an Islamic bank to the other which makes competition is very low and almost not found. The products are either Ijara or Murabaha mostly. This makes Islamic banks lack having efficiency in different financial areas such as having effective and standard financial contracts or even standard products which leads clients to be afraid of taking risks with Islamic banks.

4. Nature of Islamic banks

The nature of many Islamic banks as being financial institutions for Murabaha and Ijara and neglecting important factors in the Islamic financial concepts such as Mudaraba and Musharaka which leads to ambiguity in dealing with clients. Another thing is the ambiguity of projects applied by some Islamic banks and to the processes and procedures they take in buying shares for clients and selling them which raises risks and makes clients feel afraid. (Karimi, 2016)

5. Small assets and capital size

This refers to the fact that Islamic banks are not very old compared to commercial banks and that Islamic banks assets are not big enough for making all the needed operations of buying for Ijara and this leads to limitations in the bank's processes.

6. Terrorism movements in the Islam world

Terrorism movements performed by many people around the world pretending to be Muslims lead many people around the world to have Islamophobia and think that dealing with Islamic banks is dealing with terrorist and this reduced the development of Islamic banks in many countries around the world. (Iqbal, 2007)

How can Islamic banks face the challenges they face

Islamic banks have to take serious steps to face the different challenges face them; these steps should include urging the government to give more care and interest to Islamic banks by sharing in more CSR projects and by establishing effective profitable projects for engaging the youth in. Another thing to face these challenges is to employ effective supervisors by the central banks to guide Islamic banks and help them improve their level of implementing different financial projects. There should also be more supportive laws and legislations that suit Islamic banks' systems and realize how they work. Islamic banks should use the media channels and make effective advertising campaigns to make people aware of the way they work, their services and how they can invest their money in Islamic banks. Islamic banks should work harder to reach more people by sharing in public events and being a sponsor to different public events.

Future of Islamic banks in the world and in Oman

Many researches prove that Islamic banks have grown rapidly in their beginnings and currently that growth is declining which shows that Islamic banks are in need to review their strategies and techniques in order to find out reasons for this decline and solutions to face it and regain trust of clients again. Islamic banks in the future are supposed to change their dynamics and focus on new areas as they have to regard their profitability compared to commercial banks as they are in need for making repositioning for their position among other financial institutions. Atkearney, (2016)confirmed that they need to work more for facing competition and not only depend on attracting Muslims who are afraid of Riba and its interests. According to Mubeen et al, (2014) the future of Islamic banking in Oman seems to be successful, promising and effective because the study shows that people in Oman are all preferring Islamic banks and that the number of clients of Islamic banks is increasing daily which raises the expectations for promising future for Islamic banks in Oman as people are almost Muslims and prefer Islamic financial dealings and the Islamic banks in Oman prove to present effective projects for investing money of their clients which raises the trust in them by clients from Oman.

Research methodology

Research design

This research used the Descriptive Research design that depends on implementing the survey method.

Sampling Design: this study depended on the Proportionate Stratified Random sampling method as a number of 100 questionnaires were delivered to Islamic banks clients in Oman and a number of 30 questionnaires were distributed to economists in Oman.

Sample Unit: the sample unit of this study includes Islamic banks clients as well as economists from Oman including employees from Islamic banks and others from business institutions.

Data Collection Methods: the study depends on both primary data and secondary in it as the data was collected through the answers of the questionnaires and through other sources such as the internet, journals and books.

Data Analysis Method: The data collected was analyzed using descriptive statistics and SPSS program.