This research focuses on the research
question: Can conventional banks in the UK apply valuable experiences of
Islamic banks and their pursuit of satisfying the public interest? This will
involve exploring several sub-questions including:
is the public interest in banking?
peculiarities of Islamic banks can satisfy the public interest?
Islamic banks more sustainable than conventional banks? (comparison of
any policies, procedures or practices of Islamic banks be adopted by
conventional banks to help them to satisfy the public interest?
The question of the public interest in the
operation and regulation of the banking sector is an enduring issue. However,
since the Financial Crisis of 2008 it has been a matter that has been
increasingly important. The public interest in banking needs to be pursued if
we are to avoid a repeat of the excess and poor governance that fueled the most
recent banking meltdown. This research asserts that the public interest is
served by a sustainable banking system. Therefore, the research is important in
highlighting the good practice within Islamic banking which can help inspire
and influence policies within conventional banking towards sustainable banking.
Relation to previous research (Theoretical
The Financial Crisis of 2008 highlighted
the need to focus on long-term sustainability (Banerjee and Velamuri, 2015). The point that should be
noted is that the public interest in a banking system is presented as a
sustainable system (Catalyst, 2015). According to the Global Alliance for
Banking on Value and Finance Watch (2017), financial institutions should focus
more on the public interest by developing systems which are sustainable in
relation to assessing assets, capital requirements, financial assets and
sustainability training. The assumption is made in this research that a
sustainable banking system is one that necessarily serves the public interest.
Islamic banks are presented as markedly
different to conventional banks in terms of governance structures and
accountability mechanisms and their sustainability (Abdelsalam et al., 2016). A
study by Zaharuddin in 2007 found that Islamic banks were based on Islamic
Sharia while conventional banks were founded upon man-made principles. Further,
Islamic banks aim to maximize profit with restrictions unlike conventional
banks. Islamic banks prioritize the public interest whereas conventional banks
pursue private interest and uncontrolled growth. However, the same study
indicates that in certain respects, the public interest may not be served in
part. For example, accessing capital is more difficult with Islamic banks.
The fundamental difference between Islamic
banks and conventional banks is that Islamic banks’ activities are built on the
partnership and the principles of Islam (Sharia), which implies transparency,
responsibility and a different approach to banking as a whole. Islamic
financing principles prohibit financing under interest. The profit should be
associated with investments in production and all financial operations should
be backed by real assets. Islamic banks do not lend money to clients for
interest, do not reward depositors as a percentage but invest in projects with
subsequent distribution of profits. Moreover, Islamic banks share the risk of
ownership with the clients they finance. At the same time, Islamic banks
observe ethical principles and norms of Islam and pay close attention to moral
values and cannot finance activities that do not conform to the norms of
Sharia. Another major difference between Islamic banks and conventional banks
is that Islamic banks are not interested in imposing fines and penalties for
late payments. Fines are used as an instrument for regulating the discipline of
clients rather than generating income. Therefore, these funds cannot go to the
income of the bank but go to charitable funds. Moreover, in case of clients’
insolvency, the bank will work to improve the situation together with the
client. On the other hand, traditional banks force clients to pay fines,
penalties and additional interest.
Islamic banking aims to ensure social
prosperity through efficient capital allocation as well as decision-making
which seeks to promote growth and development (Khan, 1986). Furthermore, Islamic banks are expected to
contribute to the social well-being of a community (Chapra, 1992). Islamic
banks aim to satisfy the maqasid objectives
which include educating individuals, facilitating social justice and protecting
the public interest (Amin et al., 2015). Mohamad et al. (2016) record that
Islamic Banks in Malaysia, for example, are actively promoting maqasid in the country with a particular
focus on ensuring the public interest is satisfied. Further, Islamic banks
limit speculation and complex securities which are considered detrimental to
the public interest (Zaman, 2009).
Darrat (1988) argues that Islamic banks
have greater stability and have more effective policies than conventional banks.
This has been confirmed by Hassan and Aldayel (1998). In addition, Hasan and Dridi (2010) note that
in a sample of 120 banks, Islamic banks were more profitable than conventional
banks. The same study shows that the credit and asset growth of Islamic banks
was at least double that of conventional banks.
This research aims to examine whether it
can still be said that Islamic banks are more sustainable than conventional
banks. There is a dearth of literature which compares the sustainability of
Islamic banks and conventional banks. Consequently, this research will fill
that gap by exploring whether Islamic banks are more sustainable than
conventional banking systems in the modern banking climate.
This study will assess whether Islamic
banks are more sustainable than conventional banks. To begin with, it will
involve examining factors such as return on assets, leverage and assets and
analyse the z-score. I will compare five conventional banks with five Islamic
banks. Qualitative and quantitative data will be used. Data can be extracted
from banks’ balance sheets which are available through their corporate
websites. I will extract data to calculate return on assets and leverage
between 2005 and 2016. The selection of Islamic banks will be made from banks
operating in the UK.
I will use the z-score to assess the
stability of banks. The z-score is used to assess the likelihood of a bank’s
insolvency which occurs when debt value is higher than the assets of the bank.
I will use the following equation:
(C?ihák & Hesse, 2008).
k-is the equity capital of each bank. This
is expressed as a percentage of total assets.
m-is the return of assets as expressed as a
s-is the standard deviation of the return of
The z-score will link a bank’s capital with
its return on assets and the measure of volatility of returns. A high z-score
will imply a more stable bank. This measure is an objective measure that can be
used to compare and contrast conventional and Islamic banks. Further, the
z-score is not impacted by the specific activities of each bank (Li, Tripe
& Malone,2017) so it is more likely to be accurate and not skewered by
external variables. However, I will be mindful that the z-score is not without
its limitations. For example, it focuses on the book value of capital and any
reserves and therefore may undervalue the financial robustness of Islamic banks
(Li, Tripe & Malone, 2017).
Leverage will be calculated as total
liabilities divided by total equity. The lower the result, the more likely that
a financial institution will be financially safe over the long-term. Return on
assets looks at profitability and will be calculated by reference to net income
divided by total assets. Return on assets acts as a measure of how much bank
generates from held assets. A high return on assets indicates that a bank can
generate more profit from the assets it holds (Heikal, Khaddafi & Ummah, 2014).
Finally, I will perform regression analysis
on this data with the z-score as the dependent variable using a statistical
package. I acknowledge limitations at present with knowledge of the various
packages available but intend to overcome those through tutorials and practice.
have picked the 2005-2016 time period as this will allow me to make observations
of pre and post Financial Crisis in 2008. This is important to ascertain if the
principle of sustainable banking has been affected across both banking types.
In my opinion, it will be important to
assess the value of the literature used in the study. For example, some
commentators opine that the economic and financial theories of Islamic banking
are under-developed (Siddiqi, 2006) and care must be taken to ensure that
studies include real data as opposed to normative theories only. Further,
studies that show that the Islamic banks perform better than conventional banks
are old studies and therefore conclusions should be analysed to ensure they
apply to today’s banking system.
The study will try to destroy the myth that
Islamic Banks are only for Muslims. The point that should be noted is that
large Islamic banks are located in the United Kingdom, the United Arab Emirates
and Malaysia and the share of non-Muslims among their clients reaches up to 70%
(Gordon Haskins, 2017). Thus, religion
is not the reason for using Islamic banking products.
This study will avail of public data and no
primary data collection will take place. Thus, the risk level is relatively
low. However, it is important to ensure that the selection of secondary data is
selected in a way which reduces the likelihood of bias. I accept that some data
will be published which is not uniform across banks. I therefore have factored
time in to ensure that I can reduce data to a consistent form.
It is important to note that the timeline
for the research will be closely monitored. Also, I want to ensure that I have
a significant amount of time for data analysis as this is an area that I need
to develop. I will not select studies that serve to prove a pre-defined
conclusion. I will not use any personal or religious opinions. I will examine
data from an objective standpoint and step back from the data to detect
patterns and trends. I will be alert to the ongoing risk of introducing bias
into the study.
In addition, the study is restricted to
banks in the UK. Therefore, the external validity of the study may be limited.
However, while this may be construed as a shortcoming, I believe that
concentrating on this one market is imperative given the dearth of research in