The Fierce Competition between the Conventional and Islamic Banks at the Kuwait Finance Bank in Bahrain - Case Study Example

? The fierce competition between the conventional and Islamic banks at the Kuwait finance bank in Bahrain Introduction The world of 21st century is aglobally connected market place. The high level of developments in the field of information technology has played a major role in the process of establishing connections and networking links in various markets around the world. This has resulted in the opening up of economies and market places to various multinational organizations around the world that are increasingly focusing on the process of making large scale investments for the purpose of developing the markets of various emerging economies in order to attain future growth in the marketplace. This has resulted in the process of tremendous competition in the marketplace. In an effort to sustain in the well connected and highly competitive global marketplace, companies around the world are significantly asking for large loan amounts in order to fuel their organizational growth needs. On the other hand, the consumers in an attempt to maintain a suitable lifestyle are focusing on the process of acquiring financial support for the purpose of acquiring homes, vehicles and other necessary products and services. This is triggering the need for financial support services from banking institutions around the world. However, the banks in an attempt to maintain profits are providing loans on competitive and attractive interest rates. However, talking on this note, it can be said that the effect of macroeconomic factors like slowdown of productivity in the developed countries, credit crunch and Euro Zone crisis are playing significant roles in the process of determining the rate of interest on the financial loans in banking systems around the world. As a matter of fact, the countries of the world over are looking to alternative banking methodologies apart from the conventional banking methods to maintain global balance for the need of finances for economies, businesses and nations . Brief about Islamic Banking Islamic banking has its roots since the historic days of human civilization. The process of Islamic banking began as a mere trend during the days of the Ottoman Empire, which dominated the Muslim world around the year 1299. During these medieval days, the Islamic traders of Arabia were conducting businesses with various other countries of the world. With the growth of business operation in the Middle Kingdom, a particular style of banking was introduced in an attempt to fund the large scale business operations of that time. During those early days of banking, the financial institutions used to charge riba. The riba in various Arabic and Middle East religions dialects is represented and meant as a bite to the pain inflicted upon the debtor (Ahmed 2011) . Riba in simple terms represents the interest rates on a loan (Bakar, “Riba and Islamic Banking And Finance”). However, with regards to the Islamic Law which is referred as Shari’aa, Muslims were not allowed to deal in riba and it was declared as a highly prohibited action, which will attract sin. As a result of this, when the Europeans of those times focused on developing the trade channels with the Ottoman Empire by doing business through the interest based loan and banking system, the local business community rejected the offers. This led to the formation of a culture among the Muslim community to avoid loans altogether. In the recent times, a lot of development has happened with regards to the initiative taken King Faisal of Saudi Arabia in 1974 to develop a banking system, which follows the Islamic law (Rahman 2010). The years after that followed a generation of a significant amount of interest for the purpose of building and developing a more sophisticated and modernized version of the pre-existing methods related to Islamic banking. It can be said also highlighted in these regards that the process of re-emergence of the Islamic banking system was to some extent fuelled by the desire of the Muslim communities to stay clear of any kind of financial debts and related loans and interests, since it was highly prohibited with regards to the Islamic principles. Many Islamic countries around the world like Iran, Sudan, and Pakistan etc. are taking a major initiative and policy based restructuring in an attempt to completely alienate and eliminate the interest factors from their financial systems, rules, regulations and frameworks. In various other countries around the globe, it can be said that the Islamic banks are opening and spreading their network as compared to the traditional and conventional banks, for the purpose of smooth conduction of financial operations in the economic as well as the social arena (Iqbal & et.al 2002). In the recent few years, it can be also be said that a significant amount of initiatives taken by the various Islamic financial regulatory bodies like the AAOIFI as well as the Islamic Financial Services Board (IFSB) for the purpose of developing and building significant framework of regulations which will provide smooth running and execution of financial and business operations for the multiple Islamic financial institutions around the world (Ahmed 2011 ). Talking from the statistical point of view, it can be said that at the present times, there are more than 300 financial institutions around the world, who deal in the Islamic banking methodologies. Also, it can be further that the Islamic banking and financier industry has achieved an average growth rate of around 23.5% in the span of last 5 years. In regards to the future, it can be said that the Islamic banking will be catering to a population of around 2.5 billion Muslims by the year 2020 (Standard & Poor, “The Globalization of Islamic Finance”). Company Overview It can be said that the Kuwait Finance House had its inception in the year 1977. The financial institution was founded with the main motive to promote and practice Islamic banking, while the honouring the highly respected and widely recognized Shari’a law of the Islamic society. This institution has the honour of being the first Islamic bank in the Kuwait region and as of today’s date, the company is the leading player in the Islamic banking industry. The financial institutions product and service offerings has a highly diversified portfolio, which comprises of the banking sector, real estate, trade finance, investment portfolios and even corporate and commercial financial markets. Apart from all this, the company has also services to the retail sector, which are highly customized to suit the needs and requirements of the clients (KFH, “About KFH”). Competition between the conventional and Islamic banks with regards to Kuwait Finance House It has to be noted that the conventional as well as the Islamic banks operate in the same society and in same markets around the world. Hence the level of impact arising from the various macroeconomic, political and social factors are supposed to impact the entire banking industry, irrespective of their individual mode of operations in regards to conventional or Islamic banking practices. The Islamic banks have developed their operational framework on the basis of the traditional banking practices followed by the conventional banks. The only difference is that the Islamic banks do not follow the implementation of interests in its banking practices. Talking on these lines, it can be highlighted that this redesigning of the traditional and conventional banking practices by removing the application of interests has led to the differentiation of financial products and services in the Islamic banking industry, which has gained significant competitive advantage in the market place. By capitalizing on the differentiated set of products and services, the Islamic banking industry has become a highly attractive option from the points of depositors, investors, clients and customers. In terms of the future, it can also be said that while the entire banking industry is attaining slow growth, Islamic banking can trigger growth rate due to product differentiation and its ability to serve a great deal of Muslim customers all over the world, who are looking for ethical banking practices that honour and pays regards to the Shari’a law. Talking on the aspects of competition, that is existent between conventional banking and Islamic banking, it has to be mentioned that the competition is mostly in regards to acquisition of customers in order to generate more sales of services and products. It can be said that the conventional banks has specific interest rates, applicable in its services to the customers related to deposits while in the case of Islamic banking, instead of interest sharing, suitable rates of profit sharing is offered to the customers. Through this process, the Islamic banks are earning significant competitive advantage in regards to sharing of profits as well as risks involved with the customers, rather than paying out amounts comprising of the fixed rates as applicable in the case of conventional banks. Also, the Islamic banks are free from the losses arising of banking overdrafts since their mode of operations allows issuing of debit rather than the credit (Hanif 2011). The competition analysis also reveals that the Islamic banks, despite their significant growth potential in the future, are experiencing problems related to declining profitability and average returns on equity. But in an attempt to tackle these challenges, the Islamic banks are focusing on the process of increasing efficiency while reducing the cost of operations (Vizcaino). Work Cited Ahmed, Amr Mohamed El Tiby. “Islamic Banking: How to Manage Risk and Improve Profitability”. USA: John Wiley & Sons. 2011 Bakar, Mohd. Daud. “Riba and Islamic Banking And Finance” n.d. Web.25 Dec 2012. Hanif, Muhammad “Differences and Similarities in Islamic and Conventional Banking” Feb.2011. Web. 25 Dec 2012 Iqbal & et.al Islamic Banking and Finance: New Perspectives on Profit Sharing and Risk UK:Edward Elgar Publishing House Ltd. 2002. KFH. “About KFH” 2012. Web. 25 Dec 2012. Rahman, Yahia Abdul. The Art of Islamic Banking and Finance: Tools and Techniques for Community-Based Banking USA: John Wiley & Sons. 2010 Standard & Poor. “The Globalization of Islamic Finance” 25 Sep 2012. Web. 25 Dec. 2012 Vizcaino, Bernardo. “Islamic banks to expand, compete for mainstream clients: study” 10 Dec 2012. Web. 25 Dec 2012 Read More