Islamic Financial System as an Effective Planning & Control Framework in Kuwait - Admission/Application Essay Example

?Planning and Control Framework Table of Contents Planning and Control Framework Table of Contents 2 Introduction 3 Thesis ment 4 Planning & Control Framework 4 The Concept of Islamic Financial System & Kuwait 5 Islamic Financial System as an Effective Planning & Control Framework in Kuwait 9 Islamic Financial System and its Strengths from Kuwait’s Perspective 10 Conclusion 15 Works Cited 17 Introduction The application of planning as well as control has been acknowledged as elementary in relation to the management practice in organizations since long. The process of planning is considered to be quite integral for organizations as it aids the organizations in establishing its intentions and objectives along with ascertaining the ways of attaining them. The functions of planning along with control assists in building extensive principles or instructions for the reason of ensuring the appropriate distribution of the accessible resources with regard to the organization. Planning helps in arranging the required business operations in a sequence which facilitates in carrying out the functions in an effectual way. The control process refers to the activities of handing over, assessing and modifying resources on a constant basis for the reason of attaining the intended goals of a particular organization. Similarly, the function of control has been referred to a procedure that is supposed to be undertaken by the organization or its managers with the purpose of making certain that the definite performance obey the rules as specified in the plans of the organizations. Control relates to the process of measuring the performance of the organizations in opposition to a developed plan along with making modifications or alterations accordingly in the established plan or in the business operations whichever is considered to be required or even both at times. Therefore, it can be well comprehended that the existence of a particular structure of planning as well as control is deemed to be necessary especially for the finance companies in order to survive and overcome the recent international financial crisis. Thesis Statement This research report will intend to focus on developing or establishing an appropriate planning as well as control structure for the business organizations operating in Kuwait. The planning as well as the control structure will be specifically developed by taking into deliberation the finance companies for the reason of enhancing the flexibility of such companies with regard to the current international financial crisis. Planning & Control Framework The Islamic nations are blessed with the trait of being the world’s best nations brought up from humanity. The nations understand their responsibility well that people need to be aggressive in rising against immorality and unfairness. One of such wrong deeds, observed by the Islamic nations, is the economic coercion and injustice that is adversely disturbing the world. The recent financial crisis initiated within the capitalist economy of the Western countries provided the basis for presenting the Islamic socialist financial system as a substitute for the entire world (El-Gamal, “Overview of Islamic Finance”) A rising popularity of the Islamic financial system has been found to be observed soon after the failure of the present international financial system that is prevalent and practiced widely all throughout the world. Through the middle ages, the Islamic financial system had evolved as a popular phenomenon in Muslim world. With the passage of time, this financial system has spread not only within the countries like Kuwait but also throughout such regions where there is existence of extensive range of Muslim community. The underpinning of the Islamic financial system was reliant upon the actuality of barring giving or taking any return on the made investment being set earlier or even guaranteed. This basis restricts the prevalence of interest and prevents utilization of debt tools. In other words, the Islamic financial system persuades sharing of risk with the promotion of entrepreneurs and dejects tentative behavior within the economy. The Islamic financial system can be anticipated to be secured pertaining to the eradication of financing operation through debt and increased efficiency in allocation (Godbole, “Islamic Financial System”). Thus, the inclusion and presence of the factor of risk sharing in the Islamic financial system has made it to be an effective and competent framework that could be successfully applied by the financial organizations in Kuwait for the reason of avoiding any kind of financial crisis. The existence of this particular factor has made this financial system to be a strong framework in relation to planning and controlling the dealings in the financial organizations. It has been observed during the crisis that the organizations following this particular planning as well as controlling framework remained successful in overcoming the recent financial crisis effectively. Therefore, the application of this particular framework can be considered to prove effective for the financial organizations in Kuwait to effectively avoid financial crisis. This framework has been luring quite a lot of financial institutions that are western multinationals, for instance HSBC and Citigroup (El-Gamal, “Overview of Islamic Finance”). The Concept of Islamic Financial System & Kuwait The idea followed by the Islamic finance system is quite interesting. It has been observed that the Islamic Financial System has the potency to alleviate the current financial crisis. But in order to determine this it is first necessary to understand the Islamic financial system. Islamic system of finance commenced in a few countries in Arab as a small sized cottage industry during later period of 1970s. This financial system differentiates itself from the usual financial system by its apparent conformity with the ‘Sharia’ or the principles of the law of Islam. The development since then has been increasing in relation to its operation in countries in terms of numbers and in the different fields of finance where it has its possibility. These institutions began presenting financial products that were Islamic in few countries in Arab especially in the United Arab Emirates and Bahrain and also in the western countries to a smaller degree (El-Gamal, “Overview of Islamic Finance”) This financial system is governed by ‘sharia’ or the Islamic law under which giving and taking of interest is completely prohibited. The Islamic economics recognize ‘socio economic justice’ as to be the most important purpose. The principles fundamental to the financial transactions of the Islamic financial system state that no action should be engaged which is forbidden by the Islamic Law behind the intention of financing and should not indulge in ‘riba’ which means giving or taking of interest. The principles also state to keep away from ‘gharar’ which means hazard, doubtfulness and assumption. For instance, as gambling is prohibited by the Islamic law so, any kind of preparation for funding a casino would be against the law and thus would not be supported by the Islamic financial system. Islamic finance encourages partaking of risk as well as reward among the parties of the contract. In the Islamic financial system, either the hazard associated with the result of the particular business or the hazard associated with owning of an asset former to its sale is presumed by the financier. Neither hazard is presumed in providing loan, where the major hazard presumed by the financier is the hazard of credit. This implies the hazard that the individual or entity being financed will be deficient of the capacity or the eagerness to return back the owed money. Credit hazard is involved in credit sales in installment too. The modern Islamic finance includes these principles along with the few other doctrines in relation to the Muslim faith in an extensive range of products in order to meet up with the increasing global requirement for financing and investment that are satisfying with the Islamic law (Bala & Zahari, “A Primer on Islamic Finance”). The concept of Islamic finance was measured like a more theoretical concept then the reality sometime back was witnessed to be coming in shape. The demand for financial products that were Islamic, for instance the equity funds, private equity, fixed income, project finance, banking, insurance, mortgages and easy derivatives were seen to be increasing in the preceding few years by approximately 15% annually. Therefore, this particular system can be considered quite beneficial for the financial organizations in Kuwait. After making a strong commencement in the economies that were Muslim dominated for instance Bahrain and Malaysia, the conception of Islamic finance now appears to be appealing to few of the largest and leading financial institutions in the world. It is regarded as a ‘parallel financial system’ by them which cannot be absolutely ignored. Amid the most noteworthy characters, the one, which is crucial in terms of modern economics is the ‘interest’, that is the fee which is demanded for the chance of having access to money. Interest prompts economic efficiency and generates riches by helping lenders as well as borrowers to initiate exchanges based on their mutual benefit. Financial instruments in terms of modern financial markets are reliant on the interest factor which is forbidden in Islam. But it does not appear for Islam to be completely unwilling to the conception of financial intermediation. Financial intermediation engages getting collectively those people who have additional money and make contact with those people who need money. This, the excess and insufficient units in relation to custody of resources that are financial in nature are needed to work together for utilizing the resources efficiently. Though Islam identifies capital to be a production factor but it prohibits the factor from making an earlier or pre-decided declaration on the fruitful excess in the shape of interest. Muslims are checked from transactions by their beliefs of Islam that engage interest irrespective of the intention or the amount of rate to be charged. Alternatively, people in the Islamic countries require services in finance as well as banking for many reasons like financing new projects or endeavors, purchasing property and purchasing vehicles among others. A financial product that is Islamic in nature and referred as ‘sharia’ compliant needs to hold on to two main principles and they are, it should not pay anything as interest and the wealth must not be produced from ways that are considered to be offensive (Iqbal, M. & Molyneux, P., “Thirty Years of Islamic Banking: History, Performance and Prospects”). Islam observes the economic trouble in a thoroughly different way compared to Socialism and Capitalism. Islam lays emphasis on the allocation of wealth and not only on production. The trouble of poverty would not get solved if more is produced for the well-off consumers but rather it can be solved by making certain that the fundamental needs of each and every individual are completely fulfilled. The Islamic system of economy is neither completely Capitalist where the marketplace is left liberated to direct to the adversities that are being seen and nor Socialist where all the things are possessed and managed by the state. Islam clearly differentiates among state property, public property and private property. It prohibits the private possession of huge resources, for instance the Oil and Gas. The crisis depicts a chance for all the Muslims to signify the economic system of Islam as a substitute. Therefore, it is essential today to depict the economics of Islam as an additional component to Islamic banking as well as finance. It needs to be mentioned in the first place that the Islamic banking was not affected to a great extent by the financial crisis caused globally as this system is not greatly common in the countries that were badly affected by the disaster. Secondly, the concept of Islamic banking was comparatively new in the field of finance (Iqbal, “Islamic Financial Systems”). The practices of investment and lending are essentially quite traditional in comparison to their counterparts which are lot more conventional. Thirdly, due to the intrinsic mannerism within the Islamic system of banking, it is to a great degree resistant against this kind of crisis. This is because the Islamic system of financing is constantly supported by assets that are tangible. Any decrease in the value of the fundamental assets is possible to be alleviated by the participation of the customer which offers usual margin for an Islamic bank. The second factor is that it is not possible for a debt to be traded, securitized or discounted as a result, it becomes impossible to elongate the financial market further than the actual assets. In point of fact, the financing will always remain lesser compared to the actual worth of the assets because a specific portion of the deal is funded by the customer. Derivative transactions are primarily speculative and fail in adding worth to any economy. The third factor is the limitation in relation to short selling which means that an individual is not allowed to sell what that individual does not own. The fourth factor is the fact that the Islamic banks are much more engaged and worried regarding the profitability and also about the feasibility of the businesses of the customers as all the deals are reliant on the notion of sharing of profit as well as loss. And the fifth factor is that no loans that are personal in nature and credit cards in Islamic banking are accepted by the intellectuals as products that are compliant with the Islamic law. These are the special features that have helped the Islamic financial system to a great deal to survive the crisis (Hassan, “Islamic Economics and the Environment: Material Flow Analysis in Society-Nature Interrelationships”). Islamic Financial System as an Effective Planning & Control Framework in Kuwait The financial system of Islam provides important basis for the entire world to establish an effective mode of avoiding both financial as well as economic crisis. The Islamic financial system is a principle for the world economy and, if any region wants to learn lesson from this system, it would be essential to gain insights into the economics personified in the outlook of Islamic institutions. The Islamic finance system has been stated to be a financial system which is based on the market and not on the banking system is such a method which can stay away from economic along with financial crisis. It is an indicator for the developed countries of the world which can take the initiative of introducing financial system based on the market and set an example for the developing countries (Hassan, “Islamic Economics and the Environment: Material Flow Analysis in Society-Nature Interrelationships”). Presenting in another way, the Islamic financial system has been observed to be an intermingling of both capitalism and socialism as also mentioned earlier. The mixed implementation of these two verses states that systems should be such that they encourage the humanity towards working along with becoming more productive and generate earning as much as possible. In other words, Islamic values enforce the people not to be beaten up by feelings of greed and terrible attachment towards money. Truthfulness, integrity, clear facts, facilitation, collaboration and harmony are the essence of the Islamic regions that also influence the financial system of the Islamic countries. These principles are primary for an economy because these certify stableness, secured sense and most importantly safety to all the people who are indulged in financial operation of the region. The reason that the Islamic financial system has become able to survive within the financial crisis is that it follows a completely diverse philosophy from the entire world (Hassan, “Islamic Economics and the Environment: Material Flow Analysis in Society-Nature Interrelationships”). Materially, the Islamic financial system provides the basis of promoting financial operations that are with respect to sharing of both profit as well as risk. Encouragement of participatory role in financial system by the people is initiated within the financial system of the Islamic region. They called this initiation to be “Mudarabah” which represents partnership in the perspective of activities and management of capital and also “musharakah” determining joint ventures. This phenomenon has been presented in the figure below. The primary aim of this approach is to promote involvement in the fundamentals of risk-reward apprehension and also outcomes or results through financial operations. Although the phenomenon, undoubtedly, provide assistance to the upgrading of economic condition, at times, it even gives rise to misbalance between formation of wealth and effective management of risk. Moreover, this financial system has also initiated increase in risk prevalence due to several levels of leveraging and unequal distribution, which as a result can increase the amount of systematic risk. Hence the Islamic financial system can contribute towards enhancement of probability of volatility within the entire financial as well as economic system and prove advantageous for the financial organizations (Hassan, “Islamic Economics and the Environment: Material Flow Analysis in Society-Nature Interrelationships”). Islamic Financial System and its Strengths from Kuwait’s Perspective Absenteeism of sharing of risk has been identified as one of the most essential causes towards occurrence of financial crisis in the global market. According to Khan, risk sharing has been held responsible for weakening market discipline within a country’s financial system. This is because risk sharing is the ultimate contributor towards too much of lending activities, extreme leveraging, assumptions and untenable risk in the prices of assets of the financial institutions. The strength of the Islamic financial system in this regard is that the system enhances sharing of risk but initiates with it the provision of credit availability aimed at buying goods and services. This aspect of the financial system is believed to be generating greater market discipline, thus would reduce the prevailing instability within the economic condition of the world. Hence, it is indicating that the economies within the Islamic region have intrinsic methods that instigate the international financial system to operate in a systematic and logical way. This trait of the Islamic financial system, when injected into the international phenomenon, would definitely be successful in avoiding further collapse of the entire system and also for the financial organizations (Khan, “An analysis of risk sharing in Islamic finance with special reference to Pakistan”). The Islamic financial system has been recognized as a prompt answer to the queries of the world with respect to their search for a better and effective financial system. This broad statement has been uttered on the basis of the comparative advantage that the Islamic financial system has over all other financial systems of the world. The preliminary advantage of the Islamic financial system is that it builds up strong cohesion between the activities in the real economy that is aimed towards creation of value and the activities related to finance that aids in the creation of value for the economy. The second identified advantage of the Islamic financial system is that it is not involved in permitting formation of new risks in the process of profit generation. Finally, the Islamic financial system has been mentioned to be global and broad-based. This indicates that innovations can freely occur within the system, despite the innovations are in correspondence to the essentialities of the financial system. Hence, the Islamic financial system’s open system based performance is an important strength that can be effectively utilized by every financial systems and organizations of the world (Khan, “An Analysis of Risk Sharing in Islamic Finance with Special Reference to Pakistan”). The requirement for a financial system based on social values of the people was soon identified. In this regard, the strength of the Islamic financial system has been observed to be held because this financial system operates with provision of comprehensive respect to the values of the people within a particular country. Faith and buoyancy of the public towards a country’s financial institutions along with the market forces act as the fundamental sign of strength and firmness of the financial system. Apart from the societal aspects of the Islamic financial system’s strengths, it had been evaluated to be stronger than other financial systems with respect to its stress upon the ethical grounds and reforms in relation to self-regulation. With these operational structures of the Islamic financial system, it can thus reinforce the control systems within the internal paradigm of every financial institution. Ethical concerns can also be anticipated to generate allocation of financial resources more towards the areas that are socially responsible and in turn would promote higher well-being of the society as a whole. In practical sense of the Islamic financial system, the operators within the system are highly concerned about the determination of viability of the projects and overall performance of the real economic aspects. This concern of the financial system can even be held responsible towards enhancement of competence in allocation of resources (Khan, “An Analysis of Risk Sharing in Islamic Finance with Special Reference to Pakistan”). It has been observed in this regard that all the financial institutions or the companies in Kuwait does not follow or abide by the instructions of the Islamic finance system such as the Kuwait Finance & Investment Company (KFIC) and the International Finance Company which generally do not function in accordance with the Islamic financial system. This implies that not all the finance companies or rather the organizations follow this particularly mentioned financial system. The various advantages identified above with regard to the Islamic financial system has been learnt to prove to be helpful in preventing such financial organizations from suffering huge losses in case of any financial crisis. To state in a general context, the existence of a suitable legal as well as regulatory framework is considered to be fundamental for the reason of triggering a facilitating environment. This environment is believed to offer the benefit of healthy progress and development with regard to the financial sector and the organizations. Owing to the benefits and the soundness of this particular financial system, the Kuwait Real Estate Bank (KREB) transformed itself into a completely Islamic bank (KPMG, “Growth and Diversification In Islamic Finance”). It needs to be mentioned in this regard that the benefits of this particular planning as well as controlling framework has proved to be quite advantageous for the Kuwait Finance House (KFH). KFH is known to pursue this specific financial system and has spread out in operations in Turkey and is considered to be the biggest Islamic bank in that country. The bank was able to witness such rapid developments in terms of its business owing to its implementation of operations in accordance with the Islamic financial system. The main principle of this financial system which has been identified to be the ban on paying as well as collecting any kind of interest along with the prevention of indulgence in speculative activities is believed to have been the most imperative advantage in relation to this system. The success factor behind KFH can be measured to be the housing products that are offered by them. The products offered by the bank are known to be in compliance with the Islamic financial system which acts as the chief point of benefit. The products are developed in a way so that they remain successful in offering great benefits to its respective customers. The Islamic financial system has emerged to be quite a successful one owing to its prevention from indulging in speculative investments for instance derivatives. This particular aspect has been assessed by numerous analysts to be the factor that has aided such banks to prevent suffering grave losses during the global financial crisis (Ilias, “Islamic Finance: Overview and Policy Concerns”). Therefore, it can be well comprehended from the above discussion that the pursuance or the prevalence of the Islamic financial system will help the financial organizations and contribute to a great extent in enhancing the flexibility of these companies in Kuwait (International Monetary Fund, “Financial System Stability Assessment”). The Islamic form of financial system has been measured to be quite effective in mitigating the present occurrence of the financial crisis. It was observed in this regard that the financial institutions that pursued this form of financial system suffered lesser amount of losses in comparison to the others owing to its fundamental nature of distributing the losses. Thus, it can be deciphered that this particular form of financial system would also prove beneficial for the financial organizations in Kuwait. However, a proper planning as well as control framework with regard to a financial infrastructure is supposed to entail the factors of having an effectual regulatory, supervisory and legal structure that is perceived and believed to fortify the steadiness of the financial structure. The supervisory as well as the regulatory application is considered to be an obligatory along with an essential constituent in relation to a particular financial structure. With regard to the mentioned system of Islamic finance, the stated structure also requires to be constant in accordance with the necessary criterion of the stated Shariah principles which would even engage the development of a council of Shariah. The Shariah council is believed to offer assertion regarding the actuality that the aspect of strategic course, the development of certain guiding principles along with the carrying out of the financial business dealings. This definite aspect would call for the requirement of being backed by a competent court structure which is perceived and expected to manage the cases related to Islamic banking as well as finance. The decisions of the court would also be regarded as obligatory in terms of the variety of financial matters, for instance bankruptcy, loan recovery, contracts and collaterals which are all considered to be quite a vital part of the business operations related to finance (Aziz, “Ensuring stability in the Islamic financial system “). Conclusion Recently, there had been turmoil in the financial industry which led to the financial crisis that had its adverse effects on the countries throughout the globe. The Islamic finance system did not have much of an impact of the crisis and survived it. The advantages of this system were observed by all the countries which made them come to a decision to embrace this system of finance. Despite all the challenges discussed above, the Islamic finance system emerged out to be a clear survivor in such a tough crisis. The facts that helped in the survival were examined based on two fronts. Firstly, the Islamic banking industry was not influenced directly and the impact was negligible because of its inherent principles. The Islamic banks escaped the trap of assets that were toxic as interest is forbidden as per the ‘shariah’ law and the dearth of products that were structured as well as the lack of enthusiasm in utilizing the refined financial instruments by the Islamic banks. Secondly, as per the law of Islam, lending is founded on the conception of backing by asset where the favored instrument to defend these investments is real estate. An exclusive system that would shield the individual investors along with the financial institutes from possible hazards has been set up by Islam. The Islamic finance system is administered by the ‘shariah’ rules which prohibits uncertainty, usury, gambling and specifies that revenues should be a result of economic activities that are productive in nature and should be reliant on the main beliefs of contracts of sharing profit as well as loss. Therefore, it can be well inferred from the above made discussion that the planning and controlling framework in relation to the Islamic financial system is considered to be quite effective as it is known to share the risks with regard to the financial products. The wide acceptance of this framework by the Western countries and financial institutions substantiates its effectiveness. Therefore, the persuasion of this particular system or rather planning and controlling framework is likely to prove to be advantageous for the financial organizations in Kuwait for surviving and avoiding the occurrence of any financial crisis. The Islamic financial system entails a strong regulatory, supervisory as well as legal structure which makes it an effectual system for avoiding financial risks. There is a strong rising requirement for financial dealings and services that are ‘shariah’ compliant from Muslims all over. Secondly, the increase in oil wealth is giving rise to requirements for appropriate investments towering in the region of Gulf. Thirdly is the growing competition of quite a number of products that are catching the attention of many investors both Muslims as well as non-Muslims. And lastly which is the most important factor is surviving the financial crisis by this system which has not spared any other industry. Works Cited Aziz, Zeti A. “Ensuring stability in the Islamic financial system.” Annual Islamic Finance Summit (2004): 1-7. Print. Bala, Shanmugam. & Zahari, Zaha R. “A Primer on Islamic Finance”. May 28, 2012. The Research Foundation of CFA Institute, 2009. El-Gamal, Mahmoud A. “Overview of Islamic Finance.” Office of International Affairs 4 (2006): 1-13. Print. Godbole, Deepak. “Islamic Financial System.” Islamic Finance- A Parallel Financial System VII. II (2007): 29-36. Print. Hassan, Abul. “Islamic Economics and the Environment: Material Flow Analysis in Society-Nature Interrelationships.” J.KAU: Islamic Econ 18. 1 (2005): 15-31. Print. Ilias, Shayerah. “Islamic Finance: Overview and Policy Concerns”. Congressional Research Service (2010): Print. Iqbal, Munawar & Molyneux, Philip. Thirty Years of Islamic Banking: History, Performance and Prospect Palgrave Macmillan, 2005. Iqbal, Zamir. “Islamic Financial Systems.” Finance & Development (1997): 42-45. Print. Khan, Tariqullah. “An Analysis of Risk Sharing In Islamic Finance with Special Reference to Pakistan.” Islamic Banking & Finance (1996): 1-346. Print. KPMG. “Growth and Diversification in Islamic Finance”. KPMG International (2007): Print. The International Monetary Fund. “Financial System Stability Assessment.” Monetary and Financial Systems and Middle East and Central Asia Departments (2004): 1-45. Print. Read More