Islamic Bank operating framework: a casestudy of Dubai and Malasyia banks - Dissertation Example

? A study into Islamic Bank operating framework: A case study of Dubai and Malasyia banks List of Abbreviations IFSB- Islamic Financial Services Board IOSCO- International Organization of Securities Commissions AAOIFI- Accounting and Auditing Organization for Islamic Financial Institutions OIC- Organization for Islamic Conference USAIB- United States of America International Business LIBFC- Labuan International Business and Financial Centre DIFC -Dubai International Finance Centre DFSA -Dubai Financial Services Authority DMCC -Dubai Multi Commodities Centre Authority Contents Appendix 3: Research Invitation Letter 30 1.0 Introduction According to Mahlknecht and Hassan (2011), there are more than three hundred Islamic Banks in sixty countries. The main objective of establishing an Islamic bank was to promote economic and social development of Islamic communities in pursuit of Shari’ah principles. Some conventional banks have integrated Islamic banking by creating subsidiaries that offer Shari’ah products. Jurisdiction’s Central Bank Acts, Islamic Financial Services Board, International Organization of Securities Commissions and Accounting and Auditing Organization for Islamic Financial Institutions have been created to provide framework under which Islamic Banks will operate (Rahman, 2010). Modern Islamic finance and banking took off in 1960s after Egypt launched a Social Bank in 1963. Initially, as early as 1973, Islamic Finance was confined to Middle East, although countries like; Pakistan and Sudan have tried to ‘Islamicise’ their financial systems. Middle East adopted, nurtured and preserved Islamic banks to what it is today. According to Mahlknecht and Hassan (2011), Islamic finance is expanding worldwide and growing at exponential rate. According to Kettell (2010), the world of Islamic Banking Competiveness Report 2007/08 stated that the value of Islamic banking assets and assets under management was expected to reach US$ 1 trillion by 2010. One of the important means through which Islamic finance is thriving is through offshore jurisdictions. According Ariff and Iqbal (2011), most of the offshore centres in the world are anxious to become influential financial locations and aggressively seek investors interested in global investment from any part of the world. Offshore jurisdictions that are fertile for Islamic finance include; Cayman Islands, Isle of Man, Jersey, Guernsey, Bahamas, British Virgin Islands, Bahrain, Labuan (Malaysia), Luxembourg, Dubai International Financial Centre and Dublin (Ireland). The offshore jurisdiction favoured for investment includes Turks and Caicos Islands, Bermuda, Barbados, Cook Islands, Labua, Liechtenstein, Mauritius, Cyprus and Gibraltar (Academie de Droit and International de la Haye, 1995). Growth of global investments has caused unprecedented growth of offshore jurisdictions in the past years. Uteem (2009) asserted that accumulation of petrodollars and increasing Muslim population, as well as increase in infrastructural projects demanding huge amounts of capital have increased demand for Islamic finance products. Furthermore, active participation of investors and independence of countries in Islamic capital markets are some of the reasons of growth and development of global Islamic finance (Muhammad, 2009). 2.0 The Research Problem Islamic finance is becoming one of the most attractive financial products across the world. Both Muslims and non-Muslims are approaching Islamic banks and Islamic financial institutions to meet their banking and financial needs (Hertwig and Maus, 2010). Islamic finance is based on the Shari’ah (Islamic law) and does not operate like a conventional financial institution. Rather, it has a different operating framework, which must meet the dictates of the Shari’ah. Ahmed (2011) hinted that unlike conventional banks, Islamic banks are faced with more challenges in terms of inadequate or failed internal processes, systems, external events or people due to perceived or real Islamic religion influence. As more money is invested in Islamic financial products, there will be more challenges brought about by increasing customer base, new government legislations, religious requirements, increased competition in the sector, as well as economic hardships (Ayub 2009). To remain stable, competitive, relevant and productive; offshore jurisdictions must develop best practice framework to provide Islamic finance services effectively and efficiently (Rehman 2010). According to Vernardos (2010), there is a lack of uniformity in shari’ah principles among Islamic countries due to the absence of a universally accepted central authority on Islamic banking and finance. 3.0 Islamic bank theory (model) EL-Hawari and Grais (2004) asserted that two- tier Mudarab model is a non-interest formal model that explains operations of an Islamic finance. The two-tier Mudarab model emphasizes profit sharing based on an agreed predetermined profit sharing ratio between the financier and the entrepreneur. Mudaraba contract is the foundation of Islamic banking, which is entered into by the investors (Rab ul mall or depositors or suppliers of funds) and the entrepreneurs. The bank and depositors may act as financiers. A bank may act as a financer by providing deposited funds to the entrepreneur. At the same time a bank can act as an entrepreneur if it invests the funds (Vogel and Hayes, 1998). The Islamic bank model utilizes the concept of partnership. The two-tier Mudaraba model stipulates that return on capital employed should not be fixed in advance. Rather, it should be a ratio based on earned profits. The model also explained that labour is not liable to venture’s financial risk, which capital is. Mudaraba contract presents an opportunity to suppliers of funds to invest without getting directly involved in the management of their funds. Therefore, financiers are not exposed to liability beyond their capital. As a rule, investors do not claim fixed profits or rate of return on their capital. The entrepreneur (Mudarib) is apportioned part of the profit based on a specific profit sharing ratio. If there are genuine losses in the venture, the entrepreneur losses his effort and labour only while the investor loses part or whole of the capital. Public funds are unrestricted Mudarab and can be invested in any place, for any time duration and in any activities that are not haram. On the other hand, the bank can restrict application of restricted funds as they see fit as long as it does not interfere with operation of the entrepreneur. The Islamic bank can pool and sum-up profits of other investments and share net profit accordingly. According to the Islamic model, the financier is prohibited from demanding any guarantee or insisting on fixed return on capital. Mudaraba contract must assign profits appropriately to the financier and the entrepreneur (Kettel, 2011). In an Islamic bank model, an Islamic bank can charge fees on services such as; letters of credit, withdrawals or guarantees among many other services. The banks may also issue interest free credit as a favour to their esteemed customers or as a charitable action. Figure 2- Mudaraba flow Chart The figure represents Islamic banks asset/ Liabilities structure on a two-tier model a= P&L-management fees e= Y % ownership b= P&L-management fees f= Y%P&L c= X% ownership g= Z% ownership d= X% (P&L) h= Z%P&L Source: Kettel (2011) 3.1 Principles of Islamic Finance It is a norm for every Islamic financial institution to set up Shari’ah Advisory Board. The Shari’ah Board provides opinions on many aspects associated with Islamic finance and banking. Islamic financial products are Shari’ah compliant and are based on sharing risks and rewards (Ilias, 2009). The investors usually agree to a profit-sharing ratio (formula). However, losses are shared in proportion to the capital invested (Ariff and Iqbal, 2011). Profit from lending or investments may be earned through profit or loss sharing or mark-up pricing in business ventures. Profit is considered lawful if entrepreneur or the bank bears the risk of loss. As a principle, Shari’ah compliant Islamic financial products must not invest in entities that charge interest (riba) or trade in illicit (haram) product or services (Ayub, 2009). (Kettel, 2011) explained that illicit products include pork, obscene materials, alcoholic beverages, weapons, pornography, armaments, gambling and tobacco. 3.2 Elements of Islamic finance (Kettel, 2011) asserts that Murabaha (cost–plus financing contract) is popular and is used to purchase a variety of assets. If a person wishes to buy a house using Murabaha, the buyer and the seller approach a bank. The bank will assume risks associated with the property and agree to purchase a house registered in the name of the buyer. The house will be sold back to the buyer (customer) at a higher price. Murabaha is also used to purchase cars, TV sets, refrigerators and other household appliances, as well as finance trade. Murabaha can also issue letters of credit. Under Ijara (lease), bank buys an asset and leases it to a customer for an agreed future time (Pock, 2007). During the lease, the buyer pays some form of rent deemed to be reflective to risk involved in the transaction. The customer will eventually own the property. Musharaka (participation) is also used in Islamic finance. Bank agrees to finance part of the asset and customer contributes the remaining amount of the asset. The bank and the customer then agree on a profit or equity sharing ratio for the asset and loss is shared based on the similar ratio (Ayub, 2009). According to USA International Business (2007), Mudharabah contract is used to finance new business ventures. Under this, one party (rabal-maal) provides finding while the other party (the entrepreneur or mudarib) provides labour and management. Profit is shared at an agreed-upon ratio, but if the business venture fails, the loss is borne by rabal-maal and mudarib receives nothing for his or her efforts. Financial assets (international bonds) called the sukuks are backed by assets like the pools of Ijara. Assets are leased to clients to yield the return on the sukuk backed by real assets. This ensures that sukuk could be traded in a Shariah-compliant secondary market (Ahmad, 2010). 3.3 Islamic Financial regulators Archer and Karim (2007) asserted that Islamic Financial Service Board (IFSB) was founded in 2002 by association among the Central Banks, the Islamic Development Bank, and International Monetary Fund (IMF) to provide prudent guidelines and standards to be used in supervising Islamic banks. According to, IFSB standard number one prescribes guiding principles for risk management in financial institutions offering Islamic Finance Services. It is based on Basel Committee operational risk guidelines to provide direction on risk caused by inadequate or failed internal processes, systems, external events or people associated with Shari’ah compliance as well as risks associated with institutions and fiduciary responsibilities toward different fund providers. IFSB standard number two cover adequacy for financial institutions offering the Islamic Financial Services. It prescribes that amount of capital meant to cover for operational risk is measured using the Basic Indicator Approach or Standardization approach dictated by Base II. According to Schoon,(2009), the Indicator Approach, a bank needs to set aside a fixed 15% of its annual average gross income (averaged over three preceding years) (Ahmed, 2011). However, under the Standardization approach, the fixed percentage may vary between 12% and 18% depending on the line of business (LOBs). Operational risks for corporate finance, trading, sales, payment and settlement is 18%, commercial banking services is 15% and retail banking as well as asset management and retail brokerage is set for 12% (Schoon, 2009). Islamic Financial Services are organized according to the LOBs (Archer and Karim, 2007). However, ISFSB has proposed to Islamic Financial Services to use Basic Indicator Approach, which require setting apart a fixed percentage of average annual gross income averaged over three preceding years (Archer et al, 2007). Mohd and Shariah (2001) asserted that a well developed governance structure is important for safety, stability and soundness of Islamic Financial Institutions (IFIs). Governing structure ensure that Shari’ah and principles are complied with. Development of Shari’ah governance involved domestic and international initiatives. Domestic initiatives include establishment of Shari’ah Committee for each IFIs (Kettell, 2010). In addition, central bank ensures that centralized Shari’ah Advisory body, legislations and specific guidelines are set up (Kettell, 2010). International initiatives include contributions by international regulatory bodies such as Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), IFSB, and Organization for Islamic Conference (OIC) Fiqh Academy. AAOIFI developed governance standards, Auditing standards and Ethics Standards for IFIs (Schoon, 2009). IFSB developed guiding principles on corporate governance and governance systems for IFIs. OIC Fiqh Academy published guidelines for Shari’ah advisory roles on matters associated with Islamic Finance. Schoon (2009) stated that some of the roles played by audit departments and committees to ensure that the company complies with best practices of Islamic finances. According to Bock (2010), the State Bank of Pakistan clearly specifies duties of Shari’ah advisors, handling conflicting Shari’ah edicts as well as how to integrate Shari’ah compliance with new products and services introduced to Islamic Finance. On the other hand, IFSB advices on ways of setting up and running a Shari’ah governance system and how to handle fiduciary risk. Hassan and Lewis (2007) stated that Labuan International Business and Financial Centre (LIBFC), Dubai International Finance Centre (DIFC), Dubai Financial Services Authority (DFSA), Dubai Multi Commodities Centre Authority (DMCC), Islamic Financial Service Board (IFSB), Central Bank of Malaysia Act 2009 and Banks and Trust Companies Law 1995 are some of the regulatory bodies that have contributed immensely to growth and development of Islamic finance (Oxford Business Group, 2010). 3.4 Application and development of Islamic Finance at selected offshore jurisdictions Mauritius is an offshore jurisdiction offering Islamic financial products and is regarded as one of the most active players in global Islamic finance sector (Muhammad, 2009). Mauritius is experiencing ever growing demand for Shari’ah-compliant financial products. HSBC is one of the banks in Mauritius offering Islamic banking services. Some microfinance institutions are also offering Islamic banking Services based on Murabaha (deferred sales). According to Muhammad (2009), financial products and services available in Mauritius include Takafu (Islamic Insurance), Ijara (Islamic leasing), and sukuk (Islamic bonds). According to Tegally (2009), license to open and operate an Islamic bank is issued by Central Bank of Mauritius to financial institutions. To qualify for the operating license, the financial institution must have a share capital of at least MUR 200million (US$6million). In Mauritius, it is mandatory for all Islamic banks to set up Shari’ah Advisory Board made up of a Shari’ah advisor (scholar) or three members. Shari’ah advisor must have integrity, honesty, ethically reliable and proven experience or knowledge in Shari’ah rulings and issuance of scholarly opinions on issues associated with Islamic law ((Mistry and Treebhoohun, 2009). Comprehensive, modern and efficient regulatory framework coupled with multilingual professionals (French, Arabic, English, Hindi or Mandarin) makes Mauritius attractive to Islamic Financing (Tegally, 2009). According to Offshore Incorporation (n.d.), Cayman Islands are among the most respected offshore jurisdiction with one of the largest and most efficient banking centre in the world. The islands have established best legal regimes, efficiency, lower costs and large pool of professional and experts. It has trusts and mutual funds worth $ 20 billion (Ariff and Iqbal, 2011). Cayman Islands are respectable and have stable commercial infrastructure accompanied by flexible legislations. In addition it is able to provide asset protection and have not joined the Hague Convention. Therefore, it does not recognise foreign judgements and exclusion of forced inheritance. According to Oxford Business Group (2008), Cayman Islands do not have foreign exchange control and Caymanian dollar is fixed against the US dollar at the rate of CI$ 1.00 to US$ 1.20. All banks are governed by Banks and Trust Companies Law 1995. Cayman Islands offer Sukuk. In a March 2007, Dar Al-Arkan Real Estate Company was allowed to issues $ 600 million three year Sukuk Al-Ijara. Sukuk Al-Ijara was heavily oversubscribed. Even Western investors, in particular hedge funds were attracted to it due to its diversification and strong asset backing (Oxford Business Group, 2008). Labuan is an offshore jurisdiction in Malaysia with a vibrant and comprehensive Islamic finance structure. According to Republic of Malaysia (2010), Islamic Finance Sector is regulated by Central Bank of Malaysia Act 2009, Shari’ah Advisory Council of Central Bank of Malaysia and Labuan Islamic Financial Services and Securities Act 2010. The Labuan Islamic Financial Services and Securities Act 2010 clearly outline governance of Islamic finance institutions (Republic of Malaysia, 2010). The Act provides guidance for appointing Shari’ah supervisory council, fund managers and administrators and trustees/ custodians and lincensing intermediaries. It also provides the roles of and duties of Islamic and securities bank licensees, and Islamic self-regulatory organizations. It outlines the management of Sukuk, Islamic mutual funds and other financial products (Oxford Business Group, 2010). The 2010 Act also indicates and registers the types of businesses that are allowed to get involved in Islamic finance. To look into the good governance of funds, Central Bank of Malaysia Act 2009 require the Islamic Finance institutions to create risk management committee, management committee board, Shari’ah committee and board audit committee management to look into the affairs of the institutions (Republic of Malaysia, 2010). In addition, the country’s constitution emphasizes the use of the court and arbitrators to settle disputes arising. 3.5 Strategies to make Islamic institutions effective and efficient There are specific actions that Islamic financial apply during their operations. They develop Shari’ah Audit & Compliance for Islamic Banking. Shari’ah audit plan and audit program as well as Development of Shari’ah Compliance Review & Auditing for Retail Products, Corporate, and Treasury Products trade financing and hedging instruments (Islamic swaps, forwards) (Ahmed, 2011). Islamic finance institutions also try to understand and institutionalize the objectives of Shari’ah (Maqasid al-Shari’ah). According to Vandekerckhove (2011), there are also Shari’ah principles governing risk management practice of Islamic finance as well as Shari’ah Internal Control System. Furthermore, Islamic finance institutions need to develop a pool of Shari’ah experts and scholars who will be able to understand the complexity of Islamic financial instruments (Kettell, 2010). The Islamic products are Ijara, Musharaka, Diminishing Musharaka, Mudaraba, Salam, Istisna, Murabaha, Qarz, Dayn, Qard and Multiservice financing (Pakistan State, n.d). Services include Sight Bills Purchase, import letter of credit, bank guarantee and foreign exchange (Sharf). Islamic bonds (Sukuk), Shariah-compliant mutual fund assets, commodity murabaha trading platform, Islamic Hedge Funds and Derivatives are some of other products of Islamic Finance (Mahlknecht and Hassan, 2011). 4.0 Justification Muslim constitute a third of the global population. However, there are about 505 Islamic banks in sixty five countries (United States of America International Business Publications, 2007; Mahlknecht and Hassan, 2011). The current Islamic banks are very few as compared to other conventional banks. Thus, banking and financial services and products that are Shari’ah compliant are inadequate. This makes most Muslims inaccessible to appropriate services. In some countries, there have been deliberate efforts by Muslims not to borrow from conventional banks because of the underlying interest mode of lending and borrowing, which is unacceptable in Islam. There is need for development of more Islamic banks in different jurisdictions. Therefore, there is need for a general framework of establishing stable Islamic banks. Findings of this research may contribute to development and implementation of a comprehensive guiding framework (best practice) that will be useful in establishing new Islamic banks in other parts of the world. Furthermore, this research will add to existing body of knowledge on Islamic bank best practices. This will ensure that efficiency and stability prevail in Islamic banking and finance at all times so that the sector will have more credibility and win over the confidence of all the stakeholders. 5.0 Research Questions i. What principles govern Islamic finance operations? ii. What services do Islamic banks offer? iii. What standards of IFSB, IOSCO and AAOIFI have Islamic banks integrated into their operational frameworks? 6.0 Research Methodology 6.1 Introduction In this chapter, designs, procedures and methods that will be used to conduct the study, as well as collect and analyse data shall be discussed. The study is descriptive and quantitative data will be collected via a survey. The data that will be collected will be analysed using the Statistical Packages for Social Scientists (SPSS) and presented using appropriate tables and graphs. 6.2 Research Design This study will take the form of surveys. Forty three Islamic banks in Dubai and Malaysia will be surveyed. Survey is preferred because it is cost and time saving. The research to be carried out is descriptive because it seeks to establish best practices that are to be applied in establishing and operating Islamic banks in new jurisdictions. 6.3 Sampling The total number of Islamic banks in Dubai and Malaysia are eighty five. However, due to geographical distance between all the banks, it will be costly and time consuming to survey all eighty five banks in the two jurisdictions. It will be cost effective, representative and practical to survey forty three Islamic banks in both jurisdictions. The sample will be chosen through systematic sampling (Nth selection technique), where the banks will be arranged alphabetically from A to Z. Systematic sampling technique is convenient and easy to implement (Black, 2009). The arranged banks are then numbered from 1 to 85. All odd numbers (1, 3, 5 ... 81, 83, 85) will be included in the sample. Population size of Islamic banks in Dubai and Malaysia are 85 and the size of the interval is 2. The formula for calculating the sample is as follows; n= N ? k =85 ? 2 = 42.5 which is equivalent to 43. Where n= sample N= population size K= size of interval for selection Table 1-Sampling Table Malaysian and Dubai Islamic Banks to be surveyed 1. 3i Capital Group, Dubai 2. AFFIN Bank Kuala Lumpur Malaysia 3. Al Hilal Bank (ABK), Dubai 4. AmBank Kuala Lumpur Malaysia 5. Amlak Finance, Dubai 6. Asian Finance Bank Berhad Kuala Lumpur Malaysia 7. Badr Al-Islami, Dubai 8. Badr Al-Islami, Dubai 9. Bank Islam Malaysia Berhad Kuala Lumpur Malaysia 10. Bank Melli Iran, Dubai 11. Bank of America Malaysia Berhad Kuala Lumpur Malaysia 12. Bank of Nova Scotia Berhad Kuala Lumpur Malaysia 13. Bank Persatuan Malaysia Berhad Penang Malaysia 14. Bank Rakyat Kedah Malaysia 15. BIMB Trust Ltd (BTL) Kuala Lumpur Malaysia 16. Bumiputra-Commerce Holdings Kuala Lumpur Malaysia 17. CIMB SI Sdn Bhd Kuala Lumpur Malaysia 18. Commerce International Merchant Bankers (CIMB) Kuala Lumpur Malaysia 19. Credit Guarantee Corporation Malaysia Selangor Malaysia 20. Dayax Islamic Bank Kuala Lumpur Malaysia 21. Emirates Islamic Bank, Dubai 22. EON Bank Group Kuala Lumpur Malaysia 23. EONCAP Islamic Bank Berhad Kuala Lumpur Malaysia 24. First Gulf Bank, Dubai 25. HSBC Amanah (Malaysia) Kuala Lumpur Malaysia 26. HSBC Amanah, Dubai 27. J.P Morgan Chase Bank Kuala Lumpur Malaysia 28. KAF Investment Bank Berhad Kuala Lumpur Malaysia 29. Lembaga Tabung Haji Kuala Lumpur Malaysia 30. Malayan Banking Berhad (Maybank) Kuala Lumpur Malaysia 31. Malaysian Industrial Development Finance Kuala Lumpur Malaysia 32. National Bank of Kuwait (NBK), Dubai 33. Noor Islamic Bank, Dubai 34. Public Bank Berhad Kuala Lumpur Malaysia 35. Public Bank Berhad Kuala Lumpur Malaysia 36. Rusd Investment Bank Labuan Malaysia 37. Sharjah Islamic Bank, Dubai 38. Standard Chartered Bank Kuala Lumpur Malaysia 39. The Asian Banker, Dubai 40. The Bank of Tokyo-Mitsubishi UFJ, Ltd., Dubai 41. UBS - Islamic Finance, Dubai 42. Unicorn International Islamic Bank Kuala Lumpur Malaysia 43. Yasaar Ltd., Dubai Source: The Muslim Tribute 2011 6.4 Research Instrument (Questionnaire) The questionnaire will be used to collect data from the chosen 46 Islamic banks in Dubai and Malaysia. The questionnaire will majorly cover topics on Shari’ah boards and capital fund requirements. 6.5 Pilot Study The pilot study will be carried to establish whether the research objectives and questionnaire are practical. This will help to minimise research biases and improve the questionnaire. Pilot study will also help to improve research logistics especially on survey timing. Finally, pilot study provides accurate way of establishing real costs and challengers. This will enable the researcher to be well prepared of challenges that are in the way. This will be done in August 2011. 6.6 Elimination of bias Bias refers to a situation where a population parameter is overestimated or underestimated. To avoid bias in this survey, all respondents will be contacted before survey is carried out to win their commitment and encourage them to participate fully. Secondly, the researcher will avoid instances of self selected volunteers. Third, researcher will avoid use of leading questions as well as ensure that all questions are easily read and understood. 6.7 Reliability and Validity Reliability refers to the degree to which survey instrument scores are free from errors in measurement. The measurement of measurement error is done using the Cronbach Alpha, where items in the questionnaire are expected to have a Cronbach Alpha of not less than 0.7. Validity refers to a degree to which the questionnaire captures the right data. It is important to ensure that all relevant variables are included in the questionnaire to ensure that questionnaire is valid. 6.8 Data sources Rights of the participants Primary data will be collected using forty-six structured questionnaires. Head of Islamic banking or a representative will be requested to fill the questionnaire. This is because a person who is head of Islamic banking understands issues concerning Islamic banking both internal and external. The respondents will be contacted by telephone. The researcher will contact the respondents from chosen Dubai and Malaysian Islamic banks to explain the purpose of the study, assure them of anonymity, give them written explanation of informed consent and administer questionnaires. The activity is expected to take 15-30 minutes per every respondent. The researcher will clarify issues that will be asked by the respondents. 6.11 Data Processing & Analysis The data will be entered into SPSS. And grouped according to what they measure. Basic data analysis will then be conducted. The data will then be presented using tables, charts and graphs. 6.10 Legal Issues Permission to conduct the research will be obtained from researcher’s University and the banks to be surveyed. Before the survey commences, respondents will be informed of the nature and purpose of research and will be thanked for volunteering information. Those who will feel that they will not participate will be allowed to do so without any negative or undesirable consequences to them. All the people who will participate in providing information will not be named or exposed. Finally, all the information obtained from the respondents and the banks will be treated with confidentiality and used only for the purpose of this academic research. 8.0 Research Plan The research is expected to begin on August 2011 and completed by September 2011. Table1 -Proposed Timeline Time / period July 2011 Finalise Research Proposal August/September 2011 Write up Introduction and Literature Review October 2011 Write up Methodology Sections, finalise Research Questionnaire/Interviews and collect Data November 2011 Analyse data and Write up Chapter on Empirical Findings December 2011 Write up Conclusion and Finalise and Submit Thesis References Academie de Droit and International de la Haye (1995). Recueil des cours: Collected courses of The Hague Academy of International Law. (Vol. 2, P. 252). Norwell, USA: Martinus Nijhoff Publishers. Ahmad, A. F. (2010).Theory and practice of modern Islamic finance: The Case Analysis from Australia. Florida: Universal-Publishers. Archer, S. and Karim, R. A. (2007). Islamic finance: The regulatory challenge. New York: John Wiley and Sons. Ahmed, A. (2011). Islamic banking: How to manage risk and improve profitability. New York: John Wiley and Sons. Archer, S., and Karim, R. (2007). 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Retrieved July 3, 2011, Shttp://www.sbp.org.pk/ibd/Handbook-IBD.pdf Appendix 1 – Islamic banks 1. 3i Capital Group, Dubai 2. ABN AMRO Bank Kuala Lumpur Malaysia 3. AFFIN Bank Kuala Lumpur Malaysia 4. AFFIN Bank Kuala Lumpur Malaysia 5. Al Hilal Bank (ABK), Dubai 6. Alliance Merchant Bank Kuala Lumpur Malaysia 7. AmBank Kuala Lumpur Malaysia 8. AmBank Kuala Lumpur Malaysia 9. Amlak Finance, Dubai 10. Arab- Malaysian Merchant Bank Berhad, Kuala Lumpur, Malaysia 11. Asian Finance Bank Berhad Kuala Lumpur Malaysia 12. Az Zahra Kuala Lumpur Malaysia 13. Badr Al-Islami, Dubai 14. Badr Al-Islami, Dubai 15. Badr Al-Islami, Dubai 16. Bank Bumiputra Malaysia Berhad, Kuala Lumpur, Malaysia 17. Bank Islam Malaysia Berhad Kuala Lumpur Malaysia 18. Bank Komuniti Anda Kuala Lumpur Malaysia 19. Bank Melli Iran, Dubai 20. Bank Negara Malaysia Kuala Lumpur Malaysia 21. Bank of America Malaysia Berhad Kuala Lumpur Malaysia 22. Bank Of China Kuala Lumpur Malaysia 23. Bank of Nova Scotia Berhad Kuala Lumpur Malaysia 24. Bank Pembangunan (Malaysia) Kuala Lumpur Malaysia 25. Bank Persatuan Malaysia Berhad Penang Malaysia 26. Bank Perusahaan Kecil & Sederhana Kuala Lumpur Malaysia Cagamas, 27. Bank Rakyat Kedah Malaysia 28. Bank Rakyat Kuala Lumpur, Malaysia 29. BIMB Trust Ltd (BTL) Kuala Lumpur Malaysia 30. Pentasoft Malaysia Sdn Petaling Jaya Malaysia 31. Bumiputra-Commerce Holdings Kuala Lumpur Malaysia 32. CIMB Islamic Bank Berhad Kuala Lumpur Malaysia 33. CIMB SI Sdn Bhd Kuala Lumpur Malaysia 34. Citibank Berhad Kuala Lumpur Malaysia 35. Commerce International Merchant Bankers (CIMB) Kuala Lumpur Malaysia 36. Commerce International Merchant Bankers Kuala Lumpur Malaysia 37. Credit Guarantee Corporation Malaysia Selangor Malaysia 38. Dallah Al-Baraka (Malaysia) Holding SDN. BHD. Kuala Lumpur Malaysia 39. Dayax Islamic Bank Kuala Lumpur Malaysia 40. Dubai Islamic Bank, Dubai 41. Emirates Islamic Bank, Dubai 42. Emirates Islamic Bank, Dubai 43. EON Bank Group Kuala Lumpur Malaysia 44. EON Bank Kuala Lumpur Malaysia 45. EONCAP Islamic Bank Berhad Kuala Lumpur Malaysia 46. EONCAP Islamic Bank Kuala Lumpur Malaysia 47. First Gulf Bank, Dubai 48. Hong Leong Bank Berhad Kedah Malaysia 49. HSBC Amanah (Malaysia) Kuala Lumpur Malaysia 50. HSBC Amanah (Malaysia) Kuala Lumpur Malaysia 51. HSBC Amanah, Dubai 52. Islamic International Arab Bank, Dubai 53. J.P Morgan Chase Bank Kuala Lumpur Malaysia 54. Jalan Sungai Tiang Kedah Malaysia 55. KAF Investment Bank Berhad Kuala Lumpur Malaysia 56. Kuwait Finance House (Malaysia) Kuala Lumpur Malaysia 57. Lembaga Tabung Haji Kuala Lumpur Malaysia 58. Malayan Banking Berhad (Maybank) Kuala Lumpur Malaysia 59. Malayan Banking Berhad (Maybank) Kuala Lumpur Malaysia 60. Malaysian Industrial Development Finance Berhad (MIDF) Kuala Lumpur Malaysia 61. Malaysian Industrial Development Finance Kuala Lumpur Malaysia 62. National Bank of Dubai, Dubai 63. National Bank of Kuwait (NBK), Dubai 64. Noor Islamic Bank, Dubai 65. Noor Islamic Bank, Dubai 66. OCBC Al-Amin Bank, Kuala Lumpur 67. Public Bank Berhad Kuala Lumpur Malaysia 68. Public Bank Berhad Kuala Lumpur Malaysia 69. Public Bank Berhad Kuala Lumpur Malaysia 70. RHB Banking Group Kuala Lumpur Malaysia 71. Rusd Investment Bank Labuan Malaysia 72. Sabah Credit Corporation Sabah Malaysia 73. Sharjah Islamic Bank, Dubai 74. SHUAA Capital International Ltd., Dubai 75. Standard Chartered Bank Kuala Lumpur Malaysia 76. Tejarat Bank, Dubai 77. The Asian Banker, Dubai 78. The Bank of Tokyo-Mitsubishi UFJ, Ltd. Kuala Lumpur Malaysia 79. The Bank of Tokyo-Mitsubishi UFJ, Ltd., Dubai 80. The National Mortgage Corporation Kuala Lumpur Malaysia 81. UBS - Islamic Finance, Dubai 82. Unicorn Capital Limited, Dubai 83. Unicorn International Islamic Bank Kuala Lumpur Malaysia 84. United Overseas Bank Kuala Lumpur Malaysia 85. Yasaar Ltd., Dubai Source: The Muslim Tribute 2011. Appendix 2 – Countries with Islamic banks Countries with Islamic Banks Albania Gambia Lebanon The Netherlands Niger Algeria France Luxembourg Nigeria Oman Australia Germany Malaysia Pakistan Philippines Bahamas Guinea Mauritania Palestine Qatar Bahrain India Morocco Russia Saudi Arabia Bangladesh Indonesia Senegal Sri Lanka Yemen British Virgin Islands Iran South Africa Sudan United Kingdom Brunei Iraq United States Switzerland Trinidad Canada Italy Tunisia Turkey Dubai Cayman Islands Ivory Coast Abu Dhabi Tobago Sharja Cyprus Jordan Singapore Seychelles Syria Djibouti Kazakhstan Azerbaijan Denmark Kenya Egypt Kuwait Thailand Japan Source: United States of America International Business Publications (2007) and Mahlknecht and Hassan (2011). Appendix 3: Research Invitation Letter Dear Respondent, I am inviting you to participate in a research project to study a framework of establishing and operating Islamic banks. I am asking you to look over the questionnaire and, if you choose to do so, complete it and send it back to me. It should take you about twenty five minutes to complete. The results of this research will help me complete my academic dissertation. Through your participation I hope to understand operations of Islamic banks. I hope that the results of the survey will be useful for my research work. I do not know of any risks to you if you decide to participate in this survey and I guarantee that your responses will not be identified with you personally. I promise not to share any information that identifies you with anyone. I hope you will take the time to complete this questionnaire and return it. Your participation is voluntary. Regardless of whether you choose to participate, please let me know if you would like a summary of my findings. If you have any questions or concerns about completing the questionnaire or about being in this study, you may contact me Sincerely Appendix 4: Questionnaire 1. What is the principle goal of Islamic Banking? Strongly agree Agree Neutral Disagree Strongly Disagree Providing highest-standard banking services Developing the economy Maximizing profits Promoting the precepts of Islam Maximizing the shareholder value Promoting social welfare Encouraging people to save and invest Build and maintain reputation in the industry Others (specify) 2. What services and products do you offer? Yes No Mudaraba Musharaka Ijara Salam Istisna Murabaha Qarz Dayn Qard Multiservice financing Sight Bills Purchase Import letter of credit Diminishing Musharaka Bank guarantee Foreign exchange services Other 3. What challenges face Islamic banks? Strongly agree Agree Neutral Disagree Strongly Disagree Ever Increasing competition Increasing cost of operation Innovation Changing consumer preferences Disintermediation Default risks Strict product and service quality control Lack of standardization of Shari’ah opinions Inefficient internal communication channels Delayed in decision making Obstructed decision making Others (specify) 4. What is the role of Shari’ah board? Yes No Ex-ante approval new products Ex-ante approval non-standard transactions Ex-ante approval standard transactions Ex- post review standard transactions Ex-ante approval general rules and guidelines Ex-post review non-standard transactions Issuance of Shari’ah compliance report Issue circulars and directives relating to Shari`ah-compliant products Issuance of Shari`ah pronouncements/resolutions Compliance checks of products Compliance checks code of ethics and conduct Other 5. How many members does the Shari’ah board have? Two three four five more than five The board members 6. What is important when choosing a Shari`ah board member Yes No Reputation Fairness Competence Diligence Capability Soundness of judgement Qualifications Not to sit on National Suvisory Board (National Shari`ah Advisory Council) 7. State whether you agree with the following statements concerning Shari’ ah boards Strongly agree Agree Neutral Disagree Strongly Disagree Shari’ah Board has clear terms of reference regarding its mandate and responsibility Shari’ah Board has Well-defined operating procedures and lines of reporting Shari’ah Board members have good understanding of, and familiarity with, professional ethics and conduct Shari’ah Board has well-organised operating procedures in regard to holding meeting and preparing reports Members of the board are facilitated to continuous professional development Shari’ah board is independent Shari’ah Board is seen as independent Shari’ah Board has a sound code of ethics and conduct Shari`ah advisory firms are treated and subjected to rules and regulations relating to outsourcing service providers Shari’ah Board is provided with complete, adequate and timely information prior to all meetings Shari’ah board comply with Shari’ah rules and principles Others, specify 8. State the extent to which you can agree with statement Strongly agree Agree Neutral Disagree Strongly Disagree There is a comprehensive and well-defined accounting principles and rules that command wide international acceptance The reporting of their financial and non-financial information meets the requirements of internationally recognized accounting standards Rights if IAH are acknowledged IAH are allowed to monitor the performance of their investments and the associated risks Investment strategy is appropriately aligned to the risk and return expectations of IAH Investment strategy is transparent in smoothing any returns There is a process of assessing overall capital adequacy in relation to their risk profile There is a strategy for monitoring compliance with regulatory capital ratios There is a strategy for maintaining their capital levels There is independent assurance that the accounts provide a true and fair view of the financial position It engages services of a competent valuer to evaluate and appraise the ICIS’s assets Others (specify) Read More