Impact Of Challenges Of Islamic Finance Example For Free - Free Essay Example

Sample details Pages: 8 Words: 2254 Downloads: 9 Date added: 2017/06/26 Category Finance Essay Type Narrative essay Did you like this example? Many countries in the West are optimistic in the establishment of Islamic Banking and Financial institutions in their country. The laws, although a contributing obstacle, can be overcome through further product development of sharia compliant product. Germany, U.S. Don’t waste time! Our writers will create an original "Impact Of Challenges Of Islamic Finance Example For Free" essay for you Create order and France are cases depicting the challenges that will be met with the establishment of Islamic Banking. The German Case: According to Engels, there is a significant population of Muslims in Germany and a substantial amount of investment interactions with the Muslim world. With that in mind, Germany may be interested in establishing Islamic Banks within the country. The BaFin# have had talks over the last 15 years with Islamic banking representatives from the Muslim community in Germany as well as from foreign Islamic banks looking to establish in the country. However, there has been no real action in its development and establishment. This could be attributed to the following reasons. First, the BaFin is skeptical of the Islamic banking models commercial viability as it will be catering to 2 million Muslims (p.179). Second, Islamic banking methods conflict with German Banking Act. Third, in accordance with German Banking Act, the principal of an investment must be insured. As , the basis of Islamic banks is profit and loss sharing as per the pre-determined ratio in structures such as murabaha, this may cause some form of conflict with the banking laws of the nation. Finally, Islamic banks differ in the method of reporting and monitoring of its operations from the European standard. The risk and financial standing must be identified clearly in its reports to be clearly evaluated. Despite these concerns, there areas in which Islamic financial services can flourish (Engels, 2010). According to the German banking law, in accordance with the German Banking Act KWG, there are nine types of services in which a business can entitle itself a credit institution#. The following are the nine banking activities: Deposit business Credit business Securities business Safe-custody business Investment fund business Revolving credit business Guarantee business Giro business (Engels,2010, p.181) According to Engel, Islamic financial institut ions, taking into account the restrictions placed on it by the German Banking Laws, could participate in the offering of at least 5 out of the nine the services stated above that will term it as a credit institution. Five of which are, deposits, credit, securities, safe-custody and Giro business (Engels, 2010 ,p.181) . Deposit business: In Islamic financial services, there are multiple forms of deposits as listed below: Current Deposits Wadiah and Qard Savings Deposits-Wadiah and Mudaraba Investment Deposits-Mudaraba According to the KWG 1, a deposit business means the receipt of monies from others as deposits irrespective of the payment of interest. In addition, it has viewed these deposits made to the bank as a loan in which the full amount must be paid back to the lender, in this case the customer of the bank (Engels, 2010). Based on these restrictions, Islamic financial institutions can provide current deposit services and savings deposit services in the form of wadiah , qard hassan and mudaraba deposits. As the principle amount is guaranteed whenever the customer wishes to withdraw the principle. However, Sharia compliant investment deposits will not be acceptable under the German law as there is in no guarantee on the return on the full principle. The losses incurred are shared by the bank and the customer at a predetermined ratio. Credit Business: According to the German Banking Law defines the credit business as the granting of money loans and acceptance of credits.# Under these guidelines, Islamic banking institutions can provide loans as the law does not specify the mandatory inclusion of interest rate. In accordance with the BaFin, an exchange of a cheque for cash is considered a credit business. This service is provided by the bank at a set administrative fee. Islamic institution could provide this as a part of their services. Furthermore, Islamic institutions can participate in the provision of promissory notes as they can also charge a fixed administrative fee in return for the service. The challenge lies in the ability to provide this service as the liquidity of Islamic banks are limited. In addition, if we look at it from a broader view point, the EC Directive has included the following services under the same definition mortgage loa ns, factoring with or without recourse and trade financing, of which , are not permissible. However, murabaha and musharaka structures may be taken into consideration to categorize it under the EC Directives definition of lending (Engels, 2010, pp.183-184). Other Acceptable activities: Islamic banking and financing institutions can participate in the sale and purchase of securities for their clients as long as it is riba free. They can also participate in the managing of securities for their clients. Finally, they can participate in Giro business, the administration of deposit funds for customers , with the provision of services such as , transferring amounts and the provision of clearances for a set administrative fee((Engels,2010,p.181). Overall, the restrictions stated by the German Banking Act are not obstacles that cannot be overcome. However, the issue arises when wanting to adapt Islamic banking in the EU. It may be compliant in Germany however; in order to be compli ant in Germany it must also be compliant in the EU. The move towards uniformity may act as an additional obstacle in the face of establishment. The US constitution and Islamic banking and finance controversy: The basis of the Western banking models foundation lies in practices that defy the Muslims basis of acceptable financial banking activities. Gimigliano argues, the First Amendment of the US constitution#may partake in the assimilation of the Islamic banking and finance model into the US economy as an official domestic bank. There has been a move towards the establishment of Islamic domestic banks in the US. According to Thomas Baxter, General Council and Executive Vice President of the Federal Reserve Bank of New York, for the following reasons: (a) the growing Muslim population on US Territory, able to influence the West in market economies;(b) an increasing awareness of socially responsible finance, after the Enron scandal;(c) the free exercise of religion clause law makers will need to ascertain whether some practices can be changed to accommodate Muslims who try to practice their religion freely. (Gimigliano, p.149, 2010) Based on the above, The First Amendment is divided into two parts, the free exercise and the establishment clause (p.149). The first clause protects the individual freedom to practice their religion of choice, which enforces the need in the establishment of Muslim friendly banking institutions. However, the second clause, deals with the governments actions, and its incorporation, with this respect makes it controversial, together with this point in the constitution, separation of church and state,and the neutrality theory may act as a legal and ideological obstacle in the face of its integration and acceptance(Gimigliano, p.159, 2010). According the Gimigilano, the strict separation of government and religion restricts any form of government participation even if it is in the form of assistance, including the fir e, police and public health services.It would be in violation of the separation clause. In this affect, may prevent the safeguard of freedom of practice (Gimigliano, p.150, 2010). In addition, based on the clause of neutrality, government cannot be involved in the monitoring of the activities because it will tie government with an institution tied to religious foundations. In this case, brings up the question who is the reasonable observer? It has been suggested that an educated individual can be appointed as an observer of Islamic banking activities. However, he only reasonable observer that can regulate the activities of an Islamic bank is Sharia scholars (Gimigliano, p.151, 2010). . The US constitution is the driving force towards the accommodation of faith. However, it is the preference of the US law to maintain secularism in the countrys economic activities. In the face of authorization and the limits of US jurisdiction, the establishment of an Islamic bank still has many obstacles before it can attain authorization (Gimigliano, 2010). The French and the provision of Islamic banking: Similarly, according to Arnaud, the French too are encouraging the opening of Islamic Banking in France as it will cater to the Muslim population, as well as, to the well off GCC nationals seeking ethically responsible banking institutions. At this point, acceptance has been very flexible. To gain authorization and licensing to operate in France it must comply with the basic standard that is applied to all banking institutions by the CECEI#. In fact, it has been quite accepting of foreign banking institutions opening in France. Banks originating from Muslin countries have been present in France for over three decades. For example, six Lebanese banks, four Iranian banks, two Pakistani, two Qatari banks, an Egyptian bank, a bank originating from Abu Dhabi, a Kuwaiti bank and a Jordanian bank have established themselves in France. However, despite Frances openness towards the establishment of an Islamic Bank in France, there has been no approach by the already present Middle Eastern banks to provide Sharia compliant services, nor has the CECEI been approached to formally authorize the establishment of an Islamic Bank. This brings up another underlying concern. As there has been no outspoken demand for an Islamic bank, CECEI are unsure of the actual demand for an Islamic bank. Notably, if an Islamic Bank establishes itself in France, it must prove itself a viable banking and financing institution. First, as per the CECEI rules, it must have qualified bank mangers running the operations. As it would be a new concept in France, the ability to find ex perienced figures locally will be difficult. It would have to bring expertise from abroad. In addition, these individuals too will have to be knowledgeable in French law to insure the Banks activities are compliant to the local law let alone the sharia law (Arnaud, 2010). In terms of product development, it must comply with Frances customer security close without inhibiting the ease in the operation of the bank. Its main concern is money laundering and terrorism. The Islamic banking institutions must have systems in place, approved by the CECEI, which will inhibit fraud and the misuse of funds. As the banking systems in France are based on the Western conventional model, mechanisms for the regulation of funds may need to be developed to suite the models of sharia compliant banks (Arnaud, 2010). In addition, there must be internal systems to monitor the day to day operations of the bank. The products provided to the customers must be compliant with French law. As this product r equires special oversight by sharia scholars, to insure they are compliant with the Islamic guidelines, it is noteworthy to mention that the shariah committee must be limited to that of vetting and certifying products and should not extend beyond this to interfere with the banks governance and internal operating modes.This could be related to the similarity between the US and French constitution. France, like the US is secular in nature. The accommodation of an institution thats foundations are based on Islamic principles is contrary to its constitutional foundations. Religious representation of a faith may be frowned upon by strict secularists (Arnaud, 2010, p.170). Moreover,the Islamic banks must be able to convert Islamic financial products into a mode understandable in the conventional accounting system. This is to insure that the risk factor and the required liquidity of the bank to sustain these products is clearly apparent by overseers (Arnaud, 2010). Furthermore, the S haria scholars must play the role of auditors in the day to day running of the institutions. The challenge arises with regards to the capacity and knowledge of these scholars to effectively insure the quality of the service provided (Arnaud, 2010). In regards to issues related to retail Islamic products, there are a few issues that arise due to the French laws lacking in areas that relate to qard, mudaraba and ijara. First, the French law does not have an accounting infrastructure to support loans given as advances to the bank from a customer. In this case, the customers rights are not fully protected by law. Therefore, the French law must be updated to insure that the customer is insured a deposit guarantee fund for deposits in the form of wadiah , qard hasan and mudraba in savings deposits. Second, in relation to the first point, deposits for the purpose of investment, mudarba, can no longer be defined as deposit funds as they cannot fall under the qualified to be labeled under the deposit guarantee fund.Finally, the ijara contracts for home financing must be compliant with the French consumer protection codes (Arnaud, 2010, p.172). Islamic banking institution will not receive any exceptions ender the French law in keeping with its non-discriminatory clause. The products must be sustainable and adequately structured to the specification of the law. Furthermore, these guidelines is not a hindrance to its development but, an insurance to future customers that their rights are fully protected. In that regard, Sharia compliant banking institutions have a chance to grow in France as the foundations of its operations are based on ethical practices that insure the equity and controlled risk. The intricately weaved infrastructure of Islamic Finance (IF) has shown a definitive growth in recent years and, IF has been highlighted in global trade as a means of integrating Western and Eastern banking practices for a more optimal trade regimen. Namely, laws in We stern regions including Europe and North America have shown an ability to accommodate IF guidelines, despite a perceived public ethos of resistance to Islamic ideals.