MODULE: 2FIM602.

Y FINANCE MAJOR PROJECT

Author (Saad Qazi) W12598252 Supervisor: Mr. Elias Boukrami

A project undertaken as part of BA (Hons) Business Financial Management degree, University of Westminster,

Major Project
1

IN THE NAME OF ALLAH, THE MOST GRACIOUS, EVER MERCIFUL

Abstract The purpose of this study is to investigate basic prohibitions in the Islamic commercial law and to identify the issues and challenges Islamic banks are facing in the U.K. Islamic banking industry is in its developing stage in the United Kingdom. British policy makers desire to develop London as a global hub for Islamic banking industry. However, as Islamic banking sector is in its evolutionary stage, therefore, it is facing various issues and challenges globally, specifically in the U.K. This is a qualitative study. And the primary data is collected with the help of in-depth interviews. Six participants participated in the interviews, where three participants were working for Islamic banks in the U.K and remaining three were PhD scholars who have done research in the broad subject area of Islamic finance. Such sampling helped the study to have insight of the issues in theory and practice both. Findings of the study illustrate that interest rate, Gharar and investment in prohibited (Haram) or unethical activities are strongly prohibited according to Islamic commercial law. However, Islamic banks do not have set procedure to eliminate Gharar completely from their contracts. Furthermore, Islamic banks in the U.K cannot use Musharakah contract while financing other businesses as by using the Musharakah contract banks will be exposed to excessive risk of loss. Islamic banks also do not have a proper solution for avoiding interest baring transactions while corresponding with foreign conventional banks. Outcomes of the study also suggests that Islamic banks should also have a separate regulatory framework in the U.K. as the current regulatory framework was formed for conventional banks thus, it is causing complexities for the Islamic banks to operate in the U.K. It was also discovered that there is a need of increase in the quantity and quality of appropriately-qualified human resource for Islamic banking industry in the U.K which will help Islamic banks to offer innovative products and services to their customers in the competitive financial industry of the United Kingdom.

Acknowledgments First of all, I would like to thank dear Allah, the Almighty who gave me health, strength, guidance and ability to complete this study. I would also like to be thankful to my supervisor Mr. Elias Boukrami, who helped me throughout the course of this dissertation. Without his supervision and guidelines it would not have been possible for me to complete this study in time. Thank you Sir! I am thankful to my cousins, Mr. Khurram Iftikhar and Mr. Shahab Aziz who helped me to understand some very important aspects of the subject area on which this study is based on. I would dedicate this study to my sweet Dadi jan, dear father, my mother, little sister and someone very special to me who supported me always and prayed for my success in each and every race of my live. I pray for your long and healthy life. Ameen!

Declaration I declare that this study is my own work. And all the material used from other sources is referenced properly as instructed by module handbook.

Table of contents Abstract Acknowledgments Declaration Table of contents 1.0-Research Question 1.1-Objectives 1.2-Introduction 2.0-Literature review ... ... ... ... ... ... ... ... 3 4 5 6 9 9 9 11 11 15 17 19 19 19 20 21 22 22 23

2.1-Islamic commercial laws basic prohibitions and Islamic Modes of Financing 2.2-Framework and Regulatory issues

2.3-Islamic Banks developing in the UK and Issues regarding Human Resource on the way 3.0-Methodology 3.1-Purpose of the study 3.2-Philosophy of the study 3.3-Research Approach 3.4-Research method 3.5-Time Horizon of the study 3.6-Secondary Data 3.7-Primary Data ... ... ... ... ... ... ... ...

3.8-Presentation of the results 4.0-Results

... ...

23 25
25

4.1-Basic prohibitions in Islamic finance and Issues regarding Islamic modes of financing 4.2-Regulatory Framework issues ...

28 29 30 30 32 32 33 35 35 36 37 40 40 43 46 49 52 55 59

4.3-Issues regarding Human Resource ... 5.0-Analysis ...

5.1-Basic prohibitions and Islamic Modes of financing ... 5.2-Framework and regulatory issues ...

5.3-Issues Regarding Human Resource ... 6.0-Conclusion 6.1-Recommendations 6.2-Limitations of the study 6.3-Suggestion for further study 7.0-References 8.0-Appendices 8.1-Appendix 1 8.2-Appendix 2 8.3-Appendix 3 8.4-Appendix 4 8.5-Appendix 5 8.6-Appendix 6 8.7-Appendix 7 ... ... ... ... ... ... ... ... ... ... ... ... ...

8.8-Appendix 8 8.9-Appendix 9 8.10-Appendix 10 8.11-Appendix 11 8.12-Appendix 12 (Glossary)

... ... ... ... ...

60 61 62 63 64

Challenges for Islamic Banking in UK 1.0 - Research Question: The aim of this study is to critically investigate the challenges which Islamic banking institutions are facing in the UK, because of determined prohibitions in Islamic commercial law. 1.1 - Objectives: 1. To identify the methodology of different Islamic financial modes and to find out the prohibitions they are based on. 2. To find out what are the impacts on Islamic banking institutions, because of an improper regulatory and institutional framework in the UK. 3. To find out whether the Islamic banking industry in UK has sufficient human resource for further product development. 1.2 - Introduction: According to BBC NEWS (2004) Islamic Banking initiated establishing its roots in the UK financial industry in 2004 when banking regulatory authorities of the UK legitimated opening of the first Islamic bank, operating purely according to the Islamic financial principles in the UK. FSA (2006) indicated that the market for the Islamic banks in the UK at that time was approximately 1.8 million Muslims living in the UK and around 12 million Muslims residing in the EU. Most of these Muslims according to their faith would expectedly prefer to bank with the banks that provides them with the products and services which will not be prohibited by the principles of their faith, as a report from Lloyds TSB discovered that more than seventy-five percent of the British Muslims community prefer the financial products and services which are sharia-compliant (cited by Christofi. H, 2007). In 2006, altogether $200 billion to $500 billion worth of assets were controlled by Islamic banking worldwide which is growing by 10% to 15% per year (FSA, 2006). British policy makers are also attentive to accelerate Islamic Banking sector in Great Britain, As Phillips M. (2009) indicated that former prime minister Mr. Gordon Brown desired global center of Islamic Banking should be the London. This study focuses on the functionality of Islamic Banks and how the prohibitions stated in Islamic commercial law are creating challenges for these institutions in order to diversify their product line in United Kingdom. Furthermore, studies identify the issues which the Islamic Banking industry in the UK has to face due to being in a non-Islamic country, which is mainly

because of insufficient regulatory and institutional framework in the UK. The study also tends to investigate, if Islamic banking industry in the U.K has sufficient appropriately-qualified staff. Firstly, in Islamic commercial law, transactions which involve rates of interest are not acceptable. Secondly, uncertainty in financial products or services is not permitted, furthermore, operating or investing in unethical businesses (according to Shari ah) such as illegal drugs, gambling and pornography is strictly prohibited. Whereas in countries like the UK, investment in which returns are in the form of interest are very common as they are convenient and profitable for the customers. Moreover, businesses which involve gambling or alcohol are considered to be highly profitable businesses in the UK. The role of Islamic banks in the society is to offer the Muslim community a diverse product line and service which are acceptable in Islamic religion. In addition Islamic banks are also sources for the non-Muslim customers to bank ethically as Islamic principles highly consider socioeconomic justice and an equitable distribution of income and wealth.

10

2.0 - Literature review: According to the Chartered Institute of management Accountants (CIMA, 2008a), Islamic finance is a term that reflects financial institutions or business whose activities are according to the Islamic teachings and principles or are not contrasting with the Islamic law (Shari ah). Islamic Law acts as a regulating umbrella for the people who follow the religion of Islam. It has its influence on almost all the aspects of human behavior. Hallaq W (2003) highlighted that Islamic Law administrates a Muslims lifestyle literally in all the characteristics and phases of life, whether it be political techniques or decorum of dining , as for the purpose of this study Islamic Law also regulates the commercial transactions for the Muslims. Hisham M (2006) has explained that the Islamic Law is a term that commonly is referred to as a merger of Shari ah (legal verses of the Quran and Traditions of the Prophet Muhammad (Peace Be Upon Him)) and Fiqh, whereas Fiqh is a procedure in which Shari ah principles and commandments are deduced in order to constitute regulations for real or hypothetical cases or circumstances (Hisham M, 2006b). 2.1 - Islamic commercial laws basic prohibitions and Islamic Modes of Financing: In Islamic law, trading that involves interest (Riba) is not passable however; profit generated by buying and selling commodities is permissible. Secondly, an element of uncertainty (Gharar) in financial products or services is not allowed in the light of Islamic Law. Thirdly, when business practices involve selling products or services, such as alcohol, gambling and pornography, then these types of businesses are not justified by Islamic law, (CIMA, Islamic Commercial Law, 2008b). These are the three restrictions on the basis of which all Islamic financial instruments are tailored. Ayub M (2009) has argued that the reason for the financial problems which different economies of the world are facing are because of the interest based financial instruments, as interest earning financial instruments create debts which are not repayable, he further discussed that this sort of financial prudence does not distribute the wealth evenly with a society which creates a class of societies wealthier whereas, other remains poor. On the other hand, some authors and Islamic scholars suggest that interest is not prohibited in Islam but in Islam unreasonably high priced Interest is prohibited. Tantawi M(Cited in Sawma G, 2010) advocated as an Islamic scholar that simple interest related instruments and saving accounts are acceptable according to Shari ah (Islamic Law) whereas, those financial instruments and products in which interest

11

rate is unreasonably high are not tolerable in Islam. However, this argument from Tantawi represented the view of the minority which was considered as highly controversial in the Muslim community (Sawma G, 2010). However, Lewis and Hassan (2007) notified that it is evident that the Quran prohibits all kind of interest whether it be a reasonable interest rate or over-priced rate of interest, As the Quran says: But if ye repent, ye shall have your capital sums [that is principal] (S2: 279). Jaffer S (2005b) identifies that using conventional interest rate as a benchmark is convenient for bank managers and the regulators; consequently, LIBOR and other established interest rates are used by Islamic banks as a benchmark, mainly for their Islamic mortgage alternative product and services. On the other hand, Islamic scholars are tolerating this matter and are not considering it as a reason for void Islamic transaction, whereas due to this practice numerous Islamic banks are struggling in consumer banking sector, because a large number of consumers think that these transactions are not valid where such benchmarks are used or applied. There is also a point of view that using such a benchmark is a greater sin than dealing in interest openly. Suleyman Uldag (Cited in Sawma G, 2010), advocated that if for an argument we accept that Interest is prohibited in Islam, in his opinion the way how Islamic Banks are operating currently, they are deceiving their customers and community by adjusting phenomenon of interest rate in their operations. He further illustrates that by having such a stance, Islamic banks are creating hurdles for themselves. Several economists argue that interest-free and asset based banking system would be good for the economy and some of the scholars have even favored zero-interest system as it would encourage investments which certainly increase productivity and employability, and as financing would be based on equity and profit and loss sharing, consequently banks would consider to direct their financial resources toward most productive investments which would help the economy, in order to reach the optimal allocation of the resources; moreover, the finance process will also be more effective (Al-Jarbi M, Cited in Ahmed A and Syed S, 2007). On the other hand, in the U.K some of businesses which are profitable involve operations which involve selling alcohol or offer services like gambling. For example, in the supermarket industry all the leading superstores do have alcohol related products and products like lottery included in their product line; dining industry and hotels also have alcohol related products in their product portfolio, whereas Islamic financial institutions have an ethical investment charter; this charter is designed conferring to the Islamic principles and teachings according to which unethical investments such as investment in pornography, alcohol related products and services and

12

gambling are not allowed and must be strictly avoided (Lewis and Hassan, 2007). These teachings and prohibitions may enforce Islamic banks to sacrifice such profitable investments which are unethical according to their ethical investment charter. However, there are some points of views regarding this issue. Firstly, as an Islamic bank considers these investments unethical, therefore, it is their social responsibility to avoid such investments and secondly, a large number of stakeholders of Islamic banks are Muslims and one of the reason for them to bank with Islamic banks is to gain investments and/or borrowings according to the teachings of Islam, hence, it is the duty of an Islamic bank to assure that their operations and investments are ensuring religious compliance of their Muslim stakeholders (Ahmad and Hassan, Cited in Lewis and Hassan, 2007). Another prohibition for the Islamic commercial contracts is that the contracts should be without any uncertainty (Gharar) be it in a transactional terms or conceptual. Professor Mustafa AlZarqa (Cited in Mahmoud A, 2006) illustrated on this prohibition that if the sale item is probable, having uncertain existence and features, moreover, if the nature of risk involved in such transaction is very similar to gambling. Such transactions are not approved by Islamic commercial law as they involve uncertainty (Gharar). Mahmoud A (2006) discusses that a certain level of uncertainty is tolerated in Islamic commercial contracts. Broadly arguing, Gharar is a term that comprehends some sort of lacking information and/or deception along with uncertain risk being a feature of the object or objects of contract, as complete language of a contract is not possible therefore minor Gharar is acceptable and considered as necessary evil. However, Professor Al-Darir (Cited in Mahmoud A, 2006) indicated towards a condition where a contract has a major Gharar in order to meet those needs which cannot be met by any other mean, in these circumstances such Gharar would not invalidate that particular contract. Another approach towards determining the validity of a commercial contract on the basis of Gharar is that Ibn Taymya (Cited in El-Gamal, 2006) penned that if economic benefit of a contract in which Gharar is identified is greater than the identified Gharar, then such particular contract would not be considered as invalid on the basis of Gharar which is identified. Question which

arises on the basis of above mentioned arguments is to identify a gauge which measures and distinguishes between a major Gharar and a Minor Gharar and how Islamic Banks satisfy their customers and influence their potential clients who follow the same religion which is Islam, but their approach towards acceptance or rejection of commercial contracts and transactions in consideration to Riba and Gharar is not identical as discussed above.

13

There are five basic financing contracts Murabaha (cost-plus profit financing transaction), Ijara (Islamic leasing), Istinsa (pre-delivery financing and leasing mode), Mudaraba (trust based financing agreement), Musharakah (a joint venture) on the basis of which most of the Islamic financial products and services are customized; due to the diverse needs of the customers and investors and also sometimes in order to gain a competitive edge in the industry, the number of products and services are designed by using different features from more than one kind of basic financing contract types (Zaher and Hassan, 2001a). Kattell B (2010) has also acknowledged sixth Islamic financing contract Salam which is referred to as deferred delivery sales in which product is delivered after the payment is received. Ahmed A (n.b) recommended that Islamic financing modes can be distributed into two sections; firstly Musharakah and Mudaraba in which Islamic banks or Islamic financial institutions directly make finance available as a partner in the partnership in the form of capital funds and secondly, indirect finance is provided in the form of leasing that is Ijara or sale contracts which includes Salam contract, Istisna, Murabaha and Bai Ajil, whereas all these Islamic modes of financing are based on the Islamic prohibitions of Interest(riba) and Uncertainty(Gharar) alongwith fulfilling the requirements of ethical investment charter of the Islamic banks as discussed earlier. Maulana Usmani T (n.b) specified that literal translation of the word Musharakah from Arabic to English is of sharing, but in commercial terms it is considered as joint enterprise where profit or loss of the joint venture is divided amongst the partners of the partnership, as Islamic principles prohibit interest therefore, an alternative for interest in this mode of Islamic finance is profit and loss sharing, where if the venture realizes a profit, it would be divided accordingly among the partners and if loss is realized the treatment would be same as in case of the profit whereas, distribution in the case of loss is justified with the argument that it is unjust to claim for the interest or the cost of capital provided. Moreover, Venardos (2006) identifies the involvement of Islamic banking principles in moral hazards such as fraud; and as Musharakah is based on profit loss sharing partnership. If an agent (borrower) under reports the profit (as loss or profit reported under actual profit) in order to avoid tax, the bank will get its share under the actual share or will have to afford the loss. There is a need to include some restrictions in the agreement to minimize such kind of risks. The question here arises that apparently in such mode of financing, Islamic banks are exposed to the risk whereas, as a business they have to compensate that risk which they are taking. How Islamic Banks compensate such risk? Does it make financing (through Musharakah) more expensive for the Islamic banking customers as

14

Islamic banks tend to compensate the risk which they are taking? Or are Islamic Banks just compromising on the risk which they are exposed to? Ahmed A (n.b) indicated that Murabaha has been the most successful mode of financing for the Islamic banks, as since 1970s it has been in charge for the employment of approximately 85% resources of the Islamic banks, it is a spot sale based on cost plus profit method where bank purchases a product which is required by its customer and then sells it to the customer on installments, and the sum of installments is the cost of the product plus profit margin of the bank. In the UK, if the product required can only be purchased from abroad, like any other European country where there is no Islamic Bank, the process may involve Letter of credit and a foreign conventional bank where Islamic banks have to step aside from the payments, which involve interest. It can also be a challenge for the Islamic banks to deal with. Salam sale contract is also referred to as a deferred delivery sale where selling party receives the full payment of the selling item but the delivery of the item is a future date which is agreed by the parties mutually, however, in Salam sale contracts, the parties involved have to make sure that they dont deal in the exchange of such items in which gain can be considered as Riba, such as Gold, Silver and Currencies (Ahmed A, n.b). 2.2 - Framework and Regulatory issues: Sir Howard Davies (cited in Oxford Business Group, 2009) recognized while he was a part of FSA, that Islamic banking experiences some difficulties within itself. Mainly it suffers from the lack of an integrated body, mandated to evaluate Shari ah compliance of Islamic financial transactions; this regulatory risk causes uneasiness among investors. Venardos (2006) indicated another vital issue that is dealing with delayed payments. Given that Islamic financial system do not charge interest, hold-ups in due payments may cause the institution various kinds of complexities and problems. This issue should be addressed otherwise the number of people in default will increase. Akkas (n.b) depicts the reason why Islamic banks are criticized about them being actually interest free banks. He identifies that as profit-sharing involves a high risk, that is why some Islamic banks tailor their financing techniques in such a way, which brings them an assured fixed return. This is the reason why there is a considerable criticism on whether these banks have actually eliminated interest from the transactions or they just have changed the nomenclature of their transactions.

15

There is a requirement of a uniform regulatory and legal framework that is supportive of an Islamic Financial system... (Zaher and Hasan, 2001, p.187b), the existing regulation system even in Islamic countries is based on the western banking model there is no common approach among countries where Islamic banking exists(Qorchi, M.,2005a), whereas Islamic principles of financing differ from conventional financing principles it makes for a complex system. It is easier said than done, to introduce new Islamic financial instruments and also, in addition there is a high possibility of Islamic financial instruments being unacceptable by Islamic laws. It is even harder for Islamic financial institutions to operate in a non-Islamic country where the regulatory body is not practicing the Islamic principles. Ali S (Cited in Ahmed A and Syed S, 2007) has discussed the Issues that are related to the structure of the Islamic Banks, as Islamic commercial principles are from ancient times, although Islamic banking sector, on the basis of these principles, have evolved in the recent modern times, when competition was such intense in the banking industry which was not very supportive for the Islamic banks to grow And the structure of Islamic banks was developed with the influence of religious, political and economic factors. Consequently, the operations of these Islamic banks were administered by the regulators who were meant for conventional banks. Therefore it had an impact on the structure of the balance sheets of these Islamic banks. Hassan K and Mahlknecht M (2011, pg. 345) indicated that another regulatory challenge arising from the liability structure of IFIs is the determination of a standard rate of return for account holders, which means that deposits are invested on the basis of profit and loss sharing where depositor is not certain or even aware of the amount of the return he will receive on his deposited capital. Moreover, if the asset or project in which capital is invested realizes a loss, it will also be shared among the investors. Therefore there is a higher degree of fiduciary risk on the management, in order to invest the funds most efficiently (Aziz, 2004, Cited in Hassan K and Mahlknecht M, 2011, pg. 345). Challenges can be overcome if the concerned central banks and institutions enhance their multilateral cooperation, and create the appropriate environment and conditions.(Qorchi, M., 2005b). There is a need to re-evaluate the entire financial framework and make it more efficient and should be designed in a way which is seen as convenient for the Islamic financial institutions to diversify into other markets, with the help of innovative financial instruments. There is also a question about who is going to do it, Islamic institutions also have a shortage of

16

trained personnel who can analyze and manage portfolios, and develop innovative products according to Islamic financial principles. (Zaher and Hasan, 2001c, p.188). Schoon N (2009) emphasizes on tax related issues that the Islamic financial system and its transactions can come across. In Islamic transactions such as savings account, hire purchase transactions, insurance, loans, etc, there is an element of buying and selling commodities. Therefore, there can be some complications related to VAT and stamp duty can exist, as they are related to element of sale and purchase in the UK and European Union. However, this issue is not significant in the UK anymore, as FSA, in order to remove the obstacles from growth of Islamic banks in the UK, has changed some tax legislations, in order to provide relief to the Islamic banks and its customers. Such changes were introduced in the Finance Act 2003 in which special legislation was designed in order to avoid multiple payments of Stamp Duty, in the case of Islamic mortgages; furthermore, some changes were also made in the favor of Islamic banks in the UK in the Finance Act 2005 and 2006 (Ainley M, et al. 2007). This indicates that the regulators of financial sector in the UK are also in the favor of contributing towards the development of the Islamic banks in the UK. 2.3 - Islamic Banks develops in the UK and Issues regarding Human Resource on the way: According to Jaffer S (2005), due to the ethical parameters underpinning Islamic wealth management products and increasing transparency of contractual terms and conditions have attracted both Muslims and non-Muslim customers, but the problem identified is not a proper setup for product development and innovation. There is a need to thoroughly develop a process in order to identify the needs of customers and deliver, by ensuring that the product or services are Shari' ah complaint. But the talent pools within the Islamic Banking sector are seen as being extremely limited which means that there is high demand in this sector for well-trained human resources, but many of the Islamic financial institutions are extremely small and cannot remain serious players...( Zaher and Hasan, 2001d, p.189). This statement means that most of the institutions, within this sector will not be able to aid research and development, because of the size of the businesses, and also their own financial powers limits training and development of staff. There is an issue pointed out in the literature that, as there is a shortage of such Shari ah scholars who are appropriately-qualified sharia scholars for the Islamic financial industry, consequently, most of such scholars who hold appropriate qualifications also possess a position

17

in the Shari ah Supervisory Boards (SSBs) of the Islamic Banks, therefore, this raises alarms that whether SSBs are likely to critically evaluate the products and services of Islamic Banks; moreover, according to FSA regulations, in the annual audit it should reflect that conflicts were identified and managed carefully, which could be an issue for the members of SSB as they have to audit their bank on yearly basis along with ensuring that all the products and services are according to the Shariah laws and principles (Ainley M, et al. 2007).

18

3.0 - Methodology: 3.1 - Purpose of the study: As Islamic Banking is a new system and is at its developing stage in the western region of the world therefore it is facing numerous challenges and issues. Hence, purpose of this study is to critically identify and investigate these challenges and what are their effects on the development of Islamic banking industry in the UK. In accordance to the research methodology this study will tend to serve the purpose of exploratory study. According to Robson (2002) exploratory study is focused on finding out what is happening in the particular field, and try to find out the reasons and understandings of whatever is happening, furthermore questions are asked to assess phenomena. Similarly purpose of this study is to identify the issues and clarify the understanding of these issues and challenges which Islamic banks are facing in the UK. 3.2 - Philosophy of the study: According to Saunders et al (2009) research philosophy is related to nature and the development of knowledge and how the methodology of the study will take its path in which a researcher is involved. Intensity of the knowledges nature and development doesnt change the definition of research philosophy as in any case research comes up with a development of the knowledge in a particular field therefore philosophy of this study is to develop knowledge regarding the challenges and issues Islamic banking industry is facing in the UK. Saunders et al (2009) discussed a number of different philosophies of research in which Positivism and Realism philosophies of research are suitable for studies which are objective in nature whereas this study is investigating the issues and challenges which Islamic banking is facing in the UK, that is subjective in nature. Therefore Positivism and Realism are not suitable philosophies for this study. However, in Pragmatism research philosophy researcher considers both objective and subjective points of view (Saunders et al, 2009). But then again this study is solely of subjective nature as the study tends to investigate theories and practice of Islamic banking and the challenges it is facing. What seems to be most suitable research philosophy for this study is Interpretivism, as discussed by Saunders et al (2009) this research philosophy concentrates on the detail of the situations and reality behind these details furthermore it is only suitable for the studies which are

19

subjective in nature. As this study is investigating the fundamentals of Islamic banking principles in-depth and the challenges which this industry is facing in the UK. Therefore Interpretivism philosophy will help in the suitable manner that which path methodology of this study should take. 3.3 - Research Approach: Kumar R (2008) defines Research Approach as conceptual structures within which research is conducted, it constitutes the blue prints of the collections, measurements and analysis of data. Saunders M et al (2009) suggested there are two main kinds of research approaches; deductive and inductive whereas in deductive approach researcher develops a theory and hypothesis and a strategy is designed to test those hypothesis; in inductive approach data is collected and then analyzed in order to develop a theory. Deductive approach is a tool which is more suitable for the scientific research in which facts are to be measured quantitatively that is why deductive approach is more appropriate for the research following positivism philosophy of research whereas, in inductive approach qualitative data is collected through different techniques such as interviews and then the collected data is analyzed in order to formulate the theory, in such a technique there is higher possibility to acquire the alternative explanations of the issues as the methodology is not as rigid as of deductive approach (Saunders et al, 2009). This argument can be backed up by the description of inductive approach given by Strauss and Corbins (1998) where inductive approach is described as a study in which observer starts with a particular area of study and the theory arises from the data which is collected and analyzed. On the basis of above discussion it can be suggested that inductive approach would make better sense if the research is based on the interpretivism philosophy. Inductive approach is more suitable and convenient to identify that what are the core issues and challenges for Islamic banking in order to develop in the United Kingdom which are evident in the theory related to the Islamic Banking and whether these identified issues are relevant to the objectives of this study. This would be helpful to identify the most relevant issues to the objectives of this study and to present the description of most important and relevant issues as findings of the study. As this study is of interpretivism philosophy and is concentrated on investigating subjective issues related to the issues and challenges for the Islamic banking in the UK, therefore this study would consider inductive approach in order to drive into the findings and conclusion of the issue.

20

3.4 - Research method: In the circle of research methodology, generally inductive approach is associated with the analysis of qualitative data as, Bryman and Burgess (1994) indicated that the studies in which qualitative data is obtained and analyzed are more likely and convenient to follow inductive approach in order to formulate their findings on the question. Auerbach and Silverstein (2003) defined qualitative research as a research that involves analyzing and interpreting texts and interviews in order to discover meaningful patterns descriptive of a particular phenomenon. According to the above mentioned definition it can be illustrated that the qualitative data is more appropriate in order to collect and analyze subjective and theoretical knowledge. It demonstrates that qualitative data is in line with both, the above discussed methodology of this study and the subject area in question. As an alternative the option available as a type of data collected and analyzed was quantitative data. Aliaga and Gunderson (2000) defined quantitative research as a research which is explaining phenomena by collecting numerical data that are analyzed using mathematically based methods (in particular statistics) (cited in Muijs, 2011). An opinion can be generated on the basis of above mentioned definition of quantitative research that choosing quantitative technique for this study would not be appropriate as it tends to collect numerical data and analyze it with the help of methods which are based mathematically, whereas for this study more subjective and theoretical data regarding the issues and challenges which Islamic banks are facing in the UK is required so it can be analyzed in order to present the findings on the question. Peninsula Research and Development Unit (n.b) has classified three methods of collecting qualitative data as the main methods, which are Focus Groups, Direct Observations and InDepth Interviews, where in Focus Groups researcher invites small number of members (respondents) and ask them to give their opinion on the question. As this study is concerned the respondents who are banking professionals therefore it was assumed due to their busy schedules and professional commitments it would be difficult to gather number of professionals at a same place and time. Moreover, Direct Observation method also was not suitable for this nature of study as subjective and theoretical issues cannot be concluded by just observing banking professionals and their activities. However, Cooper and Schindler (2008) indicated that if the purpose of the study is exploratory and it is collecting qualitative data it is more

21

appropriate to conduct non-standardized research interviews. Therefore this study conducted indepth interviews with Islamic banking professionals in order to have an insight of the issues and challenges Islamic banks are facing and to understand the reasoning behind these issues, moreover to understand the opinion of the respondents on these issues. Other advantages of In-depth interviews are that it is convenient to understand issues in detail and in depth, what is more that In-Depth interviews are also not much time consuming and complicated in the term of booking appointments as compared to other methods such as Focus Groups. Questions asked to the interviewees in these interviews will me same and pre-written. Interview questions will be based on the arguments of literature review. 3.5 - Time Horizon of the study: This study is suggested to classify as a Cross-Sectional Study as the study is concentrating upon, what issues and challenges Islamic Banks are facing in the UK in current time and time span of the study is small. According to Saunders et al (2009) there are two kinds of studies with respect to the time horizon that are Cross-sectional and longitudinal studies, where Crosssectional is a study in which a particular phenomenon is analyzed or investigated at a particular time and particularly a data collection method is conducted within short period of time; whereas in longitudinal study, change and development is studied with the passage of time and this is done with the help of repeating conducting data collection survey after several time intervals. Therefore this study is not of longitudinal time horizon as the study is not studying any sort of change in the Islamic Banking sector with the passage of time. 3.6 - Secondary Data: Initially, a researcher ponders to encounter the objectives and question of the study by considering the prospect of reanalyzing the data which already has been composed for some other purposes and other studies or reliable sources, such data is termed as Secondary Data which can provide prospect of answering the research question, or to answer the question partially (Saunders et al, 2009). In-Depth Interviews in this study are based on the findings of a secondary research. Without a doubt, there is not much research work done in this sector and availability of resources is quite limited. But after conducting secondary research on this study it is observed that the data available is not insufficient. As I am a student of Chartered Institute of Management Accountants in Islamic Finance (CIMA Cert if) it was convenient for me to look in to sufficient professional and academic data and publications related to the matter in subject. There is a blink of observation that some sources could be biased as the conductor of research

22

or the authors are Muslims and their arguments may be tilted in favor of their religion, but this issue cannot be generalized as many documents are balanced and a number of issues and challenges regarding Islamic banks are identified in them. Publications by CIMA are not biased as they are edited under the umbrella of the institution itself. Moreover the study considered a number of books, articles, publications and news releases in order to evaluate and investigate the secondary data. Some of the major sources for news releases and articles which are used in this study are BBC UK, Independent UK, Financial Times and Guardian UK. 3.7 - Primary Data: In order to collect the primary data on the objectives of the study, in-depth interviews are considered as a tool. Unstructured interviews are informal in nature and are generally known as In-Depth Interviews. Saunders et al (2009) has discussed that such interviews supports the researcher to explore in detail the subject in question. As the study is investigating the issues and challenges Islamic Banks are facing in the UK and the nature of the question is much subjective and theoretical in nature therefore In-Depth Interviews will make it easier for the respondent to talk about the issues independently and share their professional understandings on the issues and what are the actual and practical reasoning behind those understandings. Furthermore face to face In-Depth interviews creates a feasible environment for the interviewer understands the answer and the respondents also feel comfortable to share their views, ideas and information because the topic is related to their day to day professional life or is of their area of study. As mentioned earlier this study is a Cross-sectional study and tends to collect qualitative data consequently, small sample size would be sufficient for In-Depth interviews therefore total of six interviews are conducted with six individuals. However, three interviews are conducted with the Islamic banking professionals working for HSBC Amanah and Islamic Bank of Britain, other three Interviews were conducted with the students of Islamic Banking and Finance who are doing their PhDs in similar subject area. Interviews conducted were recorded on audio recording device in order to solely concentrate on the interviews and to be able to understand answers, besides it was easy to listen to the interviews repeatedly when required while documenting the finding and analysis. 3.8 - Presentation of the results: A theme from the answer of each question will be presented in the form of results. This theme will be concentrated from the answers given by all six interviewees for each question. Study will

23

also present some results in the form of tables, which are prepared by using SPSS software, and a graph, which is constructed with the help of MS Excel software.

24

4.0 - Results: In this chapter results attained from primary data (interviews) are mentioned in accordance with each objective of the study. As mentioned in the chapter of methodology six participants in total took part in the interviews, out of which three were those banking professionals who are working for the Islamic banks in the U.K and other three are those who have done some research in the field of Islamic finance. 4.1 - Basic prohibitions in Islamic finance and Issues regarding Islamic modes of financing: The objective behind finding out basic prohibitions in Islamic finance is to determine that what are the essential prohibitions in Islamic finance in theory and whether Islamic banks in the U.K are avoiding these prohibitions in their transactions and operations. To find out the answer about this issue, first of all it was asked to the participants that how Islamic finance considers interest rate. And the result for this question was achieved that interest rate is prohibited in any form and in any transaction of Islamic banks.

Is Interest Prohibited? yes a banker or a PhD. A banker A PhD Total 3 3 6 Total 3 3 6

As shown in the table above, that all of the six participants confirmed that interest rate is prohibited and it also illustrates that it is considered as prohibited in theory and practices both Because bankers (who are practicing in Islamic finance) and PhDs (who have done their research in the theory) together affirms that interest is prohibited. Religious reason given by one of the PhD respondent which is a base of prohibition of interest is quoted following: It is in Quran, in Surah-Al-Bakarah: ..but ALLAH has permitted trade and forbidden usury. (Referred to Question 1, Appendix 4). This verse categorically prohibits usury and usury is lending money at interest, that is why interest be in any form is prohibited and is not

25

considered legitimate by Islamic banks in the light of Islamic law. (Referred to Question 1, appendixes 1 to 6) Second, question was regarding if Islamic banks can invest in activities like gambling or alcohol businesses which are considered as unethical in Islam and if they cannot then do they lose certain market share. And the result obtained for the first part of this question was that Islamic banks are not allowed and do not invest in such activities (Referred to Appendixes 1 to 6) In the second part of the question, participant from HSBC clearly said that Islamic banks do lose market share due to this prohibition in the country like U.K, he said, . At the sake of opposing haram activities, yes, a section of market interesting in investing in haram activities will find the doors of Islamic banks close for them and Islamic banks have to lose that market share .... Other five participants also in a way said that Islamic banks do lose certain market due to this prohibition but it was found out that it is essential prohibition, to be as Shari ah compliant (Referred to Question 2, appendixes 1 and 3 to 6). It was also found that any form of predetermined Gharar (uncertainty) in the contract or Islamic banking products is also not permitted, and banks try their best to avoid Gharar. However there is no set procedure to avoid Gharar in the Islamic commercial contracts, although, legal requirements for tailoring a contract help Islamic banks to minimize Gharar but completely Gharar free contract is not possible yet. Moreover, even if having pre-determined Gharar results in some economic uplift, it is still prohibited and not allowed (Referred to Question 3 and 4, appendixes 1 to 6). All of the respondents also consider that LIBOR is a satisfactory benchmark for pricing Islamic banking products (referred to the table below):

Is LIBOR as a benchmark Accepted? yes Is Interest Prohibited? Total yes 6 6 Total 6 6

In above table it is shown that all the respondents who consider interest is prohibited also suggested that LIBOR is an acceptable benchmark. The reason found out for, why it does not challenge the authenticity of an Islamic banking product is that it is just a pricing technique on the basis of industry standards and the transactions of Islamic banking products are not contradicting with Islamic commercial law or Shari ah, As there is no prohibition in Shari ah

26

about pricing technique therefore, LIBOR can be used as pricing benchmark (Referred to Question 10, Appendices 1 to 6). It was confirmed, that financing other businesses is not very risky for Islamic banks shown in the graph below:

Is financing risky?

yes no

As the question asked was, if Islamic financial modes are based on profit and loss sharing, then how Islamic banks compensate themselves from the risk of loss. But it was found that Islamic banks does not use such modes of financing while financing businesses which are based on profit and loss sharing, in practice Islamic banks use such modes while financing businesses which are based on charging fixed rent or a fee, for example Murabah, Salam and Ijara modes of financing (Referred to Question 5, appendices 1 to 6) Sixth question in the interview was asked that how Islamic banks avoid interest payments if they have to correspond with any conventional bank overseas. Then in this regard only one interviewee (referred to Question 6, appendixes 6) answered that there is a set procedure in which banks avoid interest payment in the letter of credit and that is the bank opens it under Murabah or Ijarah and retires it in shape of Sale price in case of Murabah and through Rentals in Ijarah, so here too no problem of from wherever (which country), it comes under LC however, other five respondents (Referred to Question 6, appendixes 1 to 5) identified that there is no set procedure to avoid letter of credit or interest payments while corresponding with foreign conventional banks, but Islamic banks try to arrange an interest free loan from foreign corresponding bank for a short period which is not always likely to achieve.

27

4.2 - Regulatory Framework issues: A question was asked about discouraging delayed payments and it was found that Islamic banks discourage delayed payments through charging late payment penalty; this given information was common among all the respondents (Referred to Question 7, appendixes 1 to 6). It was also identified that Islamic banks are not allowed to charge this fee in order to recover the opportunity cost but they can recover the administration expenses and any amount charged more than the administrative expenses as a fine must be donated to the charity (Referred to Question 7, Appendixes 1, 2, 4 and 6). All of the six interviewees responded that FSA needs to do more for Islamic banking sector in the U.K as shown in the table below:

Is More Needed from FSA? yes a banker or a PhD. A banker A PhD Total 3 3 6 Total 3 3 6

Respondents acknowledged the supportiveness of FSA. However, it is found that FSA still need to improve the regulatory framework for the Islamic banks in the U.K, there is a need of separate legal regulatory framework for the Islamic banks and FSA should also consider hiring some Islamic banking scholars in their team, moreover there is a need that FSA should have more control over the appointing process of Islamic banks, when banks appoint Shari ah advisors for their board (Referred to Question 9, appendixes 1 to 6).

4.3 - Issues regarding Human Resource:

28

Eighth question asked to the interviewees was about the appropriately-qualified Human resource in the U.K for Islamic banking sector and the result achieved is shown below:

Enough Human Resource Available? yes a banker or a PhD. A banker A PhD Total 1 0 1 no 2 3 5 Total 3 3 6

As it can be seen from the above mentioned table only one interviewee said that there is sufficient qualified Human Resource is available in the U.K for Islamic banking industry (Referred to Question 8, appendixes 3). Whereas all other respondents identified that qualified human resource for Islamic banking sector is not sufficient, there is a need to improve quality and increase the quantity of human resource in this sector and there is also a need of such professionals who have both Islamic and financial knowledge. (Referred to Question 8, appendixes 1,2,4,5 and 6)

5.0 - Analysis:

29

This section of the study focuses on findings of the literature and analyse it in accordance with the primary research findings and then relates it to the objectives of the study. Conclusion of the study will be based on these analyses. 5.1 - Basic prohibitions and Islamic Modes of financing: As in the literature review there was two different arguments identified related to the prohibition of interest rate in Islamic finance, Tantawi M(Cited in Sawma G, 2010) stressed that simple interest is not prohibited whereas results of the primary research (referred to appendix 7) strongly supports the argument of CIMA( 2008),Ayub M (2009),Sawma G(2010),Lewis and Hassan (2007) that interest rate is strongly prohibited according to Islamic commercial law. This prohibition is based on various verses of Quran, some of them are: (S3:130), (S4:161) and (S2:275) (Referred to Question 1, Appendices 4, 5 and 6). Even when the Interest is prohibited completely, Islamic banks are still pricing their products with the help of an interest rate (LIBOR) by using it as a benchmark therefore, there is a question about the compliance of such products with the Shari ah (Suleyman Uldag, Cited in Sawma G, 2010);Jaffer S (2005b)). Technically, using such benchmark does not violate any Islamic commercial principle, as those professionals who even consider interest as strongly prohibited they justify that LIBOR can be used as a pricing benchmark (Referred to appendix 8) because there are no prohibitions about not using an interest rate as a pricing benchmark in Shari ah in addition, using LIBOR as a benchmark doesnt make transactions of Islamic banking products against Shari ah law therefore it can be used as a benchmark, apart from managers convenience it is also used because of industry norms (Jaffer S (2005b) and referred to Question 10, Appendices 1 to 6). Islamic banks are also not allowed to tie up their funds with Haram (prohibited, unethical activities) because promotion of these activities is prohibited by Islam and are considered as unethical businesses furthermore, activities like gambling or pornography also do not uplift economy as they are un-productive. However, this prohibition does affect the profitability of the Islamic banks as these activities are very common in the U.K, for example, alcohol is sold in almost every supermarket in the U.K, and therefore, Islamic banks cannot finance such businesses and they also dont have a choice as if they do invest in such businesses their operations will not be Shari ah compliant anymore (Lewis and Hassan, 2007 and referred to Question 2, Appendices 1 to 6).

30

Gharar (uncertainty) is also not tolerable in Islamic commercial contracts. Results from the primary research of this study indicate that there should not be any pre-determined Gharar in any contract of Islamic banks, however, Gharar can be in a contract accidentally but not by purpose therefore even if economic benefit by having specific Gharar, is higher, it does not justify presence of that Gharar in the contract (Mahmoud A, 2006; Professor Mustafa Al-Zarqa, Cited in Mahmoud A, 2006 and referred to Question 3 and 4, Appendices 1 to 6). Although, issue is that there is no set mechanism available for the Islamic banks in the U.K through which they can identify and eliminate Gharar from a contract, however legal requirements for contract formation help banks to minimize the Gharar (Referred to Question 3, Appendices 1 to 6). As concerned with the Islamic modes of financing, firstly the issue which was identified in the literature was regarding Musharakah mode of financing. This particular mode is based on partnership, where investing parties have to share profit or loss both (Maulana Usmani T, n.b). Musharakah contract is not used by Islamic banks in order to finance other businesses because by doing this Islamic bank will be exposed to too much risk as the bank may have to bare the loss, if the business realizes a loss. Furthermore, in such modes where profit or loss is shared, if the business under-reports the profit consequently, bank will get less share as actually it should get (Venardos 2006). In order to avoid such risk and be Shari ah compliant at the same time, Islamic banks in the U.K do not use Musharakah while financing other businesses however, they use such modes of financing which charge profit,rent or agents fee for example Murabah, Salam or Ijara, where they dont have risk of sharing any loss but they receive the profit, fee or rent. (Referred to appendix 9 and Question 5, appendixes 1 to 6). The problem arises when Islamic banks have to correspond with banks overseas, where there are no Islamic banks. In the situation where letter of credit is required from an overseas conventional bank it is difficult to avoid interest rate (Ahmed A, n.b). However, it is observed that this issue can be resolved through having a mutual agreement on the basis of trust between two banks (Referred to Question 6, appendix 6). However, it is identified that there is actually no set procedure which Islamic banks can follow in order to avoid interest payments while correspondence with foreign conventional banks, the only way which banks currently follow is to arrange interest-free short term loan from a foreign conventional bank, but this arrangement is not successful always (Referred to Question 6, appendices 1 to 5).

31

5.2 - Framework and regulatory issues: It was indicated by Venardos (2006) that Islamic banks do not have any arrangements to discourage delayed payments, but in practice Islamic banks are allowed to discourage late payments by charging late payment charges however, purpose of this charge cannot be to compensate banks with the opportunity cost, in fact banks can only recover the administrative expenses and rest of the amount must be given to a charity (Referred to Question 7, appendixes 1 to 6). But the concern is that as a business banks should be covering their opportunity cost. Therefore, Islamic banks must have stricter policies regarding late payments. As legal regulatory system in the U.K for Islamic banks is almost same as one for the conventional banks it causes various complexities for the Islamic banks in the U.K, such as compulsion for the banks in the U.K to pre-determine the fixed rate of return for the account holders, however, it is not doable by Islamic banks as it is prohibited by Islamic commercial law (Hassan K and Mahlknecht M , 2011, pg. 345; Ali S, Cited in Ahmed A and Syed S, 2007; Qorchi, M.,2005). Therefore, FSA needs to develop a separate legal regulatory framework in the U.K for Islamic financial institutions which will resolve the complexities arising from having a same regulatory framework, in addition to this FSA should work in correspondence with other international Islamic financial regulatory authorities and should also have a department for Islamic financial regulators so that, they can regulate Islamic Banks in the U.K in a way that is not contradicting with Islamic commercial law (Referred to Question 9, Appendices 1,2,3,4 and 6). 5.3 - Issues Regarding Human Resource: There is a need of more professionals, in terms of quality and quantity both, as qualified human resource in the industry is limited that have understanding of both, the Islamic commercial law and conventional finance therefore, it is difficult for Islamic banks in the U.K to pioneer the competitive innovation in their product line (Jaffer S, 2005; reffered to Question 8, Appendices 1 to 6 and appendix 11). Moreover, because industry do not have sufficient Islamic banking scholars therefore, Islamic banks will struggle to have appropriate individuals in their Shari ah supervisory board, as in the ideal scenario none of the members of Shari ah supervisory board of one bank should be a member of any other bank and neither, of the central regulatory board, but as the shortage of such scholars in the industry these memberships can easily overlap (Ainley M, et al. 2007).

32

6.0 - Conclusion This study focuses on three of many important sections of Islamic banking, and tends to find out what issues Islamic banking is facing in the U.K in those sections. Firstly, issues regarding the basic prohibitions on which Islamic banking is based on were investigated and then it was also examined that what are the issues which Islamic financing modes are facing in the U.K. It was identified that Islamic banks and Islamic financial professionals clearly understand and practice that dealing in interest rate in any form is strongly prohibited according to Islamic commercial law and using LIBOR as a benchmark for pricing Islamic banking products does not affect the compliance of these products with Shari ah. It is also unanimously agreed by all the Islamic banking professionals that any form of Predetermined Gharar is forbidden in any Islamic commercial contract however, there is not any set procedure or mechanism that can help Islamic banks in eliminating Gharar completely from a contract. Islamic banks in the U.K do not invest in the businesses which promote activities related to alcohol, gambling, pornography and etc. in view of the fact that these activities are considered Prohibited and unethical according to Shari ah. These activities are also considered not suitable for investment by Islamic banks in the U.K as these activities are unproductive. It was also identified that Islamic banks in the U.K do not use Musharakah contracts while financing other businesses, because if they do so they will have to share profit or loss of the business, in this way there is risk involve for the Islamic banks that they may have to bare loss if business realizes a loss or if the business due to some fraud purposes under-reports profit, banks will get less share than the actual share they should get. In order to avoid such risk Islamic banks use such contract in which they receive profit, rent or fixed fee; Murabah, Salam and Ijara contract are the perfect examples of this type of Islamic contracts. It is also discovered that there is no set procedure or instrument through which Islamic banks in the U.K can avoid interest baring transactions while corresponding with the foreign conventional banks. However, Islamic banks sometime try to attain interest-free short term loan when required, but this is a very uncertain solution for this issue. All of the above mentioned prohibitions and issues related to the Islamic modes of financing, together tends to meet the first objective of the study by determining the basic prohibitions of Islamic financial law and by stating the issues Islamic banks in the U.K are facing due to these prohibitions along with the issues arising in Islamic modes of financing.

33

Study met the second objective by affirming that in the U.K Islamic banks do not have a proper legal regulatory and institutional framework. It was found that the main issue is that Islamic banks do not have a separate regulatory framework from the conventional banks therefore, it make things complicated for the Islamic banks in order to remain serious player of the financial industry in the U.K. Moreover, because FSA do not work in correspondence with other Islamic regulatory authorities for example, AAIOFI, neither FSA has some Islamic banking scholars in their team. Therefore, some of the regulations from FSA are contradicting with Islamic commercial law, legal requirement for the banks to state a pre-determined rate of return for their customers is one of the best example of those critical regulations, as Islamic banks are not permitted to state a pre-determined rate of return to their account holders because it is prohibited by Shari ah. There is also a need for a regulation which will make Islamic banks much stricter for those customers who delay their payments because Islamic banks are not allowed to charge these customers fine in order to recover their opportunity cost. In order to achieve the third objective, which was regarding human resource, the study discovered that quality and quantity of appropriately-qualified human resource in the Islamic banking sector of the U.K is not satisfactory. Because of having limited staff who have both the knowledge about Shari ah and conventional finance, Islamic banks in the U.K are finding it hard to develop their product line competitively and because Islamic banks have very limited funds and their capacity is narrow therefore, it is tough for them to train their staff through expensive but efficient training programs. It is also an issue that because of limited Shari ah scholars, different Islamic banks can have same Shari ah advisors or supervisors in their boards, due to which there is a high possibility that a confidential information can be passed out to other banks easily. Moreover, if the same scholars are helping the banks to develop or tailor their products who are also certifying the compliance of those product with Shari ah, then credibility of such products, that are they actually Shari ah compliant or not will be very critical.

34

6.1 - Recommendations: Following are the recommendations by the author of this study after investigating the issues that Islamic banking sector is facing in the U.K: R1: Islamic banks should plan an effective marketing communication model through which they can clarify the misunderstandings which general public or their potential customers have in their mind about their activities. For example, clarifying the issue that interest is strongly prohibited, but using LIBOR as a pricing benchmark do no not affect the compliance of the product with Shari ah and other ambiguities of this sort. R2: Shari ah scholars should create a procedure through which Gharar can be eliminated from a contract or at least they must make stricter legal requirements for the formation of a contract in order to minimize Gharar in a contract as close to nil. R3: FSA should include Shari ah scholars in their teams in order to construct a separate legal regulatory framework for the Islamic banks in the U.K. R4: Islamic banks in the U.K should take more of a firm stance towards the customers who delay the payments. For example, they can excessively increase the rate of late payment charges. R5: Different academic institutions or universities in the U.K should offer courses which are related to Islamic finance and Islamic banks can also introduce a scholarship program for such courses. 6.2 - Limitations of the study: It was learned that the broad subject area on which this study was based, sources for the secondary data were limited and due to time constraints it was difficult to thoroughly investigate various sources for the secondary data. Therefore, more time should have been spent in order to investigate more sources of secondary data. A very critical reason, why this study can be considered bias is the characteristics of the sample chosen for In-depth interviews. As all the participants of the in-depth interview follow Muslim faith therefore, their answers can be noticed as in favor of Islamic banking. Moreover, because they all are from same industry and question asked were related to the practice of Islamic banks consequently, answers given by the respondents are very similar to each other. The study

35

should have interviewed some non-Muslims professionals in the Islamic banking sector along with such professionals who represent FSA. It was noticed that due to busy schedule of interviewees they were not showing intend to discuss the issues in such depth, which nature of the study required. Moreover, study should have investigated some Islamic banking current and potential customers in order to get insight that whether there are any perception differences among the Islamic banking customers and the Islamic banks in the U.K. 6.3 - Suggestion for further study: After investigating the issues and challenges Islamic banking sector is facing in the U.K, the study suggests that there is a need for further research in following areas: Further research should be done to find out how separate legal and regulatory framework can be developed in the U.K and other non-Muslim countries. There is also a need for further study, in training and development of human resource capital of Islamic banking industry in the U.K

36

7.0 - References

Ahmad, A. (). Islamic Modes of Finance and the Role of Sukuk [online]. Available: http://www.qfinance.com/financing-best-practice/islamic-modes-of-finance-and-therole-of-sukuk?page=2#s3. Last accessed 15th mar 2011. Ainley M, et al. (2007). Islamic Finance in the UK: Regulation and Challenges [online]. Available: http://www.fsa.gov.uk/pubs/other/islamic_finance.pdf. Last accessed 18th mar 2011. Akkas, A. (N.D) Issues and problems of Islamic banking in Bangladesh [online]. Available from: < www.scribd.com/doc/12878941/Issues-and-Problems-of-IslamicBanking > [Accessed 2nd January 2011] Auerbach, C., & Silverstein, L. (2003). Qualitative data: an introduction to coding and analysis, Qualitative studies in psychology. New York: NYU Press. Ayub, M (2009). Understanding Islamic Finance. West Sussex: John Wiley and Sons. BBC. (2004). First Islamic bank to open in UK [online]. Available:http://news.bbc.co.uk/1/hi/business/3547374.stm. Last accessed 2nd mar 2011

Bryman, A., & Burgess, R. G. (Eds.). (1994). Analyzing qualitative data. London: Routledge
Christofi, H. (2007). Islamic Banking in Britain [online]. Available: http://www.brusselsjournal.com/node/1898. Last accessed 3rd mar 2011. CIMA., (2008). Islamic Commercial Law. London: SPG Media Limited. Cooper, D., & Schindler, P (2008). Business research methods. 10th ed. Maidenhead: McGraw-Hill. El-Gamal, M. (2006). A Simple Fiqh-and-Economics Rationale for Mutualization in Islamic Financial Intermediation [online]. Available: http://www.ruf.rice.edu/~elgamal/files/mutualize.pdf. Last accessed 15th mar 2011. FSA. (2006). Islamic Banking in the UK [online]. Available: http://www.fsa.gov.uk/pages/About/Media/notes/bn016.shtml. Last accessed 2nd mar 2011. Gabriel, S. (2010). Prohibition of Interest in Islamic Finance [online]. Available: http://www.hg.org/article.asp?id=19530. Last accessed 10 mar 2011.

HALLAQ, WB (2003), Muslim Rage and Islamic Law, (54) Hastings Law Journal 1705, p 1707.
Hassan, K., & Lewis, M (2007). Handbook of Islamic banking. Cheltenham: Edward Elgar Publishing.

37

 Hisham, M (2006). Understanding Islamic law: from classical to contemporary.

Oxford: Rowman Altamira. Kattell, B. (2010) Islamic Finance in a Nutshell: A Guide for Non-Specialists, 1st Edition, John Wiley and Sons, Chichester, West Sussex. Kumar, R (2008). Research Methodology. New Delhi: APH Publishing. Mahlknecht, M., & Hassan, K (2011). Islamic Capital Markets: Products and Strategies. West Sussex: John Wiley and Sons. pg. 345. Mahmoud, A (2006). Islamic finance: law, economics, and practice. New York: Cambridge University Press. Muijs, D (2011). Doing Quantitative Research in Education with SPSS . 2nd ed. London: SAGE Publications Ltd. Oxford Business Group, The Report: Bahrain (2009) [online]. Available from <http://books.google.co.uk/books?id=_MqUJPPPXwkC&pg=PA55&dq=Oxford+Busine ss+Group+2009+Sir+Howard+Davies&hl=en&ei=EFg4TdGRKYGGhQeHutXDCg&sa= X&oi=book_result&ct=result&resnum=1&ved=0CC4Q6AEwAA#v=onepage&q&f=fals e> Philips, M. (2009). Britain's a world-leader in sharia banking - but we haven't grasped the sinister and dangerous implications [online]. Available: http://www.dailymail.co.uk/debate/article-1141087/Britains-world-leader-shariabanking--havent-grasped-sinister-dangerous-implications.html. Last accessed 3rd mar 2011. Qorchi, M., (2005). Islamic Finance Gears Up: while gaining ground, the industry faces unique regulatory challenges [online] International Monetary Fund. Available from http://www.imf.org/external/pubs/ft/fandd/2005/12/qorchi.h [Accessed 21 October 2010] RDSU. (). QUALITATIVE RESEARCH METHODS [online]. Available: http://projects.exeter.ac.uk/prdsu/helpsheets/Helpsheet09-May03-Unlocked.pdf. Last accessed 5th mar 2011. Robson, C (2002). Real world research: a resource for social scientists and practitioner-researchers. 2nd ed. Oxford: Wiley-Blackwell. Saunders, M.,Lewis, P., & Thornhill,A (2009). Research Methods for Business Students. Essex: Pearson Education. Schoon, N. (2009) Islamic Banking and Finance, 1st Edition, Spiramus Press Ltd. Sohail, J. (2005) Islamic retail banking and finance: global challenges and opportunities, Euromoney Books, London.

Strauss, A., & Corbin, J. (1998). Basics of qualitative research (2nd ed.). Newbury Park, CA: Sage

38

Syed, A., & Ahmad, A. (2007). Islamic banking and finance: Fundamentals and contemporary issues [online]. Available: http://islamfinland.files.wordpress.com/2009/08/irti-islamic-banking-and-financefundamentals-and-contemporary-issues.pdf. Last accessed 20th mar 2011. Usmani, T . (). MUSHARAKAH [online]. Available: http://www.dawoodislamic.com/docs/MUSHARAKA.pdf. Last accessed 15th mar 2011. Venardos, A., (2006). Islamic Banking and Finance in South-East Asia: Its Development and future. 2nd ed. Singapore: World Scientific Publishing. Co. Pte. Ltd. Zaher,S. And Hassan, M., (2001). A Comparative Literature Survey of Islamic Finance and Banking [online]. Available from < http://www.microfinancegateway.org/gm/document1.9.24662/23008_literature_survey.pdf> [Accessed 18 October 2010]

39

8.0 - Appendices 8.1 - Appendix 1: Interviewee name: Employment or Qualification: Interviewee E-mail: Interview Date: Purpose of conducting this interview is to collect primary data for my Dissertation Assignment, which is of Undergraduate level. Question 1-How does Islamic Banks in the UK consider Rate of Interest in their commercial activities? Answer - any sort of guaranteed interest on loan is considered as prohibited by Islamic bank of Britain as well as by the other Islamic banks operating in the U.K. Question 2- As Islamic banks cannot invest in unethical businesses such as alcoholic products or gambling which in a country like UK can be considered as profitable and secure investments. In your opinion, does such prohibition affect the profitability and performance of Islamic banks in the UK as compare to the conventional banks who can invest in such businesses? Answer- yes, Islamic banks anywhere in the world do not invest in such investments, because this is not allowed according to Islamic law regardless their profitability. Likewise, as following a concept of an ethical bank, Islamic banks cannot invest in the activities consider as unethical according to Islam. Question 3- How does Islamic Banks in the UK distinguish between major Gharar and the minor Gharar? Answer - Gharar should not be in any form in any contract, banks make sure that any sort of gharar is not in the contract which is known however there is not any set procedure which should help the banks to avoid gharar completely from a contract but it is make sure that every ambiguity is removed from the contract but limitations of language are still there.

40

Question 4 if economic benefit of a contract in which Gharar is identified is greater than the identified Gharar, and then such particular contract would not be considered as invalid on the basis of Gharar which is identified. Does Islamic Banks in the UK consider this argument valid? Answer - as I have told earlier, we dont deliberately give any place to any sort of gharar in the contract. There is no point to compare the level of gharar with the economic benefit as it is just prohibited. Question 5 - How does Islamic Banks in the UK compensate themselves with the risk they are facing due to Musharakah investments as it is based on profit and loss sharing? Answer - in the case of investments or financing businesses, Islamic banks in the UK does not use Musharkah contract as of its profit and loss sharing nature. For the financing, salam or ijara types of contracts are used where fees or rental is charged therefore risk of baring loss is not there. Question 6 - If the required item can only be purchased through Murabaha contract from a foreign country like France where there are no Islamic banks. How Islamic Banks in the UK avoid letter of credit and any foreign conventional banks in these circumstances? Answer - Islamic banks do not deal with letter of credit as it includes overdrafts and interest payments. But In some cases Islamic banks manages to get an interest free loan on certain agreed conditions which are not contradicting with Islamic law. But it is not a concrete solution as it is uncertain that every time Islamic bank will get interest free loan in every country, so there should be something done to fill this gap. Question 7- What steps Islamic banks in the UK take in order to reduce the number of delayed payments from the borrowers? Answer - it is a complicated matter, banks can not charge the fee to cover their opportunity cost but they are allowed to charge penalty fee to only cover their expenses which they occurred in that particular case. Question 8 - Do you consider that there is lack of appropriately-qualified human resource for the Islamic Banks in the UK? Answer - there are very highly qualified Islamic banking professionals present in the industry. However the pace with which Islamic banking is growing it requires a greater number of

41

qualified Islamic scholars and banking professionals. There are number of universities now in the UK and other institutions which are offering courses related to Islamic finance so hopefully this deficiency will overcome in the future. Question 9 - In your opinion is the UK perfect market for Islamic Banking from regulatory point of view or FSA would need to be more compensating? Answer- FSA has been doing a great job, by legislating some tax legislations in a way that is suitable for Islamic banks; it was a very encouraging step from FSA. However, as Islamic banks in the UK are still in the initial stage of development there are some more FSA should consider. In my opinion, as far as Islamic banking sector is concerned FSA should work in assistance with other international Islamic banking authorities for example with AAOIFI. By doing this FSA would regulate Islamic banks more effectively as they will have specialist of Islamic finance sector present in their team. Question 10 - Do you consider LIBOR is a satisfactory benchmark for the banks and its stakeholders to price Islamic banking products and services in the UK? Answer - there are some speculations out there that using LIBOR makes Islamic bank product haram (not acceptable in Islam) but this is not the case as the Islamic banks product themselves are according to Islamic Law but there is no prohibition in the Islam about setting benchmarks for pricing.

42

8.2 - Appendix 2: Interviewee name: Employment or Qualification: Interviewee E-mail: Interview Date: Purpose of conducting this interview is to collect primary data for my Dissertation Assignment, which is of Undergraduate level.

Question 1 - How does Islamic Banks in the UK consider Rate of Interest in their commercial activities? Answer - in the case of loan or debt, any amount, more than the principal, it doesnt matter big or small is classified as riba, that is prohibited in Islamic law and interest rate is a kind of riba. Question 2 - As Islamic banks cannot invest in unethical businesses such as alcoholic products or gambling which in a country like UK can be considered as profitable and secure investments. In your opinion, does such prohibition affect the profitability and performance of Islamic banks in the UK as compare to the conventional banks who can invest in such businesses? Answer - Islamic banks can deal with the people of other religion in the UK or anywhere in the world but we (the banks) have to make sure that these dealings are not promoting any haram activities or businesses. At the sake of opposing haram activities, yes, a section of market interesting in investing in haram activities will find the doors of Islamic banks close for them and Islamic banks have to lose that market share but again prohibition of promoting haram is more important. Question 3 - How does Islamic Banks in the UK distinguish between major Gharar and the minorGharar? Answer - Gharar is one of the three fundamental prohibitions in Islamic commercial law, we make sure that uncertainty in terms of objects feature are strongly avoided as well as terms of the contract are tailored in a way that there should not be any sort of ambiguity left. But there is not any certain mechanism available for the Islamic banks to completely avoid uncertainty in

43

each and every feature of a contract for example there is a possibility of a human mistake always. Question 4 If economic benefit of a contract in which Gharar is identified is greater than the identified Gharar, and then such particular contract would not be considered as invalid on the basis of Gharar which is identified. Does Islamic Banks in the UK consider this argument valid? Answer - it is not about economic benefit, if it was islamic banks has no reason not to offer the products based on derivatives. It is just prohibited. Question 5 - How does Islamic Banks in the UK compensate themselves with the risk they are facing due to Musharakah investments as it is based on profit and loss sharing? Answer - while financing rent is charged, as it mostly uses some forms of salam or ijara contract. As bank is working as a business intermediary and because of its limitations profit and loss sharing tools are not used while financing. Question 6 - If the required item can only be purchased through Murabaha contract from a foreign country like France where there are no Islamic banks. How Islamic Banks in the UK avoid letter of credit and any foreign conventional banks in these circumstances? Answer - it is an issue, sometimes its hard to resolve such situations. Islamic banks use number of different techniques to arrange interest free credit from the foreign banks and that the only way we can go with it. Question 7 - What steps Islamic banks in the UK take in order to reduce the number of delayed payments from the borrowers? Answer - Islamic banks charge administration fee to the customer who pays back late or partially but only the administration fees that has occurred anything more than that must be paid to the charity. Question 8 - Do you consider that there is lack of appropriately-qualified human resource for the Islamic Banks in the UK? Answer - yes there are only a handful of Islamic banking professionals. There is a need of more well-qualified professionals who are well literate about Islamic principles of commerce and at the same time banking norms.

44

Question 9 - In your opinion is the UK perfect market for Islamic Banking from regulatory point of view or FSA would need to be more compensating? Answer - as it is just a evolutionary stage for Islamic banking sector so role of FSA for now is not an issue but with the growth of Islamic banking in the UK, in my opinion FSA should legislate a separate legal framework for Islamic banks in the UK from conventional Banks as for now the legal framework is almost same with some essential amendments for Islamic banks.

Question 10 - Do you consider LIBOR is a satisfactory benchmark for the banks and its stakeholders to price Islamic banking products and services in the UK? Answer - it is not prohibited in Islam to use LIBOR as a benchmark for pricing Islamic banking products in fact pricing can be done with any method. Its just a markets standard.

45

8.3 - Appendix 3: Interviewee name: Employment or Qualification: Interviewee E-mail: Interview Date: Purpose of conducting this interview is to collect primary data for my Dissertation Assignment, which is of Undergraduate level.

Question 1- How does Islamic Banks in the UK consider Rate of Interest in their commercial activities? Answer - Interest must be avoided in any form, and is prohibited. It should not be paid or received by any practicing Muslim. Question 2 - As Islamic banks cannot invest in unethical businesses such as alcoholic products or gambling which in a country like UK can be considered as profitable and secure investments. In your opinion, does such prohibition affect the profitability and performance of Islamic banks in the UK as compare to the conventional banks who can invest in such businesses? Answer - there are plenty of other halal investments out there. An Islamic bank doesnt invest in such activities which are not acceptable by Islamic law and its not debatable as its just prohibited. Question 3 - How does Islamic Banks in the UK distinguish between major Gharar and the minor Gharar? Answer - a proper instrument is not available for the banks to avoid gharar. We make sure that there is no Gharar present in any sense in a contract which is identified or can be identified. Question 4 - If economic benefit of a contract in which Gharar is identified is greater than the identified Gharar, and then such particular contract would not be considered as invalid on the basis of Gharar which is identified. Does Islamic Banks in the UK consider this argument valid?

46

Answer - no not at all, its prohibited, we cant by any purpose leave any sort of ambiguity or you can say gharar in any form of a contract. Question 5 - How does Islamic Banks in the UK compensate themselves with the risk they are facing due to Musharakah investments as it is based on profit and loss sharing? Answer - Musharaka is never used for investments, Islamic banks always charge fees or rent amount for financing as it is not secure to have share in the profit and loss of other businesses. Question 6 - If the required item can only be purchased through Murabaha contract from a foreign country like France where there are no Islamic banks. How Islamic Banks in the UK avoid letter of credit and any foreign conventional banks in these circumstances? Answer - different banks have different arrangements with foreign correspondent bank. Most common practice by Islamic banks is to arrange a zero interest loan which is then cleared at the same day so its considered as a kind of spot transaction. Question 7 - What steps Islamic banks in the UK take in order to reduce the number of delayed payments from the borrowers? Answer - Islamic banks discourages delayed payments by charging a penalty fee to the party who delays the payment. Question 8 - Do you consider that there is lack of appropriately-qualified human resource for the Islamic Banks in the UK? Answer -in my opinion in the UK a sufficient amount of qualified human resource is available but it is just sufficient. We still need to improve the quality of the staff and may be the number as well. At the moment number of professionals of Islamic finance may be sufficient but with the growth Islamic banking is showing in the UK may be in the future there will be shortage of qualified staff in this industry. Question 9 - In your opinion is the UK perfect market for Islamic Banking from regulatory point of view or FSA would need to be more compensating? Answer - FSA is encouraging Islamic banking sector to develop in the UK as they want London to be the Hub of global Islamic banking. But FSA must shape a separate legal and institutional framework for the Islamic banks In the UK.

47

Question 10 - Do you consider LIBOR is a satisfactory benchmark for the banks and its stakeholders to price Islamic banking products and services in the UK? Answer -it is a view of various Islamic scholars that Islamic banks can use conventional market as a benchmark for pricing. As transactions of Islamic banking products are tailored according to the Islamic financial principles and there is no such prohibition about pricing a product in Islam therefore using LIBOR as a benchmark doesnt make Islamic banking activities haram.

48

8.4 - Appendix 4: Interviewee name: Employment or Qualification: Interviewee E-mail: Interview Date: Purpose of conducting this interview is to collect primary data for my Dissertation Assignment, which is of Undergraduate level.

Question 1 - How does Islamic Banks in the UK consider Rate of Interest in their commercial activities? Answer - it is in Quran, in Surah-Al-Bakarah: ..but ALLAH has permitted trade and forbidden usury. This verse definitely prohibits usury and usury is lending money at interest, that is why interest be in any form is prohibited and is not considered legitimate by Islamic banks in the light of Islamic law. Question 2 - As Islamic banks cannot invest in unethical businesses such as alcoholic products or gambling which in a country like UK can be considered as profitable and secure investments. In your opinion, does such prohibition affect the profitability and performance of Islamic banks in the UK as compare to the conventional banks who can invest in such businesses? Answer - in my opinion its unproductive, and investment in gambling is also against conventional economics where huge funds are pooled and given to some individual who creates inequality, as such investments are not good for any economy therefore are strictly avoided by any Islamic bank. Question 3 - How does Islamic Banks in the UK distinguish between major Gharar and the minor Gharar? Answer - Gharar is prohibited according to Islamic law, any sort of predetermined uncertainty or ambiguity should not be there in any form or if there is any there should be a way out. But there is no certain procedure to distinguish between major Gharar and the minor Gharar or eliminate Gharar from a contract which was not prearranged.

49

Question 4 - If economic benefit of a contract in which Gharar is identified is greater than the identified Gharar, and then such particular contract would not be considered as invalid on the basis of Gharar which is identified. Does Islamic Banks in the UK consider this argument valid? Answer - it is just like how Islamic banks treat interest, it is definitely not acceptable. I think interest rate can provide more uplift than gharar, but regardless of the benefits both are just prohibited Question 5 - How does Islamic Banks in the UK compensate themselves with the risk they are facing due to Musharakah investments as it is based on profit and loss sharing? Answer - if banks use Musharakah contract for financing, their duties will become very hard for them and much complicated however still unsecure. Therefore Islamic banks use salam sale or ijara while financing other businesses. Question 6 - If the required item can only be purchased through Murabaha contract from a foreign country like France where there are no Islamic banks. How Islamic Banks in the UK avoid letter of credit and any foreign conventional banks in these circumstances? Answer - Islamic banks should have some proper instrument for this matter which is yet not there. For now Islamic banks just manage to get some sort of interest free short term loan from foreign bank, which is not always a success, because a large amount would be difficult to get as an interest free loan, I think. Question 7 - What steps Islamic banks in the UK take in order to reduce the number of delayed payments from the borrowers? Answer - Muslim scholars has justified charging fine on delayed payments, but with this fine amount Islamic bank can only recover their administrative expenses and rest of the amount is donated to a charity. Question 8 - Do you consider that there is lack of appropriately-qualified human resource for the Islamic Banks in the UK? Answer - as Islamic banking in the UK is in its evolutionary stage and is growing gradually it needs more qualified Islamic banking professionals and scholars both in term of quality and quantity as well. As at this stage Islamic banking need innovation in their product lines to

50

compete therefore more highly skilled and capable Islamic banking specialists are definitely required in the industry. Question 9 - In your opinion is the UK perfect market for Islamic Banking from regulatory point of view or FSA would need to be more compensating? Answer - yes, FSA is being very positive for the Islamic banks. But in my opinion, as FSA is not a religious institution that regulates the Islamic banks therefore, there are some limitations for FSA as well when they regulate policies for Islamic banks; they have to make sure that Islamic banks regardless of their being operating Shari ah law are not having a conflict with British law. This is the reason why in my suggestion there is a need of a separate regulatory framework for Islamic banks in UK. Question 10 - Do you consider LIBOR is a satisfactory benchmark for the banks and its stakeholders to price Islamic banking products and services in the UK? Answer - this is an interesting argument, but there is no problem in using LIBOR as a benchmark by Islamic banks. For example in an Ijara based home finance, rent can be set at any amount provided it is agreed mutually by all the parties. There is no reason why this home which is financed by Islamic finance should be cheaper or expensive than if it was bought through a conventional mortgage. It may not be the best way but it is acceptable to use such interest as a base for the rent. So it doesnt make an Islamic banks product un-Islamic.

51

8.5 - Appendix 5: Interviewee name: Employment or Qualification: Interviewee E-mail: Interview Date: Purpose of conducting this interview is to collect primary data for my Dissertation Assignment, which is of Undergraduate level.

Question 1 -How does Islamic Banks in the UK consider Rate of Interest in their commercial activities? Answer - Islamic banks in the UK does not charge interest rate to their customers neither pay any interest to the depositors. Interest is forbidden in Islam as Quran says: O you who believe, you shall not take usury, compounded over and over. Observe GOD that you may succeed. interest payment is a form of usury and it is very clearly forbidden in any form. Question 2 -As Islamic banks cannot invest in unethical businesses such as alcoholic products or gambling which in a country like UK can be considered as profitable and secure investments. In your opinion, does such prohibition affect the profitability and performance of Islamic banks in the UK as compare to the conventional banks who can invest in such businesses? Answer - it must be acknowledged here that ethics is the parts and parcel of Islamic finance, any of the Islamic banks can just not invest in such unethical activities and these activities are also not permitted by Islamic law. Such prohibition may cause Islamic banks to sacrifice some investments but there are too many other ethical investments and activities available. Besides this is also a feature that distinguish Islamic banks from conventional banks. Question 3 -How does Islamic Banks in the UK distinguish between major Gharar and the minor Gharar? Answer - there is legal requirements for constructing a contract, with the help of which one can minimize risk or uncertainty. But to completely avoid gharar from a contract there is no method in practice. Therefore, there is a possibility that some form of ambiguity is still present in any

52

contract but it is not by purpose. And there is no way to distinguish between major or just a minor Gharar as there are no standards. Question 4 If economic benefit of a contract in which Gharar is identified is greater than the identified Gharar, and then such particular contract would not be considered as invalid on the basis of Gharar which is identified. Does Islamic Banks in the UK consider this argument valid? Answer - No, Islamic banks cannot accept Gharar in the contract even if there is an economic benefit. Human mistakes can be the reason of Gharar in a contract but for any other reason be it an economic benefit, it is not accepted, its an Islamic instruction. Question 5 -How does Islamic Banks in the UK compensate themselves with the risk they are facing due to Musharakah investments as it is based on profit and loss sharing? Answer - while financing banks charge rent to the party of which they are fulfilling need or requirement of. As possibility of baring a loss, musharakah contracts are avoided while financing by Islamic banks. Question 6 - If the required item can only be purchased through Murabaha contract from a foreign country like France where there are no Islamic banks. How Islamic Banks in the UK avoid letter of credit and any foreign conventional banks in these circumstances? Answer - there is no such proper measures or technique to avoid letter of credit, and I am not really sure about how Islamic banks in practice deal with such situations. Question 7 -What steps Islamic banks in the UK take in order to reduce the number of delayed payments from the borrowers? Answer - Islamic banks are allowed to charge fees on such delayed payments by numerous Islamic scholars and committees and it helps them to encourage the financial responsibility of their customers. However a portion of such fee is donated to charities. Question 8 -Do you consider that there is lack of appropriately-qualified human resource for the Islamic Banks in the UK? Answer - there is definitely a need of more qualified Islamic financial scholars in the UK, who has knowledge about Islamic laws and finances both. As compare to the growth of this industry around the globe and in the UK there are not much professionals available.

53

Question 9 -In your opinion is the UK perfect market for Islamic Banking from regulatory point of view or FSA would need to be more compensating? Answer - definitely, UK has healthy environment and opportunities for the Islamic banks to operate in. and as far FSA is concern I would say that FSA needs to have more control on the process of Islamic banks when they appoint their Shari ah advisory board as this issue is too much debated by the group of market who oppose Islamic banks. I think more control on this appointment procedure will make Islamic banks more credible in front of their critiques. Question 10 -Do you consider LIBOR is a satisfactory benchmark for the banks and its stakeholders to price Islamic banking products and services in the UK? Answer - it is justified by many Islamic scholars that using any benchmark for the pricing of an Islamic banking product is not prohibited whether the benchmark be from conventional banking or not. However, this is a misconception among the general public and the potential Islamic banking stakeholders which should be cleared through proper way or an efficient form of communication.

54

8.6 - Appendix 6: Interviewee name: Employment or Qualification: Interviewee E-mail: Interview Date: Purpose of conducting this interview is to collect primary data for my Dissertation Assignment, which is of Undergraduate level.

Question 1 - How does Islamic Banks in the UK consider Rate of Interest in their commercial activities? Answer - it is prohibited and it is a sin to pay or receive any form of interest. If a bank pays or receives interest it cannot be considered as an Islamic bank. Quran has declared dealing with interest as a punishable sin on many occasions such as [4; 161 and 2; 275] Question 2 - As Islamic banks cannot invest in unethical businesses such as alcoholic products or gambling which in a country like UK can be considered as profitable and secure investments. In your opinion, does such prohibition affect the profitability and performance of Islamic banks in the UK as compare to the conventional banks who can invest in such businesses? Answer - Islamic banks have an ethical investment charter which they have to follow. As these activities are considered as unethical and at some extent harmful for the society therefore, if Islamic banks start investing in such activities which they cannot then they will lose all those Muslim customers who bank with them due to spiritual reasons and also lose those customers who bank with them because they want to bank with an ethical bank. Question 3 - How does Islamic Banks in the UK distinguish between major Gharar and the minor Gharar? Answer - a certain type of uncertainty is strongly avoided in the Islamic commercial contracts by the banks such as ambiguity in the terms of a contract or uncertainty about any feature of the object in the contract. There is no such instrument that distinguishes between the minor gharar

55

and major gharar but neither of the parties should be exposed to any excessive risk or uncertainty. Question 4 if economic benefit of a contract in which Gharar is identified is greater than the identified Gharar, and then such particular contract would not be considered as invalid on the basis of Gharar which is identified. Does Islamic Banks in the UK consider this argument valid? Answer - if you ask me, Gharar should be allowed if the economic benefit from having it is of high level. Though in reality, according to Islamic law it is not accepted in any situation but undeliberately. On the other hand even if you say that it is allowed if there is an economic benefit then again how will you measure gharar against the benefit? There is no procedure for it and I think there cannot be any. Question 5 - How does Islamic Banks in the UK compensate themselves with the risk they are facing due to Musharakah investments as it is based on profit and loss sharing? Answer - no Islamic banks in the UK uses Musharakah contract for financing. To finance, for example if some business need to buy an equipment, Islamic bank will buy the equipment and then do a sort of Hire-purchase agreement with that business and the business will buy out that equipment from the bank in installments while paying rent. Such contract is called ijara and banks also use some other contracts of similar type while financing in which there is no share in profit or loss. Question 6 If the required item can only be purchased through Murabaha contract from a

foreign country like France where there are no Islamic banks. How Islamic Banks in the UK avoid letter of credit and any foreign conventional banks in these circumstances? Answer - About LC Opening etc., the bank opens it under Murabah or Ijarah and retires it in shape of Sale price in case of Murabah and through Rentals in Ijarah, so here too no problem of from wherever (which country), it comes under LC. Or simply, say you are approaching somebody in France to buy computers. What happens is you have to either pay him the money first or he has to send you the computers first. What is the guarantee that you will pay him the agreed money and hell send you the agreed computers? For that both of you will go to your own banks you in London and he in Pairs. Your bank will guarantee his bank in Paris that you send the computers and I (your bank in London) shall pay the money subsequently. Now the deal has become a deal between two banks and not between two individuals so no way that any

56

fraud can happen. That Guarantee by your bank is called Letter of Credit (LC). For that Guarantee your bank charges you some specific amount that is called LC charges. Now in order to make it Islamic, what your bank will do is they will appoint you the agent to deal with other person in Paris to buy the computers. Once the goods will arrive at the airport and you inform (as agent) the bank that these specific computers are safe in London, your bank will ask you to buy those computers from them (your own bank) on Murabah basis (with actual cost and the LC charges inclusive). So you see you dont need to have an Islamic Bank in Paris to do this deal. Question 7 - What steps Islamic banks in the UK take in order to reduce the number of delayed payments from the borrowers? Answer - delayed payments are discouraged through late payment penalty charges, and the amount left after recovering administrative expenses is donated to the charities nominated by Shari ah board of the bank. Question 8 - Do you consider that there is lack of appropriately-qualified human resource for the Islamic Banks in the UK? Answer - as Islamic banking is growing they have to expand their investment portfolio. In comparison to the growth and need of innovation there are not enough Islamic banking scholars and professionals who can perform such task up to the standard. But it is encouraging that students are taking interest in this field and different institutions are also offering professional courses in this discipline. Question 9 - In your opinion is the UK perfect market for Islamic Banking from regulatory point of view or FSA would need to be more compensating? Answer - in my point of view, there will be always more required from FSA as it is not an Islamic country, but Islamic banks have full support of FSA. To be more efficient I would recommend FSA to have some sort department of Shari ah scholars in their office as well, it would help FSA to understand more about the implications of Islamic banks. Question 10 - Do you consider LIBOR is a satisfactory benchmark for the banks and its stakeholders to price Islamic banking products and services in the UK?

57

Answer - I will give you an example and it would be easy for you to understand. For example McDonald is selling a burger for 3 pounds which has haram (prohibited) meat in it and a take away shop next door sell same burger but with halal (permitted) meat, at the same price of 3 pounds, you would certainly not consider takeaway burger prohibited just because it is priced on the bases of McDonald burgers price, because the ingredients of takeaway burger are halal it is permitted and can be eaten by any Muslim. Same is the case with using LIBOR as a benchmark by Islamic banks, as it is just a pricing technique, it doesnt affect transactions of Islamic banking products, which are and should be according to Islamic financial principles.

58

8.7 - Appendix 7:

Case Processing Summary Cases Valid N a banker or a PhD. * Is Interest Prohibited? 6 Percent 100.0% N 0 Missing Percent .0% N 6 Total Percent 100.0%

a banker or a PhD. * Is Interest Prohibited? Crosstabulation Count Is Interest Prohibited? yes a banker or a PhD. A banker A PhD Total 3 3 6 Total 3 3 6

59

8.8 - Appendix 8:

Case Processing Summary Cases Valid N Is Interest Prohibited? * Is LIBOR as a benchmark Accepted? 6 Percent 100.0% N 0 Missing Percent .0% N 6 Total Percent 100.0%

Is Interest Prohibited? * Is LIBOR as a benchmark Accepted? Crosstabulation Count Is LIBOR as a benchmark Accepted? yes Is Interest Prohibited? Total yes 6 6 Total 6 6

60

8.9 - Appendix 9:

Is financing risky?

yes no

8.10 - Appendix 10:

61

Case Processing Summary Cases Valid N a banker or a PhD. * Is More Needed from FSA? 6 Percent 100.0% N 0 Missing Percent .0% N 6 Total Percent 100.0%

a banker or a PhD. * Is More Needed from FSA? Crosstabulation Count Is More Needed from FSA? yes a banker or a PhD. A banker A PhD Total 3 3 6 Total 3 3 6

8.11 - Appendix 11:

62

Case Processing Summary Cases Valid N a banker or a PhD. * Enough Human Resource Available? 6 Percent 100.0% N 0 Missing Percent .0% N 6 Total Percent 100.0%

a banker or a PhD. * Enough Human Resource Available? Crosstabulation Count Enough Human Resource Available? yes a banker or a PhD. A banker A PhD Total 1 0 1 no 2 3 5 Total 3 3 6

8.12 - Appendix 12:

63

Glossary:

Gharar: Uncertainty, ambiguity or excessive risk. Quran: The Holy Book of Muslims which is revealed By GOD on Prophit Muhammad (P.B.U.H). Shari ah: Islamic Law. Riba: Increase, interest rate is a form of Riba Haram: Prohibited for Muslims. Halal: Allowed for Muslims or not prohibited. Fiqh: Islamic jurisprudence.

64