TOPIC: A study about the variation between commercial banks and Islamic bank

term of systems and its impact on society in Oman.

1|Page
Contents
Introduction: .................................................................................................................................... 3

Problem Statement ...................................................................................................................... 4

Research Question .......................................................................................................................... 4

Research Aim and Objectives ..................................................................................................... 5

Research Objectives .................................................................................................................... 5

Scope of the study: ...................................................................................................................... 5

Literature Review: .......................................................................................................................... 6

Research Methodology: .................................................................................................................. 7

Research Onion: .......................................................................................................................... 7

Research Philosophy: .................................................................................................................. 8

Research Approach: .................................................................................................................... 8

Research Design: ......................................................................................................................... 8

Data Collection Method: ............................................................................................................. 9

Data Analysis: ............................................................................................................................. 9

Research Limitations: .................................................................................................................. 9

Time Plan: ................................................................................................................................... 9

References ..................................................................................................................................... 11

2|Page
Introduction:
Both Islamic and conventional or commercial banks in Oman offer scope of finance management
and transaction to the society and its people. People take help from these banks and manage their
finance in a systematic way. The research here explores ways in which commercial banks and
Islamic banks function and how these impacts on the society in Oman. These banks play a
significant role in managing the culture and life or people. Both these banks have fundamental
similarities in operation, such as they offer scope for systematic money management and
facilitate finance for business. It has been studied that the conventional banks are efficient in cost
management than the new Islamic banking system, while Islamic banks are better in terms of
short-term solvency, but very little difference could be noticed in terms of services regarding
long-term stability (A. K. Saxena, 2009).

Recent financial crisis in 2009 resulted in the collapse of large financial institution, downturns in
stock market and bailout of banks of national government. In this scenario society experienced
that services at Islamic banking is more stable than the conventional system. Stability of banks
has been identified as its ability to withstand against adverse internal as well as external
economic and financial shocks. In the traditional banks the risk are presented in both the asset
and liability side of the bank’s balance sheet. Banks generally collect fund by selling deposits as
well as lend funds to borrowers for investment (Cunningham, 2011). The main difference
between the Islamic as well as conventional banks in terms of stability as well as efficiency
could be linked with their approach towards business practices. Islamic banks do not deal with
interest and uncertainty, two main features dealt by the conventional banks in Oman. These
Islamic banks follow the Shariah principles and work on profit and loss sharing principle instead
of fixed-rate loans. Thus, there lies differences in business and finance management approach
between the conventional and Islamic bank, this impact on economic condition of the society in
Oman. The research here studies the variation between commercial banks and Islamic bank term
of systems and its impact on society in Oman (Ismath Bacha and Mirakhor, 2013).

3|Page
Problem Statement
Since 2012, Islamic banking was introduced in Oman as a response to public demand.
Economists pointed out that approach will impact on the customer mind and they will begin
switching banks and use Islamic banking facilities. From customer perspective, Islamic banking
provide an ideal avenue, through which loan may be procured at economically more reasonable
terms and conditions as opposed to conventional banking. Both Islamic and conventional banks
follow different policies, which are either preferred or disregarded by users. The problem of the
study is to understand how these two separate approaches impact on customer sentiments and
thus affect the Oman society and its financial situation (Ismath Bacha and Mirakhor, 2013).

To the society it appeared after the phenomenal financial crisis that conventional banks were the
worst sufferers of the economic downturn. Islamic banks on the other hand followed Shariah
principles which prohibited investment and this affected negatively on the decision of the
conventional banks. Many identify this condition as one of the reason behind the crisis. Thus,
both banking system are different and impacts on the society in a unique way. The researcher
here studies these problems and uncovers such issues.

Research Question
After studying the topic in detail the research questions are developed to act as a guideline of the
study. The questions assist in conducting the investigation in a systematic way and answer the
questions during the course the study through evaluation and analysis.

The research questions could be underpinned below:

i. What are the different ways in which the commercial banks and Islamic banks impact
on the Oman society?
ii. What are the key differences between the operation and system between the Islamic
and Commercial banks?
iii. Can Islamic banks replace conventional banks in Oman?
iv. Explore the future of Islamic banking and conventional banking in relation to cost of
finance
v. How far customer’s intention towards switching banks plays an important in
managing the financial environment in the Oman society?
4|Page
Research Aim and Objectives
The primary aim of the respective dissertation is to study and understand ways in which the
commercial banks and Islamic banks operate in Oman. After investigating the issue and
understanding the nature of their function, the researcher will discuss how the financial
management process impacts on the society in Oman and make customers happy.

Research Objectives
After identifying the research aim and questions the following objectives have identified. These
objectives will help in completing the study in a chronological manner. In the final chapter the
research findings will be linked with each objective and explained in detail.

The main objectives of the study are;

i. To study and understand variation between commercial banks and Islamic banks term
system and how it impacts on the society in Oman.
ii. To shed a light on the key differences between the Commercial banks and Islamic
banks.
iii. To understand if Islamic bank could replace conventional banks in Oman
iv. To study and understand the future of Islamic banking and conventional banking in
relation to cost of finance
v. To investigate and discuss customer’s intention towards switching banks plays an
important in managing the financial environment in the Oman society

Scope of the study:

Very recently, that is around 2012 Oman introduced the Islamic banking policy. The new system
is supporting customers with several loan oriented facilities and also inspiring conventional
banks toward adoption of Sariah norms and policies to offer better services. The macro financial
environment at Oman is stable and constantly evolving. Introduction of new norms and policies
are encouraging customers to switch to Islamic banks a use their services. This behaviour of
customers has dissatisfied private bank owners. Thus, there are several issues regarding finance
management and hence the research here gives scope of exploring variation between commercial
banks and Islamic banks term system and how it impacts on the society in Oman.

5|Page
Literature Review:
There is an abundant literature on the efficiency of banking institutions in Oman. After
conduction of an empirical study on the respective topic it is evident that commercial and Islamic
banking system has different foundation. Conventional economic practice is a banking based
system, and Islamic banks on the other hand follow Sariah policies and handles economy
accordingly (Bello, Hasan and Saiti, 2017). Islamic and conventional banks have several similar
approaches, but the main difference between the two includes, the process that conventional
banks charge interest or service fee while Islamic banks earn money by only sharing profit and
loss, trading, leasing and making use of the sharia contracts of exchange.

Nazal, (2017), discussed that at the Sultanate of Oman the regional demand for Islamic finance
industry in May 2011 paved the way for the launch of Islamic banks in 2012 and made way for
availability of both conventional and islamic financial facilities to the people of Oman. IB banks
introduced unique strategies to attract customers. The banks Banks Nizwa and alizz have
launched innovative products to attract Omani customers and introduced several branches around
the country. With support from local customers Islamic banking system grew steadily. With the
launch of Islamic banking facility in Oman customers now intend to switch to Islamic services
by closing their account in commercial banks. Customers are moving from one bank to the other
as the Shariah system and services are appealing (Molyneux and Iqbal, 2016). Customer
retention is thus becoming a severe challenge for the regular conventional banks in the society. It
has been studied that for the users in Oman service quality of the bank is more important than
fringe benefits. Hence people switch to Islamic banks. In the post-recession affected financial
scenario, people today look for security and stability which the private banks fail to offer. Most
banks suffered huge loss and only the Islamic banks managed amidst such crisis. Hence in the
Oman society people are generally switching towards Islamic banks (Bello, Hasan and Saiti,
2017).

According to Cunningham, (2011), the legal framework of KSA follows absolute monarchy. In
1992, the main law of KSA was adopted by the royal decree. This law has laid the outline of the
main responsibilities as well as ways in which the governing institutions should function. The
legal system today is based on the Shari’a, the Islamic law which has been taken from the Qu’ran

6|Page
and the Sunnah. The interpretation of the content in the Muslim world is complicated. Shari’s is
the primary source of law in the state (Molyneux and Iqbal, 2016).

Islamic banking in Oman is at a nascent stage. It has just begun a few years back and hence
today there is wide scope for growth. By the end of December 2013 Islamic banks successfully
opened 29 branches around Oman. The total financing activities include RO 433.9 million and
total deposit amounted to RO 171.9 million. By 2014 December these banks have 46 branches.
This rapid growth pace clearly highlight the fact that Islamic banking approaches were embraced
by the customers and with the increase in user the outlets are growing.

Several researchers have studied customer satisfaction and loyalty in relation to Islamic finance
management. Several argued that Islamic banking in future will be able to replace the
conventional banking system. In countries like Pakistan and Iran the approach was accepted but
faced several challenges. Thus, it is difficult to underpin if the banking system will be able to
replace the traditional methods or not (Ismath Bacha and Mirakhor, 2013).

Islamic banking incorporates various aspects of Islamic faith and religion into the trade and
commercial aspects of banking. Oman, like many of her neighbours, is a Muslim nation, with the
majority of nationals being Muslims. This underscores the introduction of Islamic banking in the
country. From the social perspective, Islamic banking not only brings on board religious values
practiced by the larger sections of the population, it also serves as a bridge between religious
teachings and believers’ practice.

Research Methodology:
Research methodology is a science that helps in selecting and accommodating apt technique to
complete the investigation in a specific manner. In this thesis the researcher underpinned the apt
approach, philosophy, design, tools and techniques to conduct the research in a proper manner.

Research Onion:
The research Onion is the guideline where the steps are mentioned. The Onion is the metaphor
stands for methodology. Each layer of the research onion hence helps in selection of apt method
and then the conclusion is reached in a chronological manner. Every layer discusses specific step
to be used to conduct the study (Goddard and Melville, 2011).

7|Page
Research Philosophy:
Research philosophy is strictly about search and application of the knowledge or information
within the research work. Key research philosophies include Positivism, Realism and
Phenomenology. In the positivist philosophy the researcher collects facts and then conducts the
study and evaluates relation between one set of factors with the other. Phenomenology on the
other hand is about understanding the difference between human being and their role in the
society as the social factor. Realism on the other hand considers what is being felt by senses that
might not be real and hence need justification.

In this study the researcher will apply positivism philosophy and collect facts from various
sources like primary data from respondents and secondary data from empirical study on
previously published research works. The conclusion will be finally drawn based on evaluation
of these facts. Though there will be very less scope for imagination and in this research work on
how bank functions in Oman the main evaluation will be based on collected facts the positivism
philosophy will be perfect for evaluation and analysis (Welman, Kruger and Mitchell, 2015).

Research Approach:
There are two types of research approaches, namely Inductive and Deductive. In the deductive
approach the evaluation is carried out from general to specific and it is also top down method
which systematically helps in reaching conclusion in a chronological way. The conclusion is
logically followed. Inductive approach on the other hand is about moving from specific to
general and development of new theories. Since the researcher is taking positivism, deductive
approach matches with the specific philosophy of research. He will not develop any new theory,
instead will evaluate on the base of existing financial policies of Oman and Shariah banking.
Thus the deductive approach will be applied here to complete the study (Ketchen and Bergh,
2007).

Research Design:
There are three main types of research designs, Descriptive, Explanatory and Exploratory. In this
work the Descriptive research design shall be implemented since there is a formal set of
objectives and research questions to help in giving direction to the study and assist in conducting
in-depth analysis. The study is also bound by time line (Nazal, 2017).

8|Page
Data Collection Method:
There are two types of data, namely the primary and secondary data.

The primary data will be collected fresh from the respondents by circulating questionnaire. The
secondary data on the other hand will be collected by studying extensively from previously
published research works on the same topic.

A sample size of 50 will be identified to collect primary quantitative data from the customers of
banks based in Oman. The users from both conventional banks and Islamic banks will be
included in the survey to find out their experience with the banking services and how the society
has reacted to the changes in the finance management system as introduced under Shariah
policies. The quantitative primary data will be accumulated by circulating closed ended
questionnaire among the respondents and information will be collected for evaluation and
analysis. Another set of open ended questionnaire will be circulated among 5 managers from the
banks to understand the institutions perspective on the issue. The focus group will be conducted
to collect information from the managers (Welman, Kruger and Mitchell, 2015).

Secondary data on the other hand will be accumulated by studying extensively from previously
published research works on the same topic. The researcher will study from journals, books,
articles, research works, PDF, portals etc and then present a critical review on the topic.

Data Analysis:
After collecting both quantitative data and qualitative data the figures will be first represented on
the excel sheet and then evaluated with the help of pie chart and graph. (Babbie, 2016)

Research Limitations:
A student research work is restricted by certain constraints like limited budget, available
resources and time.

Time Plan:
The time frame for this study is given below

Criteria Week 1 Week 2 Week 3 Week 4 Week 5 Week 6

Start the

9|Page
research work
with
Introduction to
the topic
Write down the
Aims and
Objectives of
research
Complete the
literature review
section by
studying from
several research
works
Planning
research
methodology
Collect primary
data by
circulating
questionnaire
among
respondents
Data evaluation
and analysis
Conclusion,
identification of
gaps, linking
with research
objectives and
recommendation

10 | P a g e
References

A. K. Saxena, A. (2009). Oman. Global Media.

Babbie, E. (2016). The practice of social research. Belmont, CA: Wadsworth Cengage Learning.

Bello, N., Hasan, A. and Saiti, B. (2017). The mitigation of liquidity risk in Islamic banking
operations. Banks and Bank Systems, 12(3-1), pp.154-165.

Cunningham, A. (2011). Banking in the Middle East. London: FT Financial Publishing.

Goddard, W. and Melville, S. (2011). Research methodology. Kenwyn, South Africa: Juta & Co.

Ismath Bacha, O. and Mirakhor, A. (2013). Islamic capital markets. Singapore: Wiley.

Ketchen, D. and Bergh, D. (2007). Research Methodology in Strategy and Management.

Burlington: Elsevier Science.

Molyneux, P. and Iqbal, M. (2016). Banking and Financial Systems in the Arab World. London:
Palgrave Macmillan UK.

Nazal, A. (2017). Impact of Islamic Banks Controller Types on Income Statement. Journal of
Islamic Banking and Finance, 5(2).

Welman, J., Kruger, F. and Mitchell, B. (2015). Research methodology. Cape Town: Oxford
University Press.

Zgheib, P. (2010). Entrepreneurship and business innovation in the Middle East.

11 | P a g e