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Examine The Impact Of Islamic Banking On Economic Prosperity
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In the last two decades, the banking sector witnessed the emergence and the development of a new financial industry: The Islamic banking (Goaied, 2015). The Islamic banking system emerged as a competitive and a viable substitute for the conventional banking system. Islamic banking has grown substantially and has become one of the well truly established world’s fastest-growing economic sectors. This industry is characterized by banking operations excluding the use of the interest rate and it is based on underlying fundamental concept of justice as well as sharing risk.
Economic prosperity means having the money necessary to fill your needs and many of your desires (Taylor hall, 2015). Let’s note that a nation can be economically prosperous as economic prosperity comes from earning sizable amounts of money. For example, a young broke person is not economically prosperous. After several years at a good job, this young person begins upgrading to a functional car, a nicer apartment or home, a washing machine and dryer, the ability to buy what they want from grocery store, trips to restaurants if they would like, money in savings and investment accounts. They can afford a vacation annually. This person is now economically prosperous. It can have different levels of status (living a middle class life is prosperous, but a yacht and private plane is more prosperous), but overall economic prosperity is having the level of money you need to take care of yourself and family, without the stress of surviving from paycheck to paycheck.
Islamic banking can ensure economic prosperity because of its non-interest nature, this will help in increasing the level of savings and investment as no interest rate is charged thus giving an individual the opportunity to save without the fear interest rate, with the profit and loss sharing ratio the financial status of an individual will increase, this will further lead to economic prosperity. Islamic banking emanated from Islam which discourages concentration of wealth in a few hands thus the Importance of Islamic banking system is to bridge the gap between the rich and the poor by modifying the distribution of wealth and economic resources in favor of less fortunate (Ismail 2010).
1.2 Statement of the Problem
There has been much debate over whether the growth of financial intermediation facilitates economic development or if banks expand because of economic development (African development Bank, 2011). Islamic Banking has become ever popular in the last three decades, not only in Arab and Islamic world but also in other parts of the World (Fatai, 2012).
However, despite over four decades of experience of Islamic banking and finance, the industry has its critics, both Muslim and non-Muslims (African development Bank, 2011). According to Nguena, (2014) Islamic finance products and services are often accused of mimicking those of the conventional financial system, while some criticisms consider the Islamic financial system as window dressing.
Islamic banking eliminates the barrier between those who save and those who invest, and bring them closer to the real market. that is, it eliminates the barrier between individuals and entrepreneurs. The nature of financial intermediation of Islamic banks significantly defers from conventional banks and it is in harmony with real market and development changes in it.
The underlying principle of Islamic banks is the principle of justice which is an essential requirement for all kinds of Islamic financing. In profit sharing of a financed project, the financer and the beneficiary share the actual or net profit/loss rather than throwing risk burden only to the investor. The principle of fairness and justice requires that the actual output of such a project should be fairly distributed among two parties. If a financer is expecting a claim on profits of a project, he should also carry a proportional share of the loss of that project.
In contrast with conventional finance methods, Islamic financing is not centered only on credit worthiness and ability to repay the loans and interest, instead the worthiness and profitability of a project are the most important criteria of Islamic financing while the ability to repay the loan is sub segmented under profitability.
In spite of the growth potential in Islamic banking, studies have shown that several challenges have been facing Islamic financial institutions and Nigeria stands to be faced by such challenges. Eze and Chiejina (2011) identified these challenges to include shortage of experts in Islamic banking, uncertainty in accounting principles involving revenue realization, disclosures of accounting information, accounting basis, valuation, revenue and expense matching to Islamic banks. Thus, the results of Islamic schemes may not be clearly defined, particularly profit and loss shares attributed to depositors (Khan and Bhatti, 2008).
Apart from these financial and accounting issues, there are also issues of knowledge of the people over operations of Islamic banking. According to Brown, Hassan and Skully (2007), many people do not understand Islamic banking; this includes both Muslims and non-Muslims. The fact that sharia boards, which oversee the transactions in relation to the Qur’an, are often at the individual bank level, can lead to many interpretations of what is and what is not a suitable ‘Islamic’ transaction. Other problems include a lack of suitable trained staff able to perform adequate credit analysis on projects, as well as suitable managers, rather than just the owner. Latest technologies as used in conventional banks are often not used by Islamic banks.
Furthermore, in a study carried out by Iqbal and Molyneux (2005, they found out some challenges facing Islamic banking which they termed ‘unresolved issues’. These include problems of conditions of participation in equity markets, delinquent borrowers and the issue of penalties, indexation, financial engineering, risk management, appropriate legal framework and supportive policies, regulation and supervision, development of a money market, corporate governance, human capital formation. In the Nigerian situation, the problem of policy making and implementation have often been lack of proper communication to the people by the government of the benefits they stand to get from a policy and the methods by which a particular policy is to be implemented. The proposed Islamic (non-interest) banking system may not see the light of the day if not properly communicated to the people before its full implementation. Again, religious-wise, the proposed Islamic non-interest banking will definitely encounter the challenge strict competition and comparison with the existing conventional banks in the country. Their activities will always be viewed and interpreted from religious angle as Nigeria is a highly religious sensitive country. This controversy has already begun.
There is no misgiving that the development of Islamic banking system plays an Important role in an economy as many writers have maintained that the development and the efficiency of such financial system is closely linked to economic growth. They have pointed out various channels through which Islamic banking system affects economic prosperity. Popular amongst such studies are; Goaned (2008); Furqan and Mulyany (2009); Iqbal and Murakhir (2013); Iqbal (1997); Tabash and Dhankar (2014); Abuh and Chowdury (2012) etc. but their works are mainly narrowed to Gulf Cooperation Countries GCC and Asian countries. However, the available literatures to Islamic banking are limited to theoretical components and only few studies to some extent linked economic prosperity with Islamic banking system. Thus, creates a vacuum in the literature. To help in filling this gap, necessitate the need for this study.
CHAPTER ONE -- [Total Page(s) 3]
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