Global economic recession

At the moment, the global world is encountering the effect from the impact of global economic recession. In this circumstance, financial professionals have begun to look for as to how they can rectify this situation and also to ensure that no such thing will recur in the future. It also been witness today that frantic efforts are also afoot to look out for new economic orders especially in the banking and financial sectors in the world. Against this backdrop of financial crisis and economic recession, world economies are increasingly getting attracted to Islamic Banking Services as an alternative financial and mortgage system free from an element of interest involved. The current economic crisis has revealed the need for a better alternative to conventional mortgage in order to prevent any similar event in the future. Right now, there is so much interest in Islamic mortgage, many sees it as just what the western world need right now. Current credit crisis is as a result of excessive lending and pure speculation, which a lot of financial analysts believe wouldn't have happened if Islamic finance principles had been followed. "Islamic banks do not invest in conventional interest-related instruments, and did not have exposure to 'toxic' American sub-prime mortgages. Islamic principles prevent selling something you do not own. Practical implications include limitations on the use of interest and short-selling is generally not accepted - the dangers of which has since been realised. Pure speculation and gambling are also prohibited".(Nadeem Haq,2008). The UK now has five fully Sharia-compliant banks and another 17 financial institutions have set up special branches or firms, all offering Islamic mode of home finance -mortgage. They include the Qatar Islamic Bank (QIB), with its London-based European Finance House in Berkeley Square, and the Islamic Bank of Britain, which has headquarters in Birmingham. Both have answered Gordon Brown's call of two years ago for Britain to become the global centre for international Islamic finance system; a report by the International Financial Services London even says that Britain's Islamic finance sector is now bigger than that of Pakistan. (Alex Wade,2008)


"The development process of Islamic finance commenced at the beginning of the 7th Century when Muhammad is professed to have received revelations directly from Allah (the God of Islam). Moore (1997 p.3) regards the actual date as 613AD when Muhammad was about forty years old. At the time, the doctrine of financial operations during Muhammad's era was derived directly from the Holy Quran and the Sunna (traditions) of Muhammad. Since then, while Islamic Sharia (Quran and Sunna) has ostensibly coordinated all financial transactions between Islamic persons, there has been a continuing process of mutual adjustment between Sharia and the actual financial practices of Muslim societies. In Muhammad's lifetime, Islamic methods of finance often drew upon examples from the Prophet's experiences. Kahf and Khan (1993), for example, have pointed out that Muhammad was the first to use the Mudarabah (silent partnership) in trade with a rich women named Khadijah (who later became his wife). At the time, Muslims used to practice Musharakah (full partnership) when operating large commercial enterprises under a profit/loss sharing principle. In addition, Muhammad made it permissible for people to use sale on credit (bai salam) which was to finance consumption or production without usury and he encouraged Muslims to provide benevolent loans (Quard Hassan) (Kahf and Khan 1993). The ongoing Islamisation of Arabic countries meant that Sharia rapidly spread to both Muslims and non-Muslims at this time. After the death of Muhammad in 632AD, a great expansion of Islam occurred throughout the Arabic states and in large parts of the non-Arab world. The Islamic state in this 'golden age' was dominant in three continents, Asia, Africa and Europe. According to Moore (1997) the Islamisation of economic systems during the four centuries following Muhammad's death reached Morocco and Spain to the west, India and China to the east, central Asia to the north and Africa to the south. The extension of Islamic tools of finance is also indicated by historical records of contracts registered between businessmen at the time, including Mudarabah and Musharakah. Islamic finance practices continued largely unchanged until the beginning of the 19th Century (Warde 2000). From the nineteenth century, nearly all Muslim countries fell under the control of the Western colonial powers (France in North Africa, Britain and France in the Middle East, Britain in the Indian sub-continent and Britain and The Netherlands in South-East Asia), effectively dividing the Islamic world into many small states. Anwar (1995) argues that by the mid nineteenth century almost all Muslim-controlled areas fell to the Western colonial powers and thus the existing financial scheme which complied with Sharia was effectively replaced by the capitalist system. From then until the second half of the twentieth century, most Muslim economies were dominated by the economic traditions and systems of Western Europe (Moore 1997). However, while commercial banks, insurance companies and other types of intermediary firms employed conventional methods of finance (mostly as braches or agents of institutions in the colonising country), Islamic methods of finance were still often practised between individual Muslims. With the independence of the Arabic countries from the colonial powers by the second half of the twentieth century, many Islamic economies also became more independent. As a result, Muslim economists started reconsidering the application of Islamic finance into a formal banking industry. Iqbal and Molyneux (2005) suggest the first attempt to establish an Islamic bank was in 1971 when the Egyptian government established the Nasser Social Bank. This bank provided a number of Islamic financial products, including interest-free loans to the poor, student scholarships and small business credit on a profit/loss sharing basis. This was followed by the Dubai Islamic Bank in 1975 and subsequent rapid expansion. (as cited by Gait & Worthington (2005))


According to Aziz Tayyebi (2008), Islamic finance is any finance that is compliant with the principles of Islamic law (Shari'ah). In terms of finance, Shari'ah explains in detail the ethical concepts of money and capital, the relationship between risk and profit and the social responsibilities of financial institutions.

El-Qorchi (2005) as well, envisaged Islamic finance - financial institutions, products and services designed to comply with the central tenets of Sharia (or Islamic law) - as one of the most rapidly growing segments of the global finance industry. Starting with the Dubai Islamic Bank in 1975 (and operations in the United Arab Emirates, Egypt, the Cayman Islands, Sudan, Lebanon, the Bahamas, Bosnia, Bahrain and Pakistan), the number of Islamic financial institutions worldwide now exceeds over three hundred, with operations in seventy-five countries and assets in excess of US$400 billion . Financial transactions are one of the more important dealings controlled by Sharia, ostensibly to ensure the more equitable distribution of income and wealth among Muslims in Islamic economies.

"As opposed to conventional finance, where interest represents the contractible cost for funds tied to the amount of principal over a pre-specified lending period, the central tenet of the Islamic financial system is the prohibition of riba, whose literal meaning "an excess" is interpreted as any unjustifiable increase of capital whether through loans or sales. The general consensus among Islamic scholars is that riba covers not only usury but also the charging of interest and any positive, fixed, predetermined rate of return that are guaranteed regardless of the performance of an investment". (Iqbal and Tsubota, 2006; Iqbal and Mirakhor, 2006; Iqbal and Llewellyn, 2000). Since only interest-free forms of finance are considered permissible in Islamic finance, financial relationships between financiers and borrowers are governed by shared business risk (and returns) from investment in lawful activities (halal). Islamic law does not object to payment for the use of an asset, and the earning of profits or returns from assets is indeed encouraged as long as both lender and borrower share the investment risk together. Profits must not be guaranteed based on assumption and can only accrue if the investment itself yields income. Any financial transaction under Islamic law assigns to investors clearly identifiable rights and obligations for which they are entitled to receive commensurate return. Hence, Islamic finance literally "outlaws" capital-based investment gains without entrepreneurial risk. In light of these moral impediments to "passive" investment and secured interest as form of compensation, shariah-compliant lending in Islamic finance requires the replication of interest-bearing, conventional finance via more complex structural arrangements of contingent claims (Mirakhor and Iqbal, 1988).


The principles of Islamic finance have been extensively studied by Muslim and non-Muslin scholars alike (Wilson 2006; Metwally 2006; Iqbal and Molyneux 2005; Siddiqi 2004; Akacem and Gilliam 2002; Zaher and Hassan 2001; Lewis and Algaoud 2001; Al-Jarhi and Iqbal 2001; Warde 2000; El-Gamal 2000; Dar and Presley 1999; Dumale and Sapcanin 1999; Abdul-Gafoor 1999; Moore 1997; Iqbal 1997; Haron 1995; Kahf and Khan 1993; Metwally 1993). The general principles are as follows: (i)The prohibition of Riba (usury or excessive interest) and the removal of debt-based financing from the economy; (ii)The prohibition of Gharar, encompassing the full disclosure of information and removal of any asymmetrical information in a contract; (iii)The exclusion of financing and dealing in sinful and socially irresponsible activities and commodities such as gambling and the production of alcohol; (iv)Risk-sharing, the provider of financial funds and the entrepreneur share business risk in return for shares of profits and losses; (v)Materiality, a financial transaction needs to have a 'material finality', that is a direct or indirect link to a real economic transaction; and (vi)Justice, a financial transaction should not lead to the exploitation of any party to the transaction.


According to Dr. Mohammed Alwosabi in his article (Bank 411), Islamic banking is a finance system whereby a bank, mostly because of religious believes provides services to its customers without interest and all its own transactions are also free of interest. Islam bans Muslims from taking or giving interest, known as Riba, this prohibition makes an Islamic banking system differs fundamentally from a conventional banking system.

"Islamic banking system is based on Sharia'a laws - Sharia'a scholars ensure adherence to Islamic laws and provide guidance, while the conventional finance system is based only on man-made laws and no religious laws or guidelines".

Haqiqi and Pomeranz (2000), has noted that in early days, when Islamic banking appeared with its ethical values, it was assumed as impracticable by the financial circles in the world. However, the attitudes changed gradually and over the last few years, many of the Islamic banks started their operations; while other conventional banks also opened a separate section for an Islamic bank to attract more customers.

Islamic banks as a novel phenomenon in the financial world since the mid twentieth century have been constructed as financial intermediaries that mobilize resource in the direction of projects approved by the Islamic law (the shari'ah) using Islamic financing instruments (Siddiqi,1983).

Main roles of Islamic financial institutions, first and foremost are based on a profit and loss-sharing principle. Islamic banks do not charge interest but rather participates in the yield resulting from the use of funds; investors also share in the profits of the bank according to a prearranged ratio. Hence, there is consequently a partnership between Islamic banks and its depositors, on one side, and between the bank and its investment client, on the other side, as one who manages depositors' resources in a productive way. This is quite different from what happen in conventional banks which mainly borrows funds at interest on one side of the balance sheet and lends funds at interest on the other.

An Islamic bank is a deposit taking banking institution whose scope of activities includes all currently known banking activities, excluding borrowing and lending on the basis of interest. On the liabilities side, it mobilizes funds on the basis of a mudarabah or wakalah(agent) contract. It can also accept demand deposits which are treated as interest-free loans from the clients to the bank and which are guaranteed, on the assets side, it advances funds on a profit and loss sharing or a debt creating basis, in accordance with the principles of the shariah.(Mabid and Munawar)


Initially the major Islamic finance activity involved wholesale operations, with banks in London providing overnight deposit facilities for the newly established Islamic banks in the gulf. In other words the business was shari'a-compliant liquidity management. The Islamic banks could not hold liquid assets such as treasury bills, which paid interest, but the joint-venture Arab banks in London, such as Saudi international bank and the united bank of Kuwait, accepted deposits on a murabaha mark-up basis, with the associated short-term trading transaction being conducted on the London metal exchange. (Maroun, 2002)


The purpose of this study is to critically analyse if Islamic mortgage might help create a stable financial environment. This analysis would be made by assessing finance professional point of view and customers' opinion on Islamic mortgage through a well designed questionnaire. Considering the results of this analysis, the study will try to suggest the strategy, which might help Islamic mortgage achieve a desirable position in the UK financial market.


The objectives of the study are: To find out the finance professional and customer view on Islamic mortgage by conducting a survey. Analyse the potential of Islamic mortgage specifically in UK to observe if it might help create a stable financial environment. To suggest a strategy to attract more customers by adopting an effective marketing strategy.

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