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ISLAMIC FINANCE: A PARADIGM SHIFT IN FINANCIAL MARKETS
ABSTRACT
Islamic finance is currently making waves in the financial markets. It is a paradigm shift from the conventional financial markets system. Despite its shariah compliant structure, countries have been adopting it even the non-shariah jurisdictions countries. This paper, therefore, attempts to look at the current state of Islamic banking and finance at a global level. Necessary Islamic financial instruments like Sukuk bond, murabaha, ijarah are explored. Some countries have adopted full pledged Islamic finance, while some have only opened Islamic window operations through their conventional banks. Some have explored Islamic finance to finance mortgage, acquire infrastructures or facilitate the growth of the economy. Challenges that might comfort Islamic finance are identified and solutions are proffered. IDB and IFSB should regulate this system and ensure compliance, issue prudential frameworks and inject reforms capable of stabilizing and solidifying the system. Islamic Finance, Islamic Banking, Paradigm Shift, Financial Markets
TABLE OF CONTENTS
TITLE PAGE…………………………………………………i
APPROVAL PAGE……………………….………………….ii
DEDICATION……………………………………………….iii
ACKNOWLEDGEMENT……………………………………iv
ABSTRACT…………………………………………………v
TABLE OF CONTENTS……………………………………vi
CHAPTER ONE
1.0 INTRODUCTION……………………………………..…..1-4
1.1 Background of the study…………………………………4-7
1.2 Statement of the problem…………………………………8
1.3 Objectives of the study……………………………………8-9
1.4 Research questions………………………………………..9
1.5 Statement of hypothesis…………………………………10
1.6 Significance of the study…………………………………10
1.7 Scope of the study………………………………………..10-11
1.8 Limitation of the study……………………………………11
1.9 Definition of terms………………………………………….11-12
CHAPTER TWO
2.0 Introduction ……………………………………………..13-14
2.1 Literature review …………………………………………14-16
CHAPTER THREE
3.0 Introduction……………………………………………………32
3.1Research design and methodology……………………………32
3.2Research design………………………………………………..32
3.3 Sources/methods of data collection…………………………33
3.4 Population and sample size…………………………………33-34
3.5 Sampling techniques…………………………………………34-35
3.6 Validity and reliability of measuring instrument……………35-36
3.7 Methods of data analysis……………………………………36
CHAPTER FOUR
4.0 Presentation and analysis of data…………………………….37
4.1 Introduction…………………………………………………37
4.2 Presentation of data…………………………………………37
4.3 Analysis of data……………………………………………..37-56
4.4 Test of hypothesis…………………………………………..56-57
4.5 Interpretation of result………………………………………58
CHAPTER FIVE
5.0 Summary, Conclusion and Recommendation…………………59
5.1 Introduction………………………………………………….59-60
5.2 Summary of findings…………………………………………60-61
5.3 Conclusion…………………………………………………….61-62
5.4 Recommendation………………………………………………62-63
References
Appendix
INTRODUCTION
Islamic finance refers to a system of financial activities that is based on profit and loss sharing and prohibition of interest rate.
“It is thus a form of financial intermediation based on profit and loss sharing (PLS) and the avoidance of interest rate -based commitments and contracts that entail excessive risks and finance activities prohibited under Islamic principles (e.g. gambling and alcoholic beverages). Consequently, shariah compliant investments follow the structure of an exchange of ownership in tangible assets or services where money’s role is to facilitate the payment mechanism to implement the transfer. Moreover, risks are supposed to be shared among all parties: investors and entrepreneurs bear the business risk and Share in the Profits. This Contrasts With Conventional banking where the Transactions involving interest payments are common (Chong and Liu, 2009, Kahf, Ahmad & Homud 1998)
Islamic finance is practiced in nearly 70 countries all over the world including, United Kingdom, United States of America Canada China, Malaysia, United Arab Emirates, Singapore, South Africa, Indonesia, Kenya, Nigeria etc Global Banks such as Barclay Bank, Citibank, HCBC etc are also offering Islamic Finance products.
Islamic finance entails justice, fairness and transparency in the treatment and recognition of revenue and expenditure and moral values on the part of investors as well as entrepreneurs. Only the profit sharing ratio between the capital provider and the entrepreneur is determined ex-ante while the lending rate in financial contracting is replaced by a rate of return determined ex-post on a profit sharing basis. (Chong and Liu, 2009)
In addition, Islamic finance considers unlawful investing in some business because of their moral hazard and capacity to distort Economic growth). It equally prohibits “Mayseer” which is involving in contracts where the ownership of a good depends on the occurrence of a predetermined, uncertain on the occurrence of a predetermined, uncertain event in the transactions. These two concepts (Maysir and Gharar) involve excessive risk and are supposed to foster uncertainty and fraudulent behaviors’.
Islamic banks provide finance using various methods: Mudarabah (Partnership) Musharakah (Joint Venture) etc. In this case the return is not fixed in advance and depends on the ultimate outcome of the business. The second category involves the sale of goods and services on credit and leads to the indebtedness of the party purchasing those goods and services these include murabaha (Commodity, Ijarah, and Salam & Istina, while the third category is the investment bonds – Sukuk bonds).
Islamic finance has benefits, some of which include: improvement of real sector, increase savings mobilization, easy access to fund, promotion of Micro, small and medium enterprises (SMEs), promotion of foreign direct investment (FDI), sharing of risk among the investors and Entrepreneurs’. It equally has some constraints, most notably transaction costs and difficulties involved in supervising and monitoring.
The rationale for the abolition of interest rate by Islamic include:
Interest rate is oppressive and unjust, especially interest on consumption loan, it imposes unilateral risk only on the borrower and sometimes strangulates entrepreneurs; it increases cost of production which are often transferred to the consumer through high prices, it widens the income inequality through the transferring of wealth from the poor to the rich.
