DISSERTATION

Islamic mortgage system as a solution for current credit crises

Changes required: Gantt chart Population size Random sampling type Percentages are the base of data analysis not the tabulation and graphical representations Research question no (18,19) and (20,21) are similar to each other I had highlighted the paragraphs in the conclusion and recommendation chapter check whether these are self created.

CHAPTER 1 INTRODUCTION
1.1 Study Context

Islamic mortgage system and practices are briefly introduced in this chapter, as these practices are being applied throughout the world as well as in UK. Shariah is the base for all the activities of life for the Muslims of the world and it has provided guideline in terms of finance as well, so the Islamic laws in this regard are being applied on the banking systems of countries like Pakistan, Sudan and Iran, however, in some other parts of the world these Islamic banking services are being provided through traditional banking facilities. In the west part of the world in countries like US, UK and Australia there is a great revolution in this field (Shanmugam, Perumal and Ridzwa, 2004). There is competitive environment between two high street banks of UK which are facilitating their customers with the help of services which are based on Islamic Finance. Islamic Bank of Britain is entirely operating under Shariah. Shariah as discussed above is so comprehensive that it covers all the segments of a human life and it carries solutions for all the problems as well as in terms of financial matters. Islamic system does not allow interest to be a part of financial system as it can cause many problems to the society like financial crises, un-even wealth distribution, reduction in the purchasing power and capability to earn etc. According to interest based system a lender while lending his money target the amount of interest more as compared to money (Usmani, 2005) and it is the major flaw in that system. However, in Islamic banking lender first purchase the required commodities for the borrower and then agrees on a re-sale price with them which involve profit as well as loss (Usmani, 2005). Hence, it can be concluded that systems of Islam related to financial matters, economy and society are best as compared with other systems like Interest based financial systems. Islamic preaches equality in the society so unlike traditional systems of financing in which risk of losses and financial burdens are transferred only on borrowers, it involve both the parties to share all such things which are attached with the credit contract. Mudaraba, Musharaka, Ijarah and Murabaha are such contracts for financing which are purely based on Islamic Principles. In countries like UK people are more attracted towards traditional systems of financing and banking but Islamic modes of finance are also becoming famous on an equal grounds because these practices are not only useful for the Muslims of the world but as well as for the mankind. These practices of Islamic Banking are so helpful for the society that in countries like UK where as discussed earlier that people were attracted towards traditional mediums of finance such Islamic financing practices are grown just in five years and become as popular as the other traditional ways of financing are. 1.1.1 Changes to the Islamic Mortgage Market in UK Because of useless taxes on the Islamic mortgages these were not much famous in UK till the year 2003. There was a doubling of the stamp fee on such agreements as the financial institution pays the duty when it purchase the asset for his client, moreover, client pay the same duty when property in asset transferred to him completely. As this type of 2

transaction or mortgage is in accordance with the rules and laws of Shariah, so, this need to done in two steps. This double stamp duty was wave off by the Chancellor of the Exchequer, when the matter was presented to him at the beginning of the second quarter of year 2003. Two monetary concerns like West Bromwich Building Society and United Bank of Kuwait were dealing in Islamic mortgages before this major change of duty, however, Lloyds TSB and HSBC also started dealing in the Islamic mortgages after this change regarding stamp duty. The growth and development of Islamic Mortgages in UK is very certain as the population of Muslim community is increasing with the passage of time in England that is currently almost 1.8 Million. According to the result of the survey conducted at the end of year 2009, the financial value of Islamic Mortgage market was almost 1.4 billion. 1.1.2 Other Issues Affecting Islamic Mortgage Provision Along with interest free mortgages of Islamic modes of financing, many banks in UK are also dealing in routine mortgages that involve interest payment. There are many businesses in UK that are not in accordance with the law of Shariah and even they disobey this. So, while selecting any institution for the mortgage it can be a concern for the religious Muslim. In normal situations, banks and other financial institution get finance for their operational activities from their depositors who provide them money at a lower rate which banks lend to its customer at greater rate and that difference between the interest rate is the profit of that banks or financial institutions. There are some financial institutions in UK like Islamic Mortgage Institutions which does not collect their finance from the money market but get enough funds for maintaining their mortgage business. The reason behind this is that a Muslim can safe his from the interest by adopting the Islamic modes of finance but still the bank will have a link with those organizations which are interest based so people hesitate joining these banks. On the other hand it is a fact that when interest rate varies in the capital market that also create negative impacts on the Islamic Mortgage Market despite of the fact that these markets are conceptually different from interest based financial markets. The financial services providers cannot claim against the changes in the rates of interest as the Shariah does not allow that. So, that affects the profitability of these financial institutions negatively (Siddiqui, Muhammad N., 2002). 1.1.3 Property Market and the impact of Islamic Mortgages Islamic Mortgage Market is growing in UK as its total value this market increase from 40 million to 1.4 billion during a period of 2002 to 2009. As there is a considerable increase in the Muslim population in UK that is currently 1.8 million, so it is not abnormal that these people will impact greatly the property market of the areas where they are with high population like in London their population is 725,000 from total 3

population of 7.2 million. Moreover, the monetary institutions working in highly populated Muslim areas have to introduce the Islamic Mortgages to fulfill that demand. In the areas where Muslim community has greater population, inflation is observed in the property market. For instances the prices of house with three bedrooms are almost double in the areas like High Field of Leicester, where a house of this kind was available in 60,000 in the year 2000 that reaches to 120,000 till the year 2007. Highly populated Muslim areas were enjoying the low prices of the properties as compared to other areas before the availability of Islamic Mortgages. As after the introduction of Islamic mortgages more and more Muslims are availing this opportunity for purchasing the houses for them and there value of total mortgage in respect of property is almost equal to all other living in UK (www.fancyamortgage.co.uk).

1.1.4 Sustainability of Islamic Mortgages There are many concerns in the UK mortgage market about the Islamic mortgage system as according to many critics the prices of properties are increasing in UK after the introduction or familiarity of Islamic mortgage system. According these critics if there will be any instability in the economy of UK that will impact equally the Islamic mortgage market as the Muslims will have fewer credit opportunities as compared to others. For the solutions of all the credit systems prevailing the markets of UK there is a need to understand the core concept and ideas of Islam as Muslims are no more a community in UK. Despite of many threats attached with the Islamic mortgage market, the probability of its growth is greater.

1.1.5 Islamic Mortgage According to Shariah Muslims are not allowed to invest or borrow the finances which are based on interest as they are strictly restricted under Islamic laws. So, following their religion Muslims of the world can not be a part of any transactions of interest bearing mortgages. This makes it difficult for the Muslims to purchase goods that they need for their domestic and business uses. Hence, Islamic modes of financing are very helpful for the Muslims of the world as the bank or financial institution buy the required assets for the mortgagee and then these are sold back to him by any of these three methods. First option is that the bank may rent out the property to the mortgagee against having payments against the original amount of loans or he might purchase the amount of asset at increased price in shape of part payments. At the time of payment of original amount and getting equity as the owner of house give property on the rent which can be termed as lease to purchase. Creation of 4

LLC is another alternative at that time purchaser of house get the ownership with the help of monetary Institution. In the western countries like United Kingdom Islamic Mortgages are becoming popular, moreover, these are becoming famous in United States as well. Approximately five years back, Feddie Mac invested in the Islamic Mortgages which change the scenario of Islamic Finance and turn it into Finances like other traditional mediums of finances. Principles of Islamic mortgages are really clear-cut that result in decrease in the default rate (www.thetruthaboutmortgage.com).

1.2

Theoretical framework

1.2.1 Types of Islamic mortgages system Islamic Systems of Mortgages of United Kingdom (UK) is the base of Musharaka, murabaha, modarba and ijara models. 1.2.1.1 Ijara Mortgages Lease to own is the base of a usual Ijara Mortgage. This type of mortgage is same like other but there is little difference that there is no need to make some advance payment. In this type of mortgage the person who wants to purchase a property, after finding it, contact with the vendor to settle the price. Then he find out a Islamic Mortgage Institution that is usually a bank dealing in Islamic credit which will purchase the property for him at a price that is being settled between the parties, moreover, he will agree with the financial institution that he will purchase it back to get its ownership. The client of the financial institution by entering into such a lease type agreement get the right to live in such property against the some payments that involve two main items: Rent expense of that property; Installment payment against the cost value of the asset. When the client successfully paid all the installments against the cost value of asset, he need not to pay rent any further and in fact he get his ownership after that. In this way both the lender and borrower avoid the interest and abide by the Shariah by not violating its basic laws regarding interest and its curse. 1.2.1.2 Musharaka Mortgages Musharaka mortgage is an alternative of the Ijara mortgage but it provides an opportunity of ownership for both the parties to a musharaka agreement. In case of ijara mortgage as discussed above the person who want to purchase a property, after finding it, takes the help of a financer for the purchase of that property with the agreement on price. The financial institution provides financing services for its customer by purchasing that property with an agreement that he will purchase it back. In musharaka customer of the financial institution get his ownership right on the basis of regular payments that he will 5

make to the Islamic Mortgage institution against the asset. As much he will pay through the regular installments of the capital value as much he will get the ownership and property in those assets. At the end of the term when he clears the full value of the asset he becomes the sole owner of that asset. So, in this way, same like Ijara mortgage the payment of interest which is against the law of Shariah is avoided by the both parties to a musharaka agreement.

1.2.1.3 Murabaha Mortgages Under such a type of credit agreement the financing body purchases assets for its customer and sale this to him at comparatively greater price. In this method financial institution earns an amount of profit over the cost of the asset. When the credit period exhausted customer purchase the asset as agreed. It is a main tool of interest free financing its other name is muabha. Just like musharaka and ijara mortgage the potential purchaser of a property that will be purchased by the financial institution for him at the present time promises to purchase it back at an agreed price in the future at the end of their mortgage agreement and will become owner of that asset completely. The monetary institution earn in this way profit that is actually the difference between purchase and selling price. This type of financing is generally used for the purchase of home where the actual buyer pays the price of that property in shape of installment that includes original cost of that asset plus agreed amount of profit. Most often the customers pay some advance payment i.e. minimum 20 % of the total price (Zangeneh, Hamid, et al., 1993). 1.3 Rationale The must of banking in Islam is that it needs to be free from interest. No doubt there is much literature available that regard interest based banking system and other systems as more favorable for the creation of equality in the society and increases the contribution in the equity (Chapra l982), but despite of all these reason interest has no place in Islam and strictly prohibited in Islamic Societies. Traditional banking system is relaying a lot on the investments by the Muslims and getting a great share of profit due to their investments as it is working in most of the parts of the world whether these are Islamic Countries or Non-Islamic Countries and there is no doubt that drawing of these funds on the ground that these are interest based can cause threat It is simply an accepted fact that there are sufficient Muslim investors and borrowers in both Islamic and non-Islamic countries to warrant the attention of traditional banks who seek to serve such clients and capture a potentially profitable slice of a still relatively untapped market. Just as interesting and useful for non-Islamic bankers are the lessons learned from the innovation and creativity applied in meeting Islamic criteria.

1.4

Aim of the study 6

To evaluate that whether System of Islamic Mortgage is satisfying UK credit market needs and whether customers are aware of it or they understand it entirely.

1.5

Research Objectives

To attain the aim of the study, objectives are drawn which are stated as under; To study the Islamic mortgage system which can positive effect on UK credit market To study the Islamic mortgages which can be able to enhance the investment opportunities in the UK and whether it can play prominent role for the UK economy To study the Islamic mortgage which has a potential to perform active role in the UK financial market and its growth in market development To study that the affects of Islamic mortgage system in the UK environment for growth and development of To study the customer satisfaction in Islamic mortgage system To study Islamic mortgage system in position to survive and develop in the age of competition and globalization To identify that why Islamic mortgage system is fairer To study and analyze the Islamic mortgage system why have solution of UK credit crises

The objectives of the study would be circumspectly completed in order to attain the aim of the study.

1.6

Research Questions Does Islamic mortgage system have positive effect on UK credit market? Do Islamic mortgages able to enhance the investment opportunities in the UK and whether it can play prominent role for the UK economy? Is Islamic mortgage has a potential to perform active role in the UK financial market and its growth in market development? Is there any affect of the UK environment (political, social and geographical) for growth and development of Islamic mortgage system? Is Islamic mortgage in position to satisfy its customers? Is Islamic mortgage system in position to survive and develop in the age of competition and globalization? Is Islamic mortgage system solution of UK credit crises? Why Islamic mortgage system solution of UK credit crises?

1.7

Scope of the research

The present study has highlighted the distinct elements of Islamic Mortgage System which can help in overcoming the present crises in the credit market.

1.8 Significance of the research Misconceptions can lead to losses and present research has identified the significance of degree of aggregation and revealed the evaluation approach which may be formed with the help of simple information. In order to understand that how present crises in the credit market appear, Is the risky practices of lending of financial organization become a factor behind certain depression in the developed and underdeveloped economies, furthermore, it is also essential to understand the history of this crises in detail. In this present study researcher will highlight that how banks and other financial institutions can make changes in their lending rules and regulations to overcome this present crises in the economy due to collapse of credit market.

1.9 Summary This chapter has introduced and provides history of Islamic Mortgage System along with its impact on the credit market of UK, other countries around the globe and more importantly on the society. Researcher tried to summarize Islamic Mortgage System with its relevant classifications in few words. After introducing the system, researcher described the aims and objectives of her research following by a comprehensive evaluation of the mortgage system presented according to the basic principles of Shariah. In the coming chapters, basic fundamentals, systems, advantages and disadvantages will be discussed in detail.

CHAPTER 2 LITERATURE REVIEW

Islamic financial system is comparatively smaller as compared to the traditional systems of finance and it is not easy to describe exactly that what is its size but this sector is growing at a high pace with the passage of time. At the end of 19th century the size of Islamic banking was about $100 billion which was $ 5 billion at the end of year 1985 (Iqbal and Mirakhor, 1999). Today there are 250 Islamic Financial institutions which are working in Dubai which were only 34 in the year 1983 as it is reported by Mohammad Khalfan bin Kharbash, Minister of Financial matters of UAE who is at the same time working as a Chairman of Dubai Islamic Bank, according to him assets of these financial organizations are about $ 200 billion (Phillips, 2001). These Islamic banking organizations are growing at a varied rate of 15% to 40% (Hamwi and Aylward, 1999). Still the size of Islamic banking sector is as low as its total assets are less than the total assets of HSBC $569 billion in 1999 but the effectiveness of this financial system cannot be denied (Azzam, 2000). However, these systems of Islamic Finance are becoming famous day by day in countries where either Muslims are in majority or minority. The size of Islamic Banking in Middle East could be realized with the help of facts that the total assets of this segment are almost $18 billion along with equity of $1.8 billion. Bosnia International Bank was established in March 2001 which has to cover the region of Balkan with its Islamic services in retail and wholesale segments in Bosnia (Carvalho, 2001). Most of the Islamic Banks are enjoying good profitability along with a good growth rate. For instance, the return on equity of Al-Rajhi Banking and Investment Corporation was 25% in 1997 with a profit of $347 million in that year (Hamwi and Aylward, 1999). The profitability of smallest bank of Saudi banking sector, Al-Jazira increased up to 41% by the end of year 2000 (MEED, 2001). The modern banks which are providing Islamic financial services has a strong base of interest free banking services as reported in The Banker (2011). However, considering the needs of market Islamic financial products are designed in way that there importance is increasing day by day and it is substituting conventional financial services in many parts of the world since last ten years. The total assets of Islamic Banking Sector are almost more than US$1 trillion till time and these are growing at a growth rate of 25% on a per annum bases, these Islamic Banks are growing speedily in Europe, Asia and Middle East (www.thebanker.com). According to The Banker (2011), despite of the fact the world is facing severe recession today and because of it people have less confidence in the financial systems of their countries but after the publication of The Banker stating a list of 500 financial organizations which purely engaged in the Islamic finance this sector is growing day by day. The assets which are according to compliance of Shariah and belong of Islamic financial organizations increase considerably by 21.45% as the figures increase from $895bn to $1,087bn during the period of 2010 to 2011. These figures are helpful in highlighting the strength of this segment. There are many techniques which are highlighting the importance of this sector; however, online intelligence technique is a 9

new one as it is comprehensive. It is become very easy for the investors to compare the financial organizations online with the help of this technique as there are 675 member organizations from 55 different countries of the world which are ranked over there. So, the investors can also rank these financial organizations one the basic of their profitability, assets, and business worth both countries wide and world wide. Every one there can see the growth of Islamic banking sector by observing the ranking of top 500 banking organizations which are growing with the passage of time. (www.thebanker.com). According to the facts and figures about Islamic financial services it can be revealed that a considerable increase has been observed in the volume of activities of these organizations along with the increase in their number and products of this sector are very distinct as compared to the products of traditional banking. There are numerous methods with the help of which one can measure the size and limit of these financial organizations but it can be seen clearly without using these methods that there is a considerable increase in their size and volume of activities. Evaluation of the potential of this finance sector is the first method which could help in measuring the size of this sector but size in this case cannot be highlighted in terms of figures but the possible growth of this sector is just explained in terms of its potential in shape of comments (Jafri , 2006). According to the statistics and opinion of the experts of banking sector, Islamic financial system is becoming popular in the countries in which it is already operating and in those in which it is newly introduce and hence capturing a big share of the market. There is a considerable increase in the profitability, return on equity and worth of assets of these Islamic financial organizations and it is approximately growing in banking sector at a growth rate of 15%, this figure tell all the story that how much attraction these services have for the customers (Jafri, 2006). Simple averages, percentages or mean can be another medium for the evaluation of up coming share of Islamic banks in the banking industry of the world, where savings will be the base of such an evaluation which these banks already have and will get from their customers in the near future (Aayan Report, 2005). We cannot neglect the subjective importance of this concept as no doubt it has attraction for the Muslims of the world and it is an expectation that volume of savings by the Muslims for these banking organizations will increase considerably by 40% to 50% in the coming decade (Aayan Report, 2005). Another method which could be helpful in measurement of the size of Islamic Financial Services is the comparison of financial indicators indicating size of this sector and evaluating the growth. For example, it is expected that assets of this sector will increase by 24% on annual basis and will reach at $ 1.85 trillion till the end of year 2013 and this did not involve assets of any conventional banking business dealing in Islamic Finance, moreover, increase in the assets of Islamic Insurance industry is also excluded here in this case. In this digital world, most of the human activities are being assisted by computers and electronic products same is the case with the banking sector as the E-commerce is being significant element of this sector, so considering it the role of these electronic commerce products in the Islamic banks cannot be denied as till the end of year 2006 the worth of 10

this sector was $6 trillion (Khooja, 2006). The importance of this sector of the world economy cannot be denied as it worth $ 1 trillion and it is becoming famous with the passage of every day (Al Manea, 2006). Moreover, there is a fourth method which could assist in measurement of the size of Islamic Finance Industry, which is comparison of the assets of banking sector and its growth in past and considering that rate the expectation about the future (Al Suwaydi, 2005). Although size of these financial institutions is comparatively short as compared to large banking organizations of US where their current assets are approximately $250 billion, whereas current assets of Islamic Banking Sector are $300 billion but these are growth from 15 to 20% at an average (Boodai, 2005; Aloush, 2005). Furthermore, the subscribed capital of Islamic financial Institutions is not greater than $25 million and there is no Islamic banking organization which has subscribed capital of greater than 1 billion. Assets managed by Islamic Financial Organizations are almost $400 billion to $500 billion and number of these organizations is growing but currently these are 300 working more than 40 countries of the world (Al Muzaini, 2006; Boodai 2005). All these methods are helpful in highlighting the growth of Islamic Financial Sector, moreover, the above stated facts and figures are helpful in indicating the size of this sector and all these forecasts are based on present facts and figures and the data is not enough credible but still it can be said that sector is growing. International markets, Gulf countries and Kuwait are the three major markets for the Islamic Financial organizations. According to the statistics collected by central banks in these countries like Central Bank of Kuwait (CBK) and many other financial organizations working at the global level the size of these Islamic Financial Organizations is measured with the help of various techniques but there is not doubt that results have shown that this sector is growing, especially in insurance and investment sector other than banking sector (IMF 2004; CBK 2004/2005). No doubt that this Islamic Finance industry is growing in different countries of the Gulf and providing equal services as compared to conventional financial organizations. The researchers and expert of this sector are agreed on the fact that this sector is growing all around the world but still there are doubts about its size in the world economy. The growth of this Islamic banking sector in Gulf countries and in Kuwait is being described by Khooja (2006). The general expectation about the growth of this sector in Gulf area is that its total equities were $210 billion till the end of year 2010. Investment sector is becoming the main strength of Islamic finance industry as according to some experts of this sector the industry will be in competition with traditional banks in this sector as it is growing very fast (Bahrain Monetary Agency, Governor 2006; Hassouane 2004; El Qorchi, 2006). The volume and size of Islamic Banking Services is increase considerably since last ten years which shows the development of this sector and this sector is now becoming a significant part of international economy (Al Bahar, et al, 2005). Countries of the world are demanding more and more Islamic Financial Institutions as their confidence on this segment is increasing with the passage of time because it is indicated by their investments 11

in this sector as the size of assets of this sector is increased considerably by 24% since last five years as discussed in the previous discussions (Al Bahar, et al, 2005). However, there is a short amount of information that is available with reference to international activities of this sector. For example, the facts and figures on Islamic financing across the traditional borders are not available, moreover, there is no information about the transactions that are taking place between different International Islamic Financial Institutions and there is also shortage of facts and figures about the investment of this sector in the real estate business. The growth and development of Primary and secondary securities can be affected by this shortage of information about the Financial Industry of Islam. The managers in these Islamic Financial Institutions are not playing their role in terms of publishing the facts and figures of their organizations which could be helping in making comparison of these Islamic Institutions with in the Islamic Finance Industry and with the conventional financial services (El Qorchi, 2005). So, the discussions in this present research about the lack of financial information about the Islamic Finance Industry may evoke researchers to work on this issue and to gather more and more facts and figures for comparison of this industry with other financial services of the world. The major reason behind the exposure of this Islamic Finance sector is the base of this sector that is sharing of profit and loss with the help of various modes of Islamic Finance like Musharakah in which equities are being shared for joint benefits and losses and a mixed structure in shape of Ijara and Mudharabah. But all these investment modes have greater risk as compared with other traditional modes (Ebrahim, 1999). An Islamic Bank is the bank which has to follow all the rules and regulations of the environment in which it is working and those which are stated in Shariah the main Islamic Law. It is for that reason in these type of financial institutions there are two types of following of legal system one is based on traditional judicial system and other is based on Shariah (AlBahar, 1996). "Islam is deeply concerned with the problem of economic development, but treats this as an important part of a wider problem, that of total human development. The primary function of Islam is to guide human development on correct lines and in the right direction. It deals with all aspects of economic development but always in the framework of total human development and never in a form divorced from this perspective" (Abbas, S. Z. M., Hamid, M. A. A., Joher, H. and Ismail, S., 2003), as the Shariah is a complete law that guides in all the walks of life so it provide comprehensive guidelines about the financial matters as well like about consumption, production and distribution of wealth (Ahmad, N. and Haron, S., 2002). Islam is clearly against the Interest and does not allow it as a reward against the investments, in fact it provides a clear guideline to the world that one cannot be rewarded if he is saving some amount from his monthly income unless until he had invested this amount in any business at a risk of loss but for earning profit. Without engaging funds anywhere in any business against the risk the reward which a person gets against his investments is regarded as interest (Ahmed, N., 2000). As the base of Islamic modes of financing is sharing of risk about the assets and organization it is for that reason there is a greater profitability observed in Murabahah as compared with traditional loan facilities of the traditional banks, so, it can be said that 12

Islam has different concepts of earning profit which are different from earning interest through traditional mediums (Iqbal and Mirakhor, 1999; Rosly, 1999). According to Kaplan and Andrade (1998) interest is so worse for the economy of the world as it could bring many disasters in the world like present credit crises which is merely caused by the collapse of banking sector in UK and US where banks were only interest to earn more and more amount of interest without having any intention for the redemption of principle amounts. So, as the base of Islamic banking is on the sharing of risk, it is for that reason it seems to be based on a basic principle of equality resulting well fare of every one engaged in a credit transaction. Kahf (1997) described the strength of Islamic Financial securities with fixed amount of profitability in shape of Ijara financing. In Islamic management of finance the basic principle to reduce the risk of investment is based on its sharing (Ebrahim, 2001) and exchange with parties (Iqbal, 1999). Moreover, according to him, one can reduce the risk of loss against his investment with the help Islamic modes of finance as these are comparatively more reliable according to their development and implementation. There are many parts of the world which are still unaware about the Islamic financial services like in Singapore where Muslims are minority; most of the population is still unaware about it whether these are Muslims or Non-Muslims (Gerrard & Cunningham, 1997). Moreover, the behavior of Muslims and Non-Muslims towards the use of these Islamic facilities is also variable in many parts of the world as being a Muslim every one want to avoid interest. For instance, in a survey it was inquired from the respondents from the Muslim community that if the profitability in Islamic Banks decrease resulting a decrease in their share of profit 62.1% were in favor of retaining their investments in that banks, however, results were not surprising in case of Non-Muslims as according to their response 66.5 % of them will draw back the holdings. There are some similarities in the Islamic Banking System and traditional banking system like both these are custodians of the money invested in them and work as an agent for their depositors but these differ in terms of rewards as in Islamic banks the rewards are based on risk of profit or loss, however, in traditional banking the reward is fixed in terms of interest (Dar et al., 2000). Moreover, the basic structure of Islamic banking facilities is completely different from traditional financing facilities but the organizational structure of both these type institutions is very similar to each other. There are many ways with the help of which we can define facilities of banking in Islam (Al-Zuhayli, W., 2002). Like it has been defined by General Secretariat of OIC as An Islamic bank is a financial institution whose status, rules and procedures expressly state its commitment to the principle of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operations (Al-Zuhayli, W., 2002). There are many differences in the traditional and Islamic banking facilities and one is because of the introduction of Profit and Loss saving account which does not ensure fixed amount of profit as the deposits against these accounts are being invested in some sort of business on profit or loss bases. In some case people dont like to invest in such accounts having less confidence on its credibility and in the same way bank face issues with reference to its assets in this context. Islamic financial system is not a new one to the world but in fact it was introduced in 13

seventh century but there are rumors spread by media in the west part of the world that it is a system which is still under development and introduced newly (Islamic Finance: A Euro money Publication, 1997). The core of Islamic banking is that it is free from any kind of interest as stated by Bakar, M. D., (2000). Moreover, in Islamic world there is no place for the interest and interest base financial services, but the basic principles of Islam are based on sharing of risk and equal distribution of income and wealth resulting an increase in the share of this sector in the world economy. The traditional banking services have a possible threat from its competitor from the Islamic financial industry as there is considerable amount of Muslims population in all the parts of world whether these Muslims are a majority there or they are living as a minority but currently these traditional banks are earning a huge amount of profits from these investments of Muslims. Non-Islamic banks are working hard with all the creativity and innovation to invent the products which are similar to Islamic laws, however, Islamic banks are using all their capabilities to expand their businesses more and more without a slice of interest. There are some investments which are considered as more close to Islamic principles as compared to other but in case of development of all these products the major issue that is needed to be considered is interest is not allowed as it is earned without any efforts and risk. Project investment finance are common equity investment are very similar to the Islamic financial services according to their structures (Bakar, M. D., 2000). The liability of the investor in case of these finance is not limited moreover there is no ensured profits in this case. Islamic banking system is more close to Japanese, German and Spanish systems where there is more trend of investing as compared to US and UK systems of banking where people are more attracted towards lending against the interest. For the proper taxation, investors from the Muslim community tend to convert the amount of interest in capital benefits so they make investments in Zero-coupon securities or discounted bonds to get capital gains instead of interest. Islam did not only prohibited interest or Riba considering it unethical and injurious for the society but it also forbid activities like gambling, narcotics and other things which are not good for humans of the world. In many of west countries these things are also now considered unhealthy for the society. It is natural that every one become greedy to get more and more share in profits and want to avoid the risks as much he could but Islam neither allowed Muslims to be greedy nor it allowed to burden on party with all the risk of the transaction. However, there are some Muslim banks which are working more closely according to the traditional banking principles but in general there should be these six essential characteristics of these financial systems: Interest free, Used more for the productive purposes like trade, It is more close to equity financing, Safe guard rights of every individual engaged in the credit transaction, Implication of the system could be on every type of business, 14

Make investments in an ethical manner.

The above discussion reveals that Islamic investments is all about investing money in an ethical manner without exploiting the rights of other involved in the transactions and are based on profit and risk sharing rather than on interest. In the economies where Islamic banks are operating with other banks, conceptually changes in the rate of interest in the market affect in Islamic Mortgages (Rosly, 1999). Due to fixed rate of interest in accordance with the Bai Bithamin Ajil (BBA) on which most of the Islamic Banks base their financing facilities, interest rate risks are attached with Islamic Banks as normally interest rate changes with the variation in the forces of demand and supply. According to Rosly an increase in the rate of interest further increase the Base Lending Rate and Bank rates of interest on deposit by the traditional banks and all these corresponds to the changes in the market rate. So, there would be no change in the profitability of the traditional banks (Johansen, S., et al., 1990).

One the other hand the Islamic Banks as following the BBA profitability rules have static interest rates so that result decrease in the profit margins on deposits of Islamic Banks. This attracts the investors towards the traditional banks where interest rate correspond to the changes in the market rate (Obiyathulla I. B., 2004). When there is tendency of increase in the rate of interest the repayments of the current BBA mortgages have positive impacts on the asset side as these become less expensive as compared with the repayments against the traditional financing. As a result the clients who are attracted by the profits will select the BBA financing when there is a possibility of increase in the rate of interest in the future (Hairetdinov, R., 1998). So, it will impact positively on the demand of BBA financial because of substitution effect. However, because of having the lower amount of deposits, Islamic Banks will not be able to finance such an increased demand as they not even have an alternate to take credit from Islamic inter-bank money market as it will be expensive for them. The decrease in the rate of interest favors the traditional banking due to sustainable profitability caused by adjustments in primary deposits and BLR (Base Lending Rates). An interesting fact is that the Islamic banks are bound to follow that lower interest rates directed by traditional banks in order to retain their deposits. This decision of Islamic bank is logical as it will help the banks in increase their profit margins by reducing their rate of return on the deposits as the profit rate is fixed because of BBA principle. As Islamic Banks follow BBA rates of profit that are fixed it will impact negatively on their financing facilities as the traditional financing facilities will become more cheaper (Pesaran, H. M., et al., 1998). Hence if there is a decreasing trend in the market rate of interest customers will like traditional credit facilities more as compared to Islamic credit facilities that results an increase in the demand of traditional credit facilities and decrease in the demand of Islamic credit facilities. Hence the after going through the theoretical concepts, it is clear that fluctuations in the rates of interest create substitution effect on the demand of Islamic and traditional credit 15

facilities and the main cause behind is the static BBA base profit rate of Islamic banks. So, Islamic banks as these are depending more on the BBA financial would not be considered as competitive as the traditional banking facilities are. There are two major reasons behind the importance of this research study. The first reason is that, in this study the core is to research the changes which appear in the Islamic banking system due to the changes in rate of interest and impact of these changes on the investment in Islamic banks (Sudin & Ahmad 2000). In the previous researches there is no discussion about this issue but in these researches the topic was just to evaluate the impact of interest on the investments in Islamic banks so the present study will provide guideline in this context as well. The second reason is that in this research, researcher had taken the duration under consideration which belongs to financial crises in Asia in which the rate of interest was very low. It is observed by the researcher, that in any kind of this period what is the behavior of investor towards Islamic and non-Islamic banking facilities (Obiyatullah 2004)? According to their hypothesis, it was assumed that investors will be more attracted towards investing their holdings in BBA as these will be comparatively better as compared to traditional facilities of this kind. So, when the profitability from the BBA will reduce in a period when such kind of interest is comparatively higher all these shows that Islamic banking system could be tough competitor in a period where interest rate is falling (Rahmatina 2007).

Rosly (1999) provides the theoretical explanation of the impact of interest rate changes on Islamic bank performance in the dual system. He emphasizes that Islamic banks are exposed to interest rate risks and the root cause of this phenomenon is the overdependence of Islamic banks on BBA financing where the profit rate (financing rate) is fixed. Rosly explains that when interest rates are rising, the base lending rate (BLR) and rates of return on deposits of the conventional bank would change accordingly to changes in the market interest rate. As a result, the profit margin of the conventional bank will not be affected. However, the Islamic bank cannot increase the rate of returns on its deposits because the BBA profit margin is fixed. As a consequence, Islamic deposits give lower returns. The substitution effect comes into play where depositors prefer the conventional banks. On the asset side, customers may find that the installments for existing BBA financing are relatively cheaper than the installments for existing conventional loans during times of rising interest rates. Hence profit motivated customers would choose BBA financing if they expect interest rates to rise in future. Hence, the demand for BBA financing would rise. However, the Islamic bank may not be able to fulfill this increased demand for BBA financing due to the fall in total deposits. The Islamic bank may not be willing to borrow from the Islamic inter-bank money market because the cost of funds in the money market is usually higher than that of bank deposits. In the case of falling market interest rates, the conventional bank is able to adjust both the deposit and base lending rates downwards hence maintaining its profit margin. It is interesting to note that the Islamic bank would also reduce the rates of return on deposits in line with the conventional deposit rates. Since the profit rate of BBA financing is 16

fixed, it is rational for the Islamic bank to lower the deposit rates hence widening its profit margin. In the case of Islamic financing, because existing BBA profit rates remain fixed customers would find that existing BBA financing is relatively more costly than existing conventional loans (Haron, S., et al., 2000). If customers expect the market interest rate to decline further, they would prefer conventional loans rather than BBA financing. Hence, the demand for conventional loan increases while the demand for BBA financing falls. The above explanation theoretically shows that any changes in the market interest rate would, on the asset side, lead to a substitution effect between Islamic and conventional bank financing. It is recognized that the root of this problem is the structural weakness of the fixed BBA mechanism. Hence overdependence on BBA financing by the Islamic bank has limited the banks ability to compete with the conventional bank in the dual system. The objective of this study is to examine the impact of interest rate changes on Islamic bank financing. The main variables for the study are total residential property financing of conventional banks (RPFcv), total residential property financing of Islamic banks (RPFis), and the base lending rate (BLR). Total residential property financing is chosen because Islamic bank financing is mainly dealt with the concept of BBA. In comparison, the level of conventional loan is measured by total residential property loan of conventional banks. In terms of the BLR, RPFis seems to respond readily to a shock in BLR and the response seems to diminish by the fourth month. This finding suggests that given the fixed rate of BBA financing, any change in the base lending rate would immediately influence customers decision in obtaining Islamic bank asset financing. This result is consistent with the theoretical discussion that an increasing base lending rate would mean existing BBA financing is relatively cheaper and that would induce customers to obtain financing from the Islamic banks. On the other hand a decreasing base lending rate would induce customers to obtain financing from the conventional banks. Conceptually, customers of the Islamic bank are not guided by the profit motive and thus, any changes in the base lending rate should not have any significant changes to the level of Islamic bank financing. However, this study found that RPFis seems to respond positively to shocks in RPFcv & BLR respectively. However the response to BLR shocks is relatively more immediate. This implies that Islamic bank customers are profit motivated and their decisions to obtain BBA financing will be influenced by the substitution effect based on the movement of the BLR (interest rates). During rising interest rates, BBA financing would be more popular and during falling interest rates customers would prefer conventional loans rather than Islamic financing. Hence they can conclude that because customers are profit motivated, Islamic bank financing in the dual system is exposed to interest rate risks despite operating on interest free principles (Haron, S., et al., 2000). Referring to the period of study, the BLR in Malaysia has been falling or remained at low levels during that period. This implies that Islamic bank financing has been relatively more expensive than conventional loans during falling interest rates. It follows that the 17

demand and growth of Islamic financing would have been slower relative to conventional loans during the period. Since the root cause of the interest rate risks is Islamic banks overdependence on BBA financing, it is recommended that Islamic banks detach themselves from interest rate movements by moving away from fixed rate instruments (BBA) into more profit sharing financing or rent based financing (leasing). In profit sharing such as mudarabah or musharakah, financing, returns are based on real sector performance. Hence interest-rate is an exogenous factor in profit sharing. In the case of leasing, the cost of financing is based on the rental rate which is flexible and not fixed like the BBA rate. The rental rate can be revised periodically to reflect market conditions. Hence the Islamic bank would be in a better position to mitigate the interest rate risks compared to its ability under the BBA fixed rate system. According to Kahf, M. (2002) though interest free banking disagrees with the interest based banking yet interest free banks have the similar credit risk as by the conventional banks. Therefore Basel II has suggested that the calculation of the minimum capital requirement should be the same as required by the conventional banks. The Islamic Banking is different in nature from traditional banking. This article first discusses the Islamic financial operations then analyzes the Islamic procedure which has been introduced in Pakistan since 1985. This article revealed that Islamization has moderate effect on this sector because the banks adopted the system that is closely resembles to traditional system. Another reason is that they are state owned (Hairetdinov, R., 1998).The Islamic banking has not been applied the fully procedures as described by the pillar II of the new Basel Accord. The application of the said proposals does not create barriers for the Islamic banking and finance (Kahf, M. 2002). It has been analyzed that conventional banking system is prevailed in all over the world but as the world is becoming global and innovations are required to survive in the global market. According to this phenomenon the conventional banks have introduced Islamic banking and some new Islamic banks have also been established in all over the world. Islamic banking is on the infant stage thats why this vehicle is facing some challenges and problems (Ahmad & Hassan, 2007). Another study has been conducted by Ahmad & Hassan, (2007) in Bangladesh regarding regulations and performance Islamic banking. The most important findings of this research article are that there is lack of regulatory framework for its proper functioning according to Shariah. There is also lack of interbank money market which also affects the performance of the Islamic banking. The discrimination has also been observed regarding legal reserve requirements. The researcher suggested that in Bangladesh the independent banking act should be constituted to control, guide and supervise the operations and practices of the Islamic banking. So that the legal support to the stake holders may be provided. The study has also been conducted in the United Kingdom regarding problems, challenges and opportunities facing by the Islamic banking. The data was collected from the senior officials of the banks. The main problem faced in the United Kingdom that is heterogeneous and potential clients. Furthermore the lack of expert staff and competition from the conventional banks also faced in United Kingdom. It has been concluded that the e-banking can play pivotal role for the success of Islamic banking. There is need to sit 18

together to the UK officials and Islamic banking representatives to discuss the challenges of the Islamic Banking (Karbhari, Naser & Shahin, 2004). There is need to recruit professional individuals who have know how about the Islamic banking. It is contended that the perceptions of senior. So that such problems may be resolved by using such strategy (Karbhari, Naser & Shahin, 2004). According to El-Din, S, Abdullah N.I, (2007) Malaysia is the first country who played the vital roll in Islamic banking. It also introduced the dual banking as well as pure Islamic banking. In this article an innovation has been brought out that is hire purchase and also known as alijara wa iqtana. The Islamic banking is going very successful but there is still need to bring changes by the policy makers. To make strengthen the Islamic banking transactions there is need to develop strong legal framework. There is also needed to make strong both the operational regularity and substantive laws to resolve problems relating to Islamic banking (El-Din, S, Abdullah N.I, 2007). The Shariah should be analyzed to make new innovations instead to impose restrictions. There is need to explore the potential and wisdom of Shariah. There is immense need of cooperation is required to make collaboration among Shariah scholars, researchers, academicians and researchers to conduct the study in depth to make strong Islamic products(El-Din, S, Abdullah N.I, 2007). The government and other agencies should also make efforts for the new avenue of Islamic banking and hire purchase. The most important is that the government should remove the uncertainty regarding Islamic hire purchase (El-Din, S, Abdullah N.I, 2007). According to Garas, N.S, (2007) that the globalization has affected their life politically, economically and financially, there are both aspects in this globalization. The positive aspect is that there is the movement of human capital and new technology among countries. On the other side of the coin the government is unable to control the flow of capital. The oil prices flourished the investment in GCC countries and also encouraged the Islamic finance. There is no doubt that Islamic financial institutions having potential for growth but still there are certain challenges. There are two types of these challenges internal and external. Internal challenges include that the customers still rely on the conventional banking system and the numbers of the current IFIs are not enough to meet the requirements to international transactions. Furthermore the transaction system is still premature to attract new clients. There is also lack of unified regulatory system for the products and transactions (Garas, N.S, 2007). On the external side there is a gap between the IFIs due to which the products are different in different countries. The IFIs should establish the effective communication system to reduce such gap and strengthen the process to enter in the international market. In such way the status of the IFIs will be increased and customers may be attracted from the non Muslim countries. In the end the IFIs should introduce the training mechanism to make expert their employees to attract the customers (Garas, N.S, 2007). According to Khan, F.M (2007) the global growth of Islamic banking is taking advantages of its uniqueness to meet the challenges of growth though the status of the Islamic banking is growing rapidly. But still the institutional arrangement is necessary to take part in the global economy. The Shariah compatibility should be judged by qualified 19

Shariah scholar because for any medical problem the person will consult with the medical specialist to get best solution. Thats why the solution of the problem in Shariah, it can be taken from the qualified Sharia scholar to get the exact decision. By this way a good institutional structure may be developed. I believe it may be the right time to start simply with an international association of shariah scholars for the finance industry (Khan, F.M 2007). Another study has been conducted in Malaysia and Bahrain by analyzing the financial record of seven banks. The purpose of this article was to analyze the Islamic financial products viability to interest based contracts. It analyzes that Islamic banks pay Zakat and finance economic activities according to Shariah. However it concludes that there is need to make legal frame work so that the Islamic financial products may regulate in the Islamic financial market Samad, A. Gardner, D. & Cook, J.B. Another article has been written in which the author determine the determinants of the Islamic Bank Profitability. This article demonstrates that all sources of funds are correlated with the profitability. It has also been observed that inflation and interest rate also affect the Islamic financial products. This study found that there was no significant variation in earning between Islamic banks in competitive and monopolistic market. However there was strong evidence that benefit of the investors has been observed in monopolistic market. The study demonstrated that banks performed well in competitive market then their counterpart. Therefore protectionism policy adopted by the Muslim governments is inappropriate and could distort future progress of Islamic Banking. In the end it has been recommended that establishment of more banks will make it more viable and efficient (Ismail, H. A., et al., 2005). According to Kahf, M (2002) the Islamic banking is new discovered Islamic economics. Islamic banking is a system which really follows the Shariah rules and regulations and Islamic economic system also abide by the Shariah. In 1950 to 1960 a study was conducted in Egypt and Malaysia regarding interest free banking. But this study did not put any face value for Islamic banking. The first Islamic bank was established in 1994 in Dubai and international Islamic Banks was established in 1976 and now it has 53 member countries. Now a days Islamic bank has been established almost in all the countries around the globe. Some institutes have been established in America even small in numbers bit they are using Islamic financing. The purpose is to create strategic alliance between Ulama and Bankers, further to develop Banking techniques by this Alliance (Kahf, M., 2002). Today Islamic banking is really in immense need of rethinking to compete in this rapidly growing world. There is also need to redefine the structure for success in future. The Islamic banking has really been appreciated by the conventional banking and it also finding ways to become main stream banking. The Islamic banks should enhance their efficiency to cope up new projects. Merger of the Islamic banks is compulsory for the survival in this era. There is need to increase the size, capital and should create ability to create assets (Kahf, M., 2002). Identify the determinants of the profitability are more important for the researches. In past decades the researchers has been found determinants for the profitability. But all previous study has been conducted for the conventional banks. The Islamic banks are still 20

waiting for such kind of study. The Kahf has been conducted study about the determinants of profitability of Islamic banking. The researcher has been identified the internal and external determinants of the profitability of the Islamic Banking. The money supply also plays an important role for the profitability of the Islamic banks (Haron, 2004).

21

CHAPTER 3 RESEARCH METHODOLOGY

3.1 Research design A system which helps in inquiring and investigating is known as research. In this process of research, evaluations are conducted on the basis of certain phenomenon, more importantly it bring into knowledge emerging and developing ideas and concepts. Like other researches, in this particular research, researcher also used different methods and included these in this chapter of methodology. It is proper way with the help of which proper interrogations take place in shape of a process of inquiry. The prime questions to be answered by exploratory questions start with the words how and why and target those things also which cannot be observed clearly with such methodologies. Moreover, this type of research is useful where researchers need to link up theoretical ideologies with particular phenomena and describes interconnections and informality. In case of descriptive research, which is also a type of methodology, researcher needs to find out the answers of the questions like when, what, where and how.

3.1.1 Quantitative Research Design Interdependency between a phenomena, which is usually regarded as an independent variable is checked with reference to another phenomena which is regarded as depended variable in quantitative type of research. The design of a quantitative research may either be empirical or descriptive. In case of empirical researches, researcher at first measures the subjects and than went for solutions however; in case of descriptive research subjects are measured for only one time. While measuring correlation between variables, in case of a descriptive research, researcher might need a minimum of 100 and even a maximum of 1000 respondents to include in his sample. However, in case of empirical research 10 respondents may be needed. If participants are being selected on random bases from the population and if there is greater involvement rate, all this will lead to un-biased study of relationship between the variables. If the respondents are treated on random bases the results of empirical research will also be un-biased. The features of the participants have an influence of the correlations being measured during any kind of research. This effect of the participants can be controlled by selecting those individuals who are less varied from each other and measuring the distinct features of their personalities and involving the results during analysis stage of the research. In case of an empirical research, measurement of variables needs to be done in a way which could describe the system of the treatment. The core of the quantitative research is to measure the correlations between the variables. These variables may include time, activity level, treatment and weight. There are various techniques of statistics like measurement of correlations, highlighting the distinctions 22

between mean values or evaluating relative frequencies, all these techniques help in measurement of variables of the research in which subjects may be cells, individuals, tissues or animals. During this present research researcher also used the statistical tools for the data analysis and her emphasis is on the structure of quantitative research. In the beginning it is being explained that which type of research can be used. Furthermore, researcher described that what is the impact of distinct features of sample on her capability of commenting about the correlations between variables in a given populations. Moreover, researcher had applied different techniques for the selection of sample size. In the end researcher, selected the type of variables that are being needed for her research. 3.1.2 Quality of Designs The worth of evidence produced with the help of different designs varies from each other in order to determine the relationship of variables with reference to cause-and-effect. In case where there is no existence of any correlation between the variables the research may be properly controlled in terms of case or that might be cross-sectional. However, case where these researches claim any correlation between the variables it is normally a fundamental link. It is for that reason when there is questioning that researcher should pursue for a design or not a case control or cross-sectional research is better in such situations. The coming levels of research are more complex and difficult but these provide outcomes which enough influential to prove the relation between cause and effect. In case when researcher is to determine the affect of one variable on another empirical researches are proved to be a best selection. In descriptions researches which aim to determine a relationship between cause and affect a major issue is confounding. When any single or all variables associated with each other are linked with a third variable it generates the problem of confounding. For instance, while studying a population an inverse relationship can be shown easily between an activity based on a habit and various kinds of degenerative disease. As a relationship between people with old age and their efficiency in context of their diseases can be established easily because it is pre-assumed that people with old age are comparatively less efficient as they have more diseases as compared with youngsters. To control this issue there are confounding elements on which we need to focus like while selecting the participants for a particular research we should consider the age factor as well. 3.1.3 Choosing the measurement The selection of the right measurement affect the entire process of research as merely all the conclusions, findings and suggestions are based on it. There are numerous tools that are being used by the researchers but most of them are not in accordance with the real world situations as they do not measure what is needed to be measured. 3.2 Data collection methods and procedure

Quality information on the current research topic is available but these are relatively small as compared to the depth of the issue, it is for this reason the data collection was 23

remain a challenge for the researcher. 3.2.1 Sampling Random method of sampling is being used by the researcher as per her for her handiness and she have done this near to her residence. It is always difficult to target the whole population of the research; it is therefore, researchers select a sample for their research involving participants possessing all distinct features of the population. The major issue is that people are no more interested in the samples as they have their major interest in the population. So, considering it researcher should select a sample which possesses all the features of the population with the help of random sampling technique. In order to ensure that all the demographic features like age, sex, races and religion are available in the sample researcher might take the help of stratified random sampling method. The process of selection is based on biases in case of a sample which cannot represent the features of the population. If there is a great difference between the averages from the sample and averages from the population this shows that there is a great difference in the statistic and the selection of sample is biased. Socioeconomic position and age are the major factors which help in highlighting biases in the sample. So, in order to avoid biases there is a need to greater compliance rate showing that greater number of individuals were being contacted to participate in the research which become respondents for the research and a compliance rate of 70% is regarded as satisfactory by the journal editors. Random selection should be the base of sampling other wise selection could be regarded as biased and the effect of the treatment may vary. Researchers want to get the result of the treatment that they applied on a research so there should not be any biases while selecting the sample, researcher while allowing individuals to form their groups or while making their groups should considering that he could have the result of his treatment rather than just having differences in the groups. So, balanced groups possessing participants having similar features like age, sex and performance, can provide effect of the treatment. The value of dependent variable before test is most significant value. While making designs for the research and in the process of selection of the participant researchers try to minimize the differences between the participants in terms of their features and attitudes. The focus is to get the required effect of the treatment. There is an issue with the method that affect of the treatment could be generalized only on the participants which belong to a specific sample having similar features and attitudes. There need to be a balance between accuracy and application in accordance with the nature of research. If we have greater focus on the application than there is a chance that features and behaviors of the participants may vary up to a great extent. 3.2.2 Selection and population of sampling Researcher has considered the diversity of respondent while select sample for her research and has included people belonging with the both sex, customers of the banks, 24

experienced employees, business people, shopkeepers and individuals that live near to her residence. The demographic features of the respondents, however, were varied. 3.2.3 Instrument of data collection used for present research The primary data for the purpose of this research study was collected with the help of self administered questionnaire. Researcher was administered the questionnaire herself and was helped the respondents in filling up the questionnaire. All the customers of Islamic and traditional banks of selected areas were the population for this research moreover; businessman, common people, observers and experts were also included. 3.2.3.1 Questionnaire Researcher designed the questionnaire based on closed-ended questions in order to collect the desired information for this research. Moreover, she was also enclosed a cover letter indicating the aim of the research. Scale or Type of sampling The measurement of responses is an important step in the research process which is done with the help of a proper measuring scale. During this present research researcher had selected Likert Scale to collect the responses against the questions: 1. Strongly disagree 2. Disagree 3. Indifferent 4. Agree 5. Strongly agree 3.2.4 Sample size What number of subjects should be involved in the research? This process can be assisted with the help of statistical techniques like confidence interval and degree of freedom etc. 20 respondents were selected and it was the sample size for this research.

3.3

Method of analysis

After getting the required data and facts and figures researcher was apply suitable methods for the analysis of data. 3.3.1 Data analysis techniques to be used for this study Tabulation and graphical representation has been based of data analysis and its interpretation.

3.4

Data validity and reliability 25

3.4.1 Test Validity and Reliability Whenever a test or other measuring device is used as part of the data collection process, the validity and reliability of that test is important. Just as we would not use a math test to assess verbal skills, we would not want to use a measuring device for research that was not truly measuring what we purport it to measure. After all, we are relying on the results to show support or a lack of support for our theory and if the data collection methods are erroneous, the data we analyze will also be erroneous. Test Validity: Validity refers to the degree in which our test or other measuring device is truly measuring what we intended it to measure. The test question 1 + 1 = _____ is certainly a valid basic addition question because it is truly measuring a students ability to perform basic addition. It becomes less valid as a measurement of advanced addition because as it addresses some required knowledge for addition, it does not represent all of knowledge required for an advanced understanding of addition. On a test designed to measure knowledge of American History, this question becomes completely invalid. The ability to add two single digits has nothing do with history. For many constructs, or variables that are artificial or difficult to measure, the concept of validity becomes more complex. Most of us agree that 1 + 1 = _____ would represent basic addition, but does this question also represent the construct of intelligence? Other constructs include motivation, depression, anger, and practically any human emotion or trait. If we have a difficult time defining the construct, we are going to have an even more difficult time measuring it. Construct validity is the term given to a test that measures a construct accurately and there are different types of construct validity that we should be concerned with. Three of these, concurrent validity, content validity, and predictive validity are discussed below. Concurrent Validity: Concurrent Validity refers to a measurement devices ability to vary directly with a measure of the same construct or indirectly with a measure of an opposite construct. It allows us to show that our test is valid by comparing it with an already valid test. A new test of adult intelligence, for example, would have concurrent validity if it had a high positive correlation with the Wechsler Adult Intelligence Scale since the Wechsler is an accepted measure of the construct we call intelligence. An obvious concern relates to the validity of the test against which we are comparing our test. Some assumptions must be made because there are many who argue the Wechsler scales, for example, are not good measures of intelligence. Content Validity: Content validity is concerned with a tests ability to include or represent all of the content of a particular construct. The question 1 + 1 = ___ may be a valid basic addition question. Would it represent all of the content that makes up the study of mathematics? It may be included on a scale of intelligence, but does it represent all of intelligence? The answer to these questions is obviously no. To develop a valid test of intelligence, not only must there be questions on math, but also questions on verbal reasoning, analytical ability, and every other aspect of the construct we call 26

intelligence. There is no easy way to determine content validity aside from expert opinion. Predictive Validity: In order for a test to be a valid screening device for some future behavior, it must have predictive validity. The SAT is used by college screening committees as one way to predict college grades. The GMAT is used to predict success in business school. And the LSAT is used as a means to predict law school performance. The main concern with these and many other predictive measures is predictive validity because without it, they would be worthless. We determine predictive validity by computing a correlation coefficient comparing SAT scores, for example, and college grades. If they are directly related, then we can make a prediction regarding college grades based on SAT score. We can show that students who score high on the SAT tend to receive high grades in college. Test Reliability: Reliability is synonymous with the consistency of a test, survey, observation, or other measuring device. Imagine stepping on our bathroom scale and weighing 140 pounds only to find that our weight on the same scale changes to 180 pounds an hour later and 100 pounds an hour after that. Base don the inconsistency of this scale, any research relying on it would certainly be unreliable. Consider an important study on a new diet program that relies on our inconsistent or unreliable bathroom scale as the main way to collect information regarding weight change. Would we consider their results accurate? A reliability coefficient is often the statistic of choice in determining the reliability of a test. This coefficient merely represents a correlation, which measures the intensity and direction of a relationship between two or more variables. Test-Retest Reliability: if a test is being administered differently but the results or outcomes of that test remain same such a consistency shows test-retest reliability. If there is a need to check the reliability of this type an experiment should take place at two different timings with the help of same participants and the similar results will be an evidence of reliability. Moreover, there is a need to high association between both the tests conducted at different timings. The effect of memory is another significant problem that may appear in case of test-retest reliability checking. If the timing of administrations is very close this might have negative impacts on the results. For instance, if in test participants were asked to answer ten multiple choice questions and after an hour same questions were asked again to them, so in this scenario there is chance that participant may remember their answers to these questions so without going through in detail in all the questions participants will just mark the answers which they did previously. In this kind of situation no doubt there will be high association between the results of both the tests conducted but such an association will be artificial and unable to prove test-retest reliability. Hence, in such kind of experiments, memory can be regarded as a significant element.

27

Parallel Forms Reliability: I order to avoid the effect of memory there is need to design pretest and posttest in a different manner. However, there should be similar evaluation of these two tests as these require measuring the same ideas. The results of both these tests should be similar to present the reliability of these tests which were being conducted with the same participants. So, as the two kinds of these tests are parallel so it is because of positive association. Inter-Rater Reliability: In case where in different studies the base of data collection is observation so the reliability of these observations is considerable. A method which could help in this case is to assign more than one observer the task to observe the same participants and than there is need to compare the results of their observations by rating these and by associating these with each other, this would help in getting reliability. For instance if the first observer rate that a student was aggressive in six attempts and the second one also rate in a same manner this would result that observations of the both are reliable. But in case of the second observer rate that he was aggressive ten times, it does not show reliability. However, both the observers should have similar methods of observations. During this present research, both reliability and validity were considered by researcher and she had used adequate techniques for the reasoning. 3.4.2 Effect of Research Design Sample size can be affected by the nature of design that is being selected by the researcher. Like in case of different type of researches the number of participants are required differently, for instance in case of descriptive researcher, there might be a need of 100 respondents to highlight little impacts, however, in case of empirical researches there might be a need of only ten respondents as these are usually one-tenth as compared with descriptive. Hence, with different type of research designs the need of number of participants showing sample size varies significantly. 3.4.3 Effect of Validity and Reliability The size of sample is being affected by the accuracy of the measure, in case if the measure of research study are not that influential this would require more participants to be involved in the study resulting increase in the sample size. How much the measures are reliable and valid that shows the accuracy. If a construct is measuring up to the mark as it was assumed that it will measure it will depict its validity. In case of descriptive research validity is really significant so in such results if the variables are not that valid there will be a need of approximately ten times greater respondents. The consistency in the outcomes of an experiment shows its reliability, if the measure of a research study is comparatively more reliable there may be need of fewer amounts of respondents in such studies. 3.5 Ethical issues Being ethical is necessary in all the walks of life so in case of this present research, research had taken all the necessary authorizations which she require as per the scope of 28

her research topic and she tried to be ethical during this whole research study. Being a researcher she had taken care of all the ethical issues and consider all the privacy policies of the organizations from where researcher had collected the responses for her research, moreover, she consider and respect the rights of respondents towards her and focus on following points: She contacted only the individuals who have some relation with her research study. She contacted them with in the authorized time limits. She did not offer them any kind of remuneration for their participation in the research neither she use any kind of undue influence. She considered the right of every individual in terms of freedom of expression. She remains with in the scope of limits and authorities given to her. She considered time a lot during interviewing and filling of survey questionnaire. She avoided all those questions which may create anxiety or stress for the participants.

3.6

Project Plan

Researcher expected that dissertation have completed as per following Gantt chart. Time in Weeks 4 5 6 7

Activities Introduction and background of the study etc Review of previous studies (Literature review) Research design and methodology Data collection through survey questionnaire Analysis of survey questionnaire Table, interpretations and graph draw Conclusion and recommendations 1st draft Editing and final draft

29

CHAPTER 4 DATA ANALYSIS

4.1 FINDINGS OF DATA ANALYSIS

Table No.4.1 Gender Sex Male Female Total Frequency 9 11 20 Percentage 45 55 100

30

100 100

90 80
70 60 50 40 45

55
Frequency Percentage 20 9 11

30 20
10 0

Male

Female

Total

Figure No.4.1

According to above Table No.4.1 and Figure No.4.1 the majority of 55% respondents were female and 45 percent were male during the survey questionnaire.

31

Table No.4.2 Age group Age in years Below 22 23-30 31-40 41-50 Above 50 Total Frequency 1 7 7 4 1 20 Percentage 5 35 35 20 5 100

100
100 90

80
70 60 50 40 35 35 Frequency Percentage

30
20 10

20 1
5 7 7 4 41-50

20 1
5

0
Below 22 23-30 31-40 Above 50 Total

Figure No.4.2

According to above Table No.4.2 and Figure No.4.2 the most of 35% respondents were in between 23 to 30 years old and same 35% also were 31-40 years old, 20% were 41-50 years old, only 5% were below 22 years old and also 5% were above 50 years old.

32

Table No.4.3 Education level Frequency Matriculation Intermediate Graduate Post graduate Other Total 1 3 4 11 1 20 Percentage 5 15 20 55 5 100

100
100 90 80 70 60 50 40 30 20 10 0

55

15
1

20

20 11 1

Frequency Percentage

Figure No.4.3

According to above Table No.4.3 and Figure No.4.3 the most of 55% respondents were post graduate, 20% were graduate, 15% were intermediate, only 5% were matriculation and also 5% were obtained technical education.

33

Table No.4.4 Religion of respondent Frequency Christian Muslim Other Total 9 6 5 20 Percentage 45 30 25 100

100
100 90 80 70

60
50 45 30 25 5 Frequency Percentage 20

40
30

20
10

0
Christian Muslim Other Total

Figure No.4.4

According to above Table No.4.4 and Figure No.4.4 the most of 45% respondents were Christian, 30% were Muslims and only 25% were other religions.

34

Table No.4.5 Islamic mortgage is better because service creativity and profitability in Islamic banks Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 0 6 0 11 3 20 Percentage 0 30 0 55 15 100

100

100 90 80 70 60 50 40 30 20 10 0

55 30

0 0

0 0

11

15
3

20 Frequency Percentage

Figure No.4.5

According to above Table No.4.5 and Figure No.4.5 the most of 70% respondents were in favor of above statement Islamic mortgage is better because service creativity and profitability in Islamic banks.

35

Table No.4.6 Islamic mortgage is better because Islamic banks provided quality services Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 0 4 0 9 7 20 Percentage 0 20 0 45 35 100

100

100 90 80 70 60 50 40 30 20 10 0

45 20 9 7

35
20 Frequency Percentage

0 0

0 0

Figure No.4.6

According to above Table No.4.6 and Figure No.4.6 the most of 80% respondents were in favor of above statement Islamic mortgage is better because Islamic banks provided quality services.

36

Table No.4.7 Islamic mortgage is better because Islamic banks maintain good manners Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 0 3 0 9 8 20 Percentage 0 15 0 45 40 100

100

100 90 80 70 60 50 40 30 20 10 0

45

40 20

15 0 0
3

0 0

8
Frequency Percentage

Figure No.4.7

According to above Table No.4.7 and Figure No.4.7 the most of 85% respondents were in favor of above statement Islamic mortgage is better because Islamic banks maintain good manners.

37

Table No.4.8 Islamic mortgage is better because Islamic banks resolving customer grievances Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 0 8 0 9 3 20 Percentage 0 40 0 45 15 100

100

100 90 80 70 60 50 40 30 20 10 0

40

45 9

0 0

15
3

20 Frequency Percentage

0 0

Figure No.4.8

According to above Table No.4.8 and Figure No.4.8 the most of 60% respondents were in favor of above statement Islamic mortgage is better because Islamic banks resolving customer grievances.

38

Table No.4.9 Islamic mortgage is better because Islamic banks provide customer support Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 0 7 0 10 3 20 Percentage 0 35 0 50 15 100

100

100 90 80 70 60 50 40 30 20 10 0

50 35 0 0
7 10

15
3

20 Frequency Percentage

0 0

Figure No.4.9

According to above Table No.4.9 and Figure No.4.9 the most of 65% respondents were in favor of above statement Islamic mortgage is better because Islamic banks provide customer support.

39

Table No.4.10 Islamic mortgage is better because Islamic banks provide safety of customers investment Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 0 2 0 12 6 20 Percentage 0 10 0 60 30 100

100

100 90 80 70 60 50 40 30 20 10 0

60 30 20 Frequency Percentage

0 0

10

12 0 0

Figure No.4.10

According to above Table No.4.10 and Figure No.4.10 the most of 90% respondents were in favor of above statement Islamic mortgage is better because Islamic banks provide safety of customers investment.

40

Table No.4.11 Islamic mortgage is better because Islamic banks keep confidentiality of accounts and transactions as compare to conventional banks Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 1 7 0 8 4 20 Percentage 5 35 0 40 20 100

100

100 90 80 70 60 50 40 30 20 10 0

35
1 5 7

40 20 20 Frequency Percentage

0 0

Figure No.4.11

According to above Table No.4.11 and Figure No.4.11 the most of 60% respondents were in favor of above statement Islamic mortgage is better because Islamic banks keep confidentiality of accounts and transactions as compare to conventional banks.

41

Table No.4.12 Islamic mortgage is better because Islamic banks various kinds of services offered regarding credit Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 4 4 0 9 3 20 Percentage 20 20 0 45 15 100

100

100 90 80 70 60 50 40 30 20 10 0

45 20 20 9

15
3

20 Frequency Percentage

0 0

Figure No.4.12

According to above Table No.4.12 and Figure No.4.12 the most of 60% respondents were in favor of above statement Islamic mortgage is better because Islamic banks various kinds of services offered regarding credit.

42

Table No.4.13 Islamic mortgage is better because promptness and accuracy in transactions is creativity of Islamic banks Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 0 5 0 11 4 20 Percentage 0 25 0 55 20 100

100

100 90 80 70 60 50 40 30 20 10 0

55 25 20 20 Frequency Percentage

0 0

0 0

11

Figure No.4.13

According to above Table No.4.13 and Figure No.4.13 the most of 75% respondents were in favor of above statement Islamic mortgage is better because promptness and accuracy in transactions is creativity of Islamic banks.

43

Table No.4.14 Islamic mortgage is better because Islamic banks opened easy to operate account Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 0 7 0 9 4 20 Percentage 0 35 0 45 20 100

100

100 90 80 70 60 50 40 30 20 10 0

35 0 0
7

45 9 20 20 Frequency Percentage

0 0

Figure No.4.14

According to above Table No.4.14 and Figure No.4.14 the most of 65% respondents were in favor of above statement Islamic mortgage is better because Islamic banks opened easy to operate account.

44

Table No.4.15 Islamic mortgage is better because Islamic banks providing prompt information to customers as compare to conventional banks Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 0 11 0 7 2 20 Percentage 0 55 0 35 10 100

100

100 90 80 70 60 50 40 30 20 10 0

55

35 0 0
11

0 0

10

20 Frequency Percentage

Figure No.4.15

According to above Table No.4.15 and Figure No.4.15 the most of 55% respondents were against and did not in favor of above statement Islamic mortgage is better because Islamic banks providing prompt information to customers as compare to conventional banks.

45

Table No.4.16 Islamic mortgage is better because sincere interest in solving customers problems in Islamic banks Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 0 3 0 9 8 20 Percentage 0 15 0 45 40 100

100

100 90 80 70 60 50 40 30 20 10 0

45

40 20

15 0 0
3

0 0

8
Frequency Percentage

Figure No.4.16

According to above Table No.4.16 and Figure No.4.16 the most of 85% respondents were in favor of above statement Islamic mortgage is better because sincere interest in solving customers problems in Islamic banks.

46

Table No.4.17 Islamic mortgage is better because staff performing services right the first time in Islamic banks Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 0 7 0 9 4 20 Percentage 0 35 0 45 20 100

100

100 90 80 70 60 50 40 30 20 10 0

35 0 0
7

45 9 20 20 Frequency Percentage

0 0

Figure No.4.17

According to above Table No.4.17 and Figure No.4.17 the most of 65% respondents were in favor of above statement Islamic mortgage is better because staff performing services right the first time in Islamic banks.

47

Table No.4.18 Islamic mortgage is better because provide services at the time they promise to do so in Islamic banks Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 0 6 0 11 3 20 Percentage 0 30 0 55 15 100

100

100 90 80 70 60 50 40 30 20 10 0

55 30

0 0

0 0

11

15
3

20 Frequency Percentage

Figure No.4.18

According to above Table No.4.18 and Figure No.4.18 the most of 70% respondents were in favor of above statement Islamic mortgage is better because provide services at the time they promise to do so in Islamic banks.

48

Table No.4.19 Islamic mortgage is better because Islamic banks staff telling customers exactly when services will be performed as compare to conventional banks Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 3 7 0 8 2 20 Percentage 15 35 0 40 10 100

100

100 90 80 70 60 50 40 30 20 10 0

35 15
3 7

40

0 0

10

20 Frequency Percentage

Figure No.4.19

According to above Table No.4.19 and Figure No.4.19 the 50% respondents were in favor and also same percentages were against of above statement Islamic mortgage is better because Islamic banks staff telling customers exactly when services will be performed as compare to conventional banks.

49

Table No.4.20 Islamic mortgage is better because Islamic banks staff willingness to help as compare to conventional banks Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 0 2 0 7 11 20 Percentage 0 10 0 35 55 100

100

100 90 80 70 60 50 40 30 20 10 0

55

35 0 0
2 10

0 0

11

20 Frequency Percentage

Figure No.4.20

According to above Table No.4.20 and Figure No.4.20 the most of 90% respondents were in favor of above statement Islamic mortgage is better because Islamic banks staff willingness to help as compare to conventional banks.

50

Table No.4.21 Islamic mortgage is better because Islamic banks staff willingness to help as compare to conventional banks Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 0 1 0 8 11 20 Percentage 0 5 0 40 55 100

100

100 90 80 70 60 50 40 30 20 10 0

55 40 20 Frequency Percentage

0 0

1 5

0 0

11

Figure No.4.21

According to above Table No.4.21 and Figure No.4.21 the most of 95% respondents were in favor of above statement Islamic mortgage is better because Islamic banks staff willingness to help as compare to conventional banks.

51

Table No.4.22 Interest has bad affects on society and economy Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 0 5 0 8 7 20 Percentage 0 25 0 40 35 100

100

100 90 80 70 60 50 40 30 20 10 0

40 25

35
20 7 Frequency Percentage

0 0

0 0

Figure No.4.22

According to above Table No.4.22 and Figure No.4.22 the most of 75% respondents were in favor of above statement Interest has bad affects on society and economy.

52

Table No.4.23 Interest has harmful effects in term of credit crunch Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 0 3 0 10 7 20 Percentage 0 15 0 50 35 100

100

100 90 80 70 60 50 40 30 20 10 0

50 35 15 0 0
3 10 20 7 Frequency Percentage

0 0

Figure No.4.23

According to above Table No.4.23 and Figure No.4.23 the most of 85% respondents were in favor of above statement Interest has harmful effects in term of credit crunch.

53

Table No.4.24 Interest has bad affects on purchasing power and expenditure Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 0 2 0 12 6 20 Percentage 0 10 0 60 30 100

100

100 90 80 70 60 50 40 30 20 10 0

60 30 20 Frequency Percentage

0 0

10

12 0 0

Figure No.4.24

According to above Table No.4.24 and Figure No.4.24 the most of 90% respondents were in favor of above statement Interest has bad affects on purchasing power and expenditure.

54

Table No.4.25 Interest reduced the decision making power and earning capacity Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 0 0 0 12 8 20 Percentage 0 0 0 60 40 100

100

100 90 80 70 60 50 40 30 20 10 0

60 40 20

12 0 0 0 0 0 0

8
Frequency Percentage

Figure No.4.25

According to above Table No.4.25 and Figure No.4.25 the whole of 100% respondents were in favor of above statement Interest reduced the decision making power and earning capacity.

55

Table No.4.26 I believe that Islamic laws beneficial every person Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 0 4 0 7 9 20 Percentage 0 20 0 35 45 100

100

100 90 80 70 60 50 40 30 20 10 0

35
20

45 9 20 Frequency Percentage

0 0

0 0

Figure No.4.26

According to above Table No.4.26 and Figure No.4.26 the most of 80% respondents were in favor of above statement I believe that Islamic laws beneficial every person.

56

Table No.4.27 I am satisfied with Islamic mortgage Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 2 3 0 8 7 20 Percentage 10 15 0 40 35 100

100

100 90 80 70 60 50 40 30 20 10 0

40 2 10

35
20 7 Frequency Percentage

15
3

0 0

Figure No.4.27

According to above Table No.4.27 and Figure No.4.27 the most of 75% respondents were in favor of above statement I am satisfied with Islamic mortgage.

57

Table No.4.28 I move to Islamic mortgage system in UK Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 2 3 0 8 7 20 Percentage 10 15 0 40 35 100

100

100 90 80 70 60 50 40 30 20 10 0

40 2 10

35
20 7 Frequency Percentage

15
3

0 0

Figure No.4.28

According to above Table No.4.28 and Figure No.4.28 the most of 75% respondents were in favor of above statement I move to Islamic mortgage system in UK.

58

Table No.4.29 Islamic mortgage is the most important aspect of Islam that can help solve the current UK credit crisis Frequency Strongly disagree Disagree Neither agreed nor disagree Agreed Strongly agree Total 1 5 0 9 5 20 Percentage 5 25 0 45 25 100

100

100 90 80 70 60 50 40 30 20 10 0

45 25 1 5 5 25 9 20 Frequency Percentage 5

0 0

Figure No.4.29

According to above Table No.4.29 and Figure No.4.29 the most of 70% respondents were in favor of above statement Islamic mortgage is the most important aspect of Islam that can help solve the current UK credit crisis.

59

4.2

RESULTS AND DISCUSSION

According to survey results, above Table No.4.4 and Figure No.4.4 has described the statement Religion of respondent. This statement shows that majority of the 45% respondent were Christian, 30% were Muslims and only 25 percent were other religions e.g., Hindu and Sikh. As a result it was concluded that majority of respondents i.e., 45% Christians who were respond the survey questionnaire. According to survey results, above Table No.4.5 and Figure No.4.5 has described the statement Islamic mortgage is better because service creativity and profitability in Islamic banks. This statement show that majority of the 55% respondent were agreed, 15% were also strongly agreed and only 30 percent disagreed and no one were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 70% agreed and also only 30% disagreed and majority of respondents were agreed with this statement that Islamic mortgage is better because service creativity and profitability in Islamic banks.

According to survey results, above Table No.4.6 and Figure No.4.6 has described the statement Islamic mortgage is better because Islamic banks provided quality services. This statement show that majority of the 45% respondent were agreed, 35% were also strongly agreed and only 20 percent disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 80% agreed and also only 20% disagreed and majority of respondents were agreed with this statement that Islamic mortgage is better because Islamic banks provided quality services. According to survey results, above Table No.4.7 and Figure No.4.7 has described the statement Islamic mortgage is better because Islamic banks maintain good manners . This statement show that majority of the 45% respondent were agreed, 40% were also strongly agreed and only 15 percent disagreed and no one were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 85% agreed and only 15% disagreed and majority of respondents were agreed with this statement that Islamic mortgage is better because Islamic banks maintain good manners. According to survey results, above Table No.4.8 and Figure No.4.8 has described the statement Islamic mortgage is better because Islamic banks resolving customer grievances. This statement show that majority of the 45% respondent were agreed, 15% were also strongly agreed and only 40 percent disagreed out of 100 percent respondents in this regard. 60

As a result it was concluded that majority of respondents i.e., 60% agreed and also only 40% disagreed and majority of respondents were agreed with this statement that Islamic mortgage is better because Islamic banks resolving customer grievances. According to survey results, above Table No.4.9 and Figure No.4.9 has described the statement Islamic mortgage is better because Islamic banks provide customer support. This statement show that majority of the 50% respondent were agreed, 15% were also strongly agreed and only 35 percent disagreed and no one were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 65% agreed and also only 35% disagreed and majority of respondents were agreed with this statement that Islamic mortgage is better because Islamic banks provide customer support. According to survey results, above Table No.4.10 and Figure No.4.10 has described the statement Islamic mortgage is better because Islamic banks provide safety of customers investment. This statement show that majority of the 60% respondent were agreed, 30% were also strongly agreed and only 10 percent disagreed and no one were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 90% agreed and also only 30% disagreed and majority of respondents were agreed with this statement that Islamic mortgage is better because Islamic banks provide safety of customers investment. According to survey results, above Table No.4.11 and Figure No.4.11 has described the statement Islamic mortgage is better because Islamic banks keep confidentiality of accounts and transactions as compare to conventional banks. This statement show that majority of the 40% respondent were agreed, 20% were also strongly agreed and only 35 percent disagreed and 5 percent were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 60% agreed and also only 40% disagreed and majority of respondents were agreed with this statement that Islamic mortgage is better because Islamic banks keep confidentiality of accounts and transactions as compare to conventional banks. According to survey results, above Table No.4.12 and Figure No.4.12 has described the statement Islamic mortgage is better because Islamic banks various kinds of services offered regarding credit. This statement show that majority of the 45% respondent were agreed, 15% were also strongly agreed and only 20 percent disagreed and 20 percent were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 60% agreed and also only 40% disagreed and majority of respondents were agreed with this statement that Islamic mortgage is better because Islamic banks various kinds of services offered regarding credit. 61

According to survey results, above Table No.4.13 and Figure No.4.13 has described the statement Islamic mortgage is better because promptness and accuracy in transactions is creativity of Islamic banks. This statement show that majority of the 55% respondent were agreed, 20% were also strongly agreed and only 25 percent disagreed and no one were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 75% agreed and also only 25% disagreed and majority of respondents were agreed with this statement that Islamic mortgage is better because promptness and accuracy in transactions is creativity of Islamic banks. According to survey results, above Table No.4.14 and Figure No.4.14 has described the statement Islamic mortgage is better because Islamic banks opened easy to operate account. This statement show that majority of the 45% respondent were agreed, 20% were also strongly agreed and only 35 percent disagreed and no one were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 65% agreed and also only 35% disagreed and majority of respondents were agreed with this statement that Islamic mortgage is better because Islamic banks opened easy to operate account. According to survey results, above Table No.4.15 and Figure No.4.15 has described the statement Islamic mortgage is better because Islamic banks providing prompt information to customers as compare to conventional banks. This statement show that majority of the 55% respondent were disagreed and 35% were agreed and 10 percent strongly agreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 55% were disagreed and 45% agreed and majority of respondents were disagreed with this statement that Islamic mortgage is better because Islamic banks providing prompt information to customers as compare to conventional banks. According to survey results, above Table No.4.16 and Figure No.4.16 has described the statement Islamic mortgage is better because sincere interest in solving customers problems in Islamic banks. This statement show that majority of the 45% respondent were agreed, 40% were also strongly agreed and only 15 percent disagreed and no one were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 85% agreed and also only 15% disagreed and majority of respondents were agreed with this statement that Islamic mortgage is better because sincere interest in solving customers problems in Islamic banks. According to survey results, above Table No.4.17 and Figure No.4.17 has described the statement Islamic mortgage is better because staff performing services right the first 62

time in Islamic banks. This statement show that majority of the 45% respondent were agreed, 20% were also strongly agreed and only 35 percent disagreed and no one were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 65% agreed and also only 35% disagreed and majority of respondents were agreed with this statement that Islamic mortgage is better because staff performing services right the first time in Islamic banks. According to survey results, above Table No.4.18 and Figure No.4.18 has described the statement Islamic mortgage is better because provide services at the time they promise to do so in Islamic banks. This statement show that majority of the 55% respondent were agreed, 15% were also strongly agreed and only 30 percent disagreed and no one were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 70% agreed and also only 30% disagreed and majority of respondents were agreed with this statement that Islamic mortgage is better because provide services at the time they promise to do so in Islamic banks. According to survey results, above Table No.4.19 and Figure No.4.19 has described the statement Islamic mortgage is better because Islamic banks staff telling customers exactly when services will be performed as compare to conventional banks. This statement show that majority of the 40% respondent were agreed, 10% were also strongly agreed and only 35 percent disagreed and 15 percent were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that no majority of respondents were agreed nor disagreed similar i.e., 50% agreed and also 50% respondents were disagreed with this statement that Islamic mortgage is better because Islamic banks staff telling customers exactly when services will be performed as compare to conventional banks. According to survey results, above Table No.4.20 and Figure No.4.20 has described the statement Islamic mortgage is better because Islamic banks staff willingness to help as compare to conventional banks. This statement show that majority of the 55% respondent were agreed, 35% were also strongly agreed and only 10 percent disagreed and no one were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 90% agreed and also only 10% disagreed and majority of respondents were agreed with this statement that Islamic mortgage is better because Islamic banks staff willingness to help as compare to conventional banks. According to survey results, above Table No.4.21 and Figure No.4.21 has described the statement Islamic mortgage is better because Islamic banks staff willingness to help as compare to conventional banks. This statement show that majority of the 55% respondent were agreed, 40% were also strongly agreed and only 5 percent disagreed and 63

no one were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 95% agreed and also only 5% disagreed and majority of respondents were agreed with this statement that Islamic mortgage is better because Islamic banks staff willingness to help as compare to conventional banks. According to survey results, above Table No.4.21 and Figure No.4.21 has described the statement Islamic mortgage is better because Islamic banks staff willingness to help as compare to conventional banks. This statement show that majority of the 55% respondent were agreed, 40% were also strongly agreed and only 5 percent disagreed and no one were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 95% agreed and also only 5% disagreed and majority of respondents were agreed with this statement that Islamic mortgage is better because Islamic banks staff willingness to help as compare to conventional banks. According to survey results, above Table No.4.22 and Figure No.4.22 has described the statement Interest has bad affects on society and economy. This statement show that majority of the 40% respondent were agreed, 35% were also strongly agreed and only 25 percent disagreed and no one were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 75% agreed and also only 35% disagreed and majority of respondents were agreed with this statement that Interest has bad affects on society and economy. According to survey results, above Table No.4.23 and Figure No.4.23 has described the statement Interest has harmful effects in term of credit crunch. This statement show that majority of the 50% respondent were agreed, 35% were also strongly agreed and only 15 percent disagreed and no one were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 85% agreed and also only 15% disagreed and majority of respondents were agreed with this statement that Interest has harmful effects in term of credit crunch. According to survey results, above Table No.4.24 and Figure No.4.24 has described the statement Interest has bad affects on purchasing power and expenditure. This statement show that majority of the 60% respondent were agreed, 30% were also strongly agreed and only 10 percent disagreed and no one were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 90% agreed and also only 10% disagreed and majority of respondents were agreed with this statement that Interest 64

has bad affects on purchasing power and expenditure. According to survey results, above Table No.4.25 and Figure No.4.25 has described the statement Interest reduced the decision making power and earning capacity. This statement show that majority of the 60% respondent were agreed, 40% were also strongly agreed and no one were disagreed or strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 100% or whole of agreed and no one respondents were disagreed and majority of respondents were agreed with this statement that Interest reduced the decision making power and earning capacity. According to survey results, above Table No.4.26 and Figure No.4.26 has described the statement I believe that Islamic laws beneficial every person. This statement show that majority of the 35% respondent were agreed, 45% were also strongly agreed and only 20 percent disagreed and no one were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 80% agreed and also only 20% disagreed and majority of respondents were agreed with this statement that I believe that Islamic laws beneficial every person. According to survey results, above Table No.4.27 and Figure No.4.27 has described the statement I am satisfied with Islamic mortgage. This statement show that majority of the 40% respondent were agreed, 35% were also strongly agreed and only 15 percent disagreed and 10 percent were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 75% agreed and also only 25% disagreed and majority of respondents were agreed with this statement that I am satisfied with Islamic mortgage. According to survey results, above Table No.4.28 and Figure No.4.28 has described the statement I move to Islamic mortgage system in UK. This statement show that majority of the 40% respondent were agreed, 35% were also strongly agreed and only 15 percent disagreed and 10 percent were strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 75% agreed and also only 25% disagreed and majority of respondents were agreed with this statement that I move to Islamic mortgage system in UK. According to survey results, above Table No.4.29 and Figure No.4.29 has described the statement Islamic mortgage is the most important aspect of Islam that can help solve the current UK credit crisis. This statement show that majority of the 45% respondent were agreed, 25% were also strongly agreed and only 25 percent disagreed and 5 percent were 65

strongly disagreed out of 100 percent respondents in this regard. As a result it was concluded that majority of respondents i.e., 70% agreed and also only 30% disagreed and majority of respondents were agreed with this statement that Islamic mortgage is the most important aspect of Islam that can help solve the current UK credit crisis.

66

CHAPTER 5 CONCLUSION AND RECOMMENDATIONS

5.1 CONCLUSION

The headings of the topic business articles written in the different newspapers during last three months of year 2008 were full of emotions like credit crises, global recession, economic crises, billions written-off and meltdown. Economies of the countries of the world whether these are still developing or are developed were adversely affected by global recession which was merely caused by collapse of the financial systems as a result of the failure of the banking system along with inadequate increase in the prices of consumer items especially food related items. In countries like UK, which are considered as developed economies, economic issues like increase in the price of major input like fuel and in the prices of consumer items was commonly observed? So there are many other economic problems which are developing during this period of global depression, considering all these situations the world should learn from countries like China that how to be stable and how to cope up with these challenges so to have a better future for the coming generations. The present situation can best be interpreted by a proverb common in China that A crisis is an opportunity riding the dangerous wind. The stock markets and economies of many developed and less developed countries are being affected by the present recession which being spread world wide. The recession which start from the last months of year 2008 had ruined many big business empires and banking organizations which disturbed a lot the political and economic systems of the countries and bring a lot of problems and questions for these economies and still we can feel its affects. Does Islamic Mortgage system have positive effect on UK credit market? is the core of present research in which researcher had used quantitative techniques to evaluate the present topic of the research and to check that whether it is generalizeable and she involve 20 participants in her research. According to survey results, Islamic mortgage is suitable for public because best service creativity and profitability in Islamic banks, it does positive work because good Islamic banks provided quality services and it is better because Islamic financial institutions maintain good manners comparatively. Islamic mortgage is better because Islamic banks staff helps in resolving customers grievances and provides customer support; moreover customers feel that their investments are safer in these banks as compared to traditional banks. Furthermore, considering the basic principles of Islam these banks keep the information about customers accounts and transactions more confidential. Islamic mortgage is best because of Islamic banks various kinds of services offered regarding credit, promptness and accuracy in transactions is creativity of Islamic banks. Islamic mortgage is best because Islamic banks opened easy to operate account, sincere interest in solving customers problems, staff performing services right the first time, provide services at the time they promise to do so in Islamic banks. The staff of Islamic 67

bank is more willing to help the customers as compared to the staff of traditional bank and according to responses against the questions they are regarded as more co-operative. Majority of respondents said that interest has bad affects on society and economy and Interest has also harmful effects in term of credit crunch. They also respond interest has bad affects on purchasing power and expenditure and it reduced the decision making power and earning capacity. Most of respondents believe that Islamic laws beneficial for every person, they were satisfied with Islamic mortgage system and most of move to Islamic mortgage system in UK. According to them Islamic mortgage is the most important feature of Islam that can help to solve the current UK credit crisis.

5.2

RECOMMENDATIONS

Generally most of the developed countries are negatively affected by the current credit crises; however, there are some developing countries which have these negative impacts specifically. However, in order to reduce these negative impacts of recession there are some steps which should be taken by these countries. Islamic financial system can assist the world in overcoming these present crises of credit and economy with the introduction of new mortgage systems in many parts of the world which are being affected by conventional financial system. Moreover, there can be completely changed environment for insurance business (takaful) based on Islamic Laws. One the bases of the results of the survey questionnaire and responses collected from the respondents following are some suggestions by the researcher which could be helping for the economy of UK as well as other countries of the world; Institutional development The government of UK needs to allow Islamic financial institutions to access the financial markets of the country in a transparent manner with a complete freedom of work. The government needs to work out capitalization policies with reference to integration of Islamic financial system with the present conventional system and to make it in accordance with the internationally acceptable standards. Accessibility of large amount of population towards the system to Islamic finance should be increased. Increase the fulfillment of Shariah principles to increase the efficiency of the Islamic financial system in UK and to make to more transparent. In order to increase the efficiency of the staff there is need to recruit individuals which possess caliber which can help in the application of Islamic Banking System. There is a need to innovation, creativity, research and develop to introduce new products of Islamic Finance which are in accordance with the basic principles of Shariah. 68

This system of Islamic Finance needs to be in accordance with the IASs (International Accounting Standards) and international auditing standards.

Infrastructural development Increase the awareness level of general public with reference to new products of Islamic Finance along with improvements in the mortgage system. Increase the co-ordination with the countries which are offering different products of Islamic Finance. Built and increase co-ordination with Islamic financial organizations which are working around the globe. Improve the present structure of the services of Islamic Financial Institutions with the integration of infrastructure and remove the biases tax system. Increase the connectivity of Islamic Banks with other conventional banking organizations of UK. Increase the connectivity of this system with the international financial system so that it could meet the domestic and international requirement of this sector.

Implementation and follow-up All these suggestions which are stated above can be implemented with the mutual consent of all the major stakeholders of the industry. Islamic Banking: To improve the Islamic Banking System in UK the role of Central Bank cannot be denied as it can play a vital role in this context. Banking Sector Reforms: There are 48 domestic and multinational banking organizations which are assisting the financial system of UK. These banks include banks to assist different sectors of economy, commercial banks and Islamic Banks. There is a need to introduce reforms in the banking system to mobilize savings towards the productive part of economy rather than to the non-productive segment. Such reforms will assist in improving the per capita income and will help in reduction of poverty in the society with the integration of Islamic Finance system in the banking sector. Policy Measures: There is a need to make improvements in the policies to overcome these credit crises: In order to control the collective demand there is a need to reduce the expenses; To overcome the credit crises Central Bank need to take strict actions in with the help of sound monetary and fiscal policies; Increase in the budgeted amounts for various development projects; In order to improve the conditions of poor people there is need to introduce such 69

plans with the help of Islamic Banking which could assist this part of the society like with the introduction of Qarz-e-Hasna. Make strong policies to improve the partnership between public and private sector and making policies to improve the contributions by foreigners in the economy; Check the present management of Islamic Banks that whether these are properly governed and possess such systems which are comparatively helpful in cutting the managerial and operational cost.

Forex Remittances: In order to overcome the present credit crises, government need to introduce Islamic Financial practices as the expatriates of UK are not that confident about conventional banking system as they were before and it is for that reason their remittances are not satisfactory as compared with the forex remittances of other countries. Economic and Financial Intelligence: Economic and financial intelligence about UK economic system can assist in increasing the popularity of Islamic Financial System in UK by increasing the level of awareness in this context without being biased. This intelligence will assist the economy in highlighting the possible threats so that proper measures could be undertaken by the financial organizations to overcome these financial issues rather than reaching the last stage. Economic Activity Bureau (EAB): In order to increase in the volume of business activities there is need to set up an Economic Activity Bureau which could assist the economy with the help of conventional financial system along with Islamic financial system. Checks and Balances: In order to overcome the issue of drain of capital in a illegal way there is need to establish a proper infrastructure which could assist in check and balance of the financial reserves so that there could be stability in external value of currency along with stability in the exchange rate. International Finance Organizations: The role of International Financial Organizations could be very vital in this context to overcome the credit crises as these may offer bailout plans but such plans can be negative for the country as well because these may affect the poor people of society so these should be tried when there is no chance of survival with out using these. Friends of Democratic UK: This forum could be helpful in assisting the UK to overcome the present credit crises, moreover, there is need to discuss positively the ideas of Islamic Finance at this level. Contingency Planning: The government needs to have a proactive approach rather than a reactive one in shape of contingency planning so that proper adjustments could be made in the existing systems of finance like introduction of Islamic Financial Systems at the right time to overcome situations like this.

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ANNEXURES
ANNEXURE A SURVEY QUESTIONNAIRE It is to highlight that I am a student of an educational institution. A research study is being conducted by me on the topic of Islamic mortgage system as a solution for current credit crises. I have developed a questionnaire which I would like them to fill up and I believe that they are fair and expert feedback will make this research a very successful one. While they fill up this questionnaire, please ensure that they are consulting the under mentioned point scale {1, 2, 3, 4, 5} to respond to every question. It will help them to select the most realistic option. Rating scale 1. Strongly disagree 2. Disagreed 3. Neither agreed nor disagree 4. Agreed 5. Strongly agree PERSONAL PROFILE Question 1 Gender Male Female Question 2 Age group Age in years Below 22 23-30 31-40 41-50 Above 50 Question 3 Education level Matriculation Intermediate Graduate Post graduate Other Question 4 71

Religion of respondent Christian Muslim Other RESPONDENTS RESPONSE Rating scale 1. Strongly disagree 2. Disagreed 3. Neither agreed nor disagree 4. Agreed 5. Strongly agree Question 5 1 Islamic mortgage is better because service creativity and profitability in Islamic banks Question 6 1 Islamic mortgage is better because Islamic banks provided quality services Question 7 1 Islamic mortgage is better because Islamic banks maintain good manners Question 8 1 Islamic mortgage is better because Islamic banks resolving customer grievances Question 9 1 Islamic mortgage is better because Islamic banks provide customer support Question 10 1 Islamic mortgage is better because Islamic banks provide safety of customers investment Question 11 72 2 3 4 5 2 3 4 5 2 3 4 5 2 3 4 5 2 3 4 5 2 3 4 5

1 Islamic mortgage is better because Islamic banks keep confidentiality of accounts and transactions as compare to conventional banks Question 12 Response 1 Islamic mortgage is better because Islamic banks various kinds of services offered regarding credit Question 13 1 Islamic mortgage is better because promptness and accuracy in transactions is creativity of Islamic banks Question 14 1 Islamic mortgage is better because Islamic banks opened easy to operate account Question 15 1 Islamic mortgage is better because Islamic banks providing prompt information to customers as compare to conventional banks Question 16 1 Islamic mortgage is better because sincere interest in solving customers problems in Islamic banks Question 17 1 Islamic mortgage is better because staff performing services right the first time in Islamic banks Question 18 1 Islamic mortgage is better because provide services at the time they promise to do so in Islamic banks Question 19 1 Islamic mortgage is better because Islamic banks staff telling customers exactly when services will be

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performed as compare to conventional banks Question 20 1 Islamic mortgage is better because Islamic banks staff willingness to help as compare to conventional banks Question 21 1 Islamic mortgage is better because Islamic banks staff willingness to help as compare to conventional banks Question 22 1 Interest has bad affects on society and economy Question 23 1 Interest has harmful effects in term of credit crunch Question 24 1 Interest has bad affects on purchasing power and expenditure Question 25 1 Interest reduced the decision making power and earning capacity Question 26 1 I believe that Islamic laws beneficial every person Question 27 1 I am satisfied with Islamic mortgage Question 28 1 I move to Islamic mortgage system in UK Question 29 1 Islamic mortgage is the most important aspect of Islam 74 2 3 4 5 2 3 4 5 2 3 4 5 2 3 4 5 2 3 4 5 2 3 4 5 2 3 4 5 2 3 4 5 2 3 4 5 2 3 4 5

that can help solve the current UK credit crisis

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