University of Bahrain

Department of English language And Literature

ENG 341

The Role of Islamic

Banking in the Middle
East Region
Submitted by:
NAVEED KARIM BAKSH

20124656

ASSAD RASHID
20110713

Section: 05
Submitted to: Dr. Yulia Vorobeva

Table of Contents

1. Executive
Summary....4
2. Introduction
....5
3. Literature
review
....6
4. Procedures...
9
5. Findings...1
0
5.1 Questionnaire Findings10
5.2 Interview Findings...25
6. Conclusion...
29
7. Recommendation
.30
8. References...
.31
9. Appendix..
32
A Copy of questionnaire

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1. Executive Summary
In brief, the report sets out to study the Role of Islamic Banking in
the Gulf region and how it had influenced the different customers
in their selection of the two banking systems i.e. the Islamic and
the conventional banking systems. In order to do so we 72
questionnaires were distributed to random people and an
interview was conducted. The report concludes about why Islamic
banking is the fastest growing banking system and leading the
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banking industry in the Middle East region. The report concludes

that Islamic Banks have a large number of market shares in the
gulf region when compared to other parts of the world. It
recommends the customers of conventional banks to give Islamic
banks a chance and try to experience their service without
thinking that Islamic banks are only for Muslims.

2. Introduction
While the Islamic banking initially was developed as a result of
the religious prohibition of the payment or receipt of interest to
fulfill the needs of Muslims, Islamic banking has now gained
universal acceptance. Islamic Banking is now recognized to be
one of the fastest growing areas in banking and finance sectors.
The first sign of an Islamic banking system apparently appeared
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in the early 1970s. The Dubai Islamic Bank (DIB) in the United
Arab Emirates was known to be the first Islamic bank followed by
the establishment of the International Islamic Development Bank
(IDB) in Jeddah, in Saudi Arabia.
Islamic Banking is a banking system which is founded on the
Principal of Islamic Law (Shariah) and directed by Islamic
economics. Two of the basic principles behind Islamic banking are
the sharing of profit and loss and the significant prohibition of the
collection and payment of interest as the collection of interest is
not permitted under the Islamic law.
The purpose of this report is to clearly define the importance of
Islamic banking in the GCC region and to differentiate between
conventional banking and Islamic banking, since the GCC
countries have a dual banking system in which Islamic banks
operate side by side the conventional banks.
In order to better understand the scope of Islamic Banking and
to differentiate between the Islamic banking and the conventional
banking systems the following research instruments were used:
1. Questionnaire
2. Interview
This report is a course requirement for English 341 (Report
Writing for Business), and it was requested by Dr. Yulia Vorobeva,
English lecturer and submitted on the 27th of December, 2015 by
Naveed Karim Baksh and Assad Rashid.

3. Literature Review
Islamic banks were initially established to reshuffle the Muslim
financial contracts and activities so that they were
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complementary to the principles of Shariah (the Islamic Law) and

enabled Muslims to conduct it without interest. Zaher and Hassan,
(2001) stated that Islamic finance was practiced largely in the
Muslim world. As a matter of fact, the expression Islamic
Financial system began to be visible only in the mid-1980s,
where it was not limited to banking only, but covered financial
instruments, financial markets, and all types of financial
intermediary. The main element which is helping the dramatic
growth of Islamic finance in the last couple of years is the rapid
spread of the Islamic religion internationally .
According to the research made by Hassan and Mervyn (2007)
and Chapra (1995), the main goal of Islamic banks is to attain the
socio-economic goals of the Islamic Religion like reaching
complete employment, a good rate of economic extension, equal
distribution of wealth and income, socio-economic justification,
easy mobilization of investments and savings while making
certain a fair return to all the parties involved. Badreldin (2009)
and Zaher and Hassan (2001) also noted that the Islamic financial
system brings the most satisfaction to the societies in terms of
equity and prosperity as compared to a conventional system
which aims to maximize the profits or creating maximum returns
on capital. Rasheed Al-Maraj, the governor of Central Bank of
Bahrain said to Reuters (2008): "In Islamic banking, there is no
black box that needs a genius to unwind it. Many of these
conventional products that have been under stress lately are very
complex and need special risk management tools. In Islamic
banking you will not have this kind of thing. Some of these
products would not be sharia accepted."

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Although Islamic Banking is commonly accepted in almost all the

countries of GCC and a majority of Islamic Nations of Asia and
Africa, it still have some disagreement on certain matters, like
Yavar Moini from the Morgan Stanley & Co. said to the
Reuters(2008): "Let's take a hypothetical -- central bank boards in
every GCC country -- that still doesn't give you the guarantee of
universal acceptability unless you have the same scholars sitting
on every board, and then the sheer quantity of material that they
would need to review and approve would be quite daunting. You
would still need sign-offs for products -- it's not the easiest
exercise to manage logistically."
Statistically as per the Asian Bankers annual report, the largest
Islamic banks of the world by assets are concentrated in only few
markets: Iran, Kuwait, Malaysia, Saudi Arabia and the UAE.
However in three of the countries, Iran, Pakistan and Sudan, the
whole banking system has been transformed into Islamic Banking,
and they are considered as the pioneers of full Islamization.
However in some countries the banking systems are still being
dominated by conventional banking institutions that operate
alongside the Islamic banks. Molyneux and Iqbal (2005) estimated
that the Islamic banks in the GCC region held about 74% of the
assets of Islamic Banking system in 2002.
The major aim of this report is to evaluate the extent to which the
GCC countries are the global leaders in Islamic banking and
finance. Some countries, in particular Malaysia, have done much
to encourage Islamic finance through legislation, tax deductions
and indirect subsidies, all of which are viewed in the context of
its affirmative action scheme to enhance the economic role of the
Malaysian Muslims. The Islamic Republic of Iran also introduced a
legislation to make its complete banking system shariah
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compliant in 1983, a pattern that none of the GCC countries have

sought to follow. Even the UK government has pursued to
promote London as one of the centres for Islamic finance, largely
because it provides as an advantage for the businesses and
generates employement for the City by demonstrating to the
British Muslim community the choice to use the services of
Islamic banks without any restrictions. However more can be done
by the GCC countries to promote the Islamic banking system and
become sole leaders in Islamic banking and finance sectors.

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4. PROCEDURES
A research was carried out to find the importance Islamic
banking have in the Gulf region and to find the difference
between the two banking systems, the Islamic and the
conventional banking systems. For the purpose of this
research a questionnaire was distributed to a random sample
of 72 customers who are connected to the two banking
systems in order to find the influence of the two banking
systems on each customer. Also, it was to identify the factors
that led them to choose a particular banking system and
how much satisfied they were after using the banks services.
An interview was conducted with one of the employee of
Shariyah Review Bureau to find out about the demand of
Islamic Banking in Bahrain and the Gulf region.

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5. Findings
5.1 Questionnaire findings
Figure 1.A

What is your Gender?

Male

32%

Female

50; 68%

As shown in Figure above, out of the 71 respondents that

answered the questionnaire 68% were males while 32%
were females.

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Figure 2.A

What is your age?

Under 18

7% 1% 1%

18 - 24
25 - 35
36 - 40
Above 40

90%

As demonstrated in the figure above, the respondents were

from different age groups, the age group of majority i.e. 90%
of the respondents were in between 18 to 24, and the age
group of the second highest percentage of the respondents
were from ages 25 to 35 with 7%. And we can also see that
the least number of respondents were under 18 and above
40 with 1.4% respondents each. And with none of the
respondents being in age group 36-40.

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Figure 3.A

What is your Profession?

1% 5%
5%

Businessman
Unemployed
Employee
Student
Other

88%

As illustrated in the above figure, a majority of the

respondents were students (about 90% of them). Employees
and unemployed respondents were each consisted of 4.2%.
A small percentage of the respondents (i.e. 1%) were
associated with professions other than the ones mentioned
above. While none of the respondents were businessmen.

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Figure 4.A

What is your Educational Qualification?

Primary

3%3%
26%

Secondary
Bachelor
Master
Other

68%

As illustrated in the above graph, we can see that the

majority of the respondents were Bachelors degree holders
(of about 68%). Around 27% of the respondents were having
just the Secondary certificate and around 3% of them were
either having the masters degree or were having other
qualifications. Whereas none of them having only the
primary qualification. This shows that the qualification of
respondents is good enough to answer the questionnaire.

Figure 5.A

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Is your Religion Islam?

5%
Yes
No

95%

As illustrated from the above figure, majority of the

respondents i.e.94% were Muslims while the 6% of them
were not.

Figure 6.A

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Do you know about Islamic Banking?

8%
Yes
No

92%

As wen confirm from the graph that around 92% of the

respondents have actually heard about Islamic banking while
around 6% answered that they have not.

Figure 7.A

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Preference of Bank Type

Islamic Banks
Conventional Banks

37%
56%

Type of Bank do not

matter!!

7%

As shown in the above figure regarding the type of bank they

would prefer, around 56% would choose Islamic banks and
37% of them were not bothered about the type of bank they
would choose. While around 7% of them would chose
conventional banks.

Figure 8.A

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Knowledge about the Difference in Bank Types?

27%

Yes
No

73%

As illustrated in the graph around 73% of the respondents

knew

the

difference

between

the

Islamic

banks

and

conventional banks while around 27% of them did not know.

Figure 9.A

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Factor that led to choosing of Islamic Bank?

Religious belief

3%

12%

7%

35%

There is no Interest in
Islamic Banks
Friends or Family
Media
other

43%

The figure above illustrates the factors that led the

respondents to choose Islamic banks. The graph shows that
around 59% of the respondents chose Islamic banks
because there was no interest related to Islamic banks.
Around 47% of the respondents chose Islamic banks due to
Islamic related beliefs. While around 10% of the respondents
were influenced by friends and families and another 4% of
them were influenced by the media. Whereas a 6% of them
were influenced by other factors which led them to select an
Islamic bank.

Figure 10.A

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When did you start using an Islamic Bank?

Recently

15%

One year ago

Three years ago

44%

15%

More than three years

ago

25%

As shown in the figures above, most of the respondents

started using an Islamic bank recently which is about 46% of
them. Another 26% of the respondents started using about
one year ago.
Whereas around 16% of them got associated with an Islamic
three years ago and 12% of them before three years ago.

Figure 11.A

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What are the factors that led you to choose a conventional bank?

Reliability of the Bank

Fixed interest

29%

33%

Media
other

16%

22%

As illustrated from the above graph the most important

factor that led the respondents to select a conventional bank
was the reliability of the bank which was around 40% of
them. The second most important factor that influenced
them were other factor such as varieties of investment
opportunities, more branch reaches and better financial
counseling. Whereas the next most important factors are
fixed interest and media with 26% and 19% respectively.

Figure 12.A

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Reasons for not using Islamic Banking?

15%

4% 11%

Perception that Islamic

Banking is for Muslims

Lack of understanding
and information

Insufficient branch
network for Islamic
Banks

Lack of Investment
opportunity

Other

27%

44%

As shown in the above figure, the most important reason

that led the respondents (about 57%) to not opt for Islamic
banking is because of the lack of information understanding
and information related to Islamic banks. The second most
important reason that influenced about 36% them not to
select Islamic banking was the lack of sufficient branch
network for Islamic banks. About 19% of them thought that
lack

of

investment

opportunity

was

the

reason

that

influenced them. The next most important reason that was

influential to 12% of them was the perception that Islamic
Banking is for Muslims. The rest 2% thought that other
factors such as lack of financial counseling, lack of interest
rates and higher commission and fees were the main
reasons.

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Figure 13.A

Satisfaction in using Islamic Banks?

Extremely satisfied

4% 5%

Slightly satisfied

29%

Its fine
Slightly dissatisfied
Extremely dissatisfied

44%
18%

The above graph shows us the number of current users of Islamic

banks and the satisfaction they have towards the bank services.
Majority of the respondents (about 44%) feel that the services
provided by the Islamic banks are just fine without any
exaggerations. However the around 29% of the respondents feel
that the services they receive are extremely satisfactory and
approximately 18% of them feel that the services are slightly
satisfactory. Finally the number of respondents who felt that the
services are extremely unsatisfactory are 6% and 4% of them feel
they are slightly unsatisfied with the services.

Figure 14.A
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Would you recommend Islamic banking to anyone?

11%
Yes
No

89%

The graph above shows us the number of respondents who feel

that there is a need to recommend Islamic banking to people who
are less informed. Majority of them (i.e. 89%) feel that they would
recommend Islamic banking to others. Whereas around 11% of
them do not feel the necessity to recommend Islamic banking.

Figure 15.A

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Do you have any intention of using Islamic Banking in the future?

10%

Yes
No

90%

The graph above shows that around 90% of the respondents have
the intention to use Islamic banking with 10% of them do not
have any intention to use it.

5.2 Interview Findings:

An interview was done with Mr. Saif Shauqi who is the business
developer of Shariyah Review Bureau a company whose aim is to
take care of all Sharia matters from Sharia Boards to
Certification to Sharia Audits.
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Below is what Mr. Saif Shauqi had to answer to our Questions.

1) Can you tell us briefly about the history of Islamic Banking?
Islamic banking as a phenomena is relatively new. It started off in
1960s in Egypt, then spread to Pakistan and then to Malaysia in
1980s and then to the gulf after the discovery of oil.
But the principles of Islamic finance are not something new, it
dates back to the times of Prophet Muhammad where Riba
(taking and giving interest) was made prohibited by the Islamic
law then. However with the spread of western banking system
and ideas in the early 20th century, the Muslim Nations got
engulfed with these ideas and then came the more popular
internationally accepted conventional banking system into the
gulf region. The Muslims having realized the need a halal (pure
way of earning) way of banking services, they started a base
(platform) where they could do this which then led to the
emergence of small credit communities that functioned in a halal
way for the Muslims. However these did not last long but were a
great foundation and later in 1980s the first Islamic bank was
founded in Dubai.

2) How does the Islamic Banking Works?

For example in Islamic financial system the properties ownership
is being transferred from the bank to the customer that is a trade
model is being followed than a pure debtor creditor model so
once the bank sells you the amount even they want a profit right
so what they do is they will add an additional markup.
So now what is the difference from an economic perspective?
How does it help the customer? Well the thing is if you want
people to pay their loan in conventional banking way the interest
amount gets compounded let say the interest is 2% initially but it
gets increased if u dont pay to 3% and then to 4% and as such
and there can be a situation where u need to sell off your
properties to repay the loan whereas in Islamic financial system if
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you are not able to repay the amount to the bank, then the bank
will not charge you more than the initial amount agreed on
between the two, that is nothing less and nothing more because
if u pay more than the agreed upon then that will be deemed as
interest.

3) How the Islamic Banking is Different from Conventional Banking?

In the most simplest sense Islamic banking follows Islamic
commercial law and conventional banking does not follow any
religious law so naturally Islamic banking are bound by a strict
code of ethics in which you cannot invest in any unethical
businesses like cigarette companies, pornographic companies,
alcohol, arms industry and like that and also not in gambling or
interest based firms which are deemed as bad for Muslims.
However there are no such restrictions for the conventional
banks.

4) How do you see the potential of Islamic Banking in the Gulf

region?
In 1960s it was just a dream and in 1980s we had the first Islamic
bank and today it is a two trillion dollars industry itself so the
growth of Islamic banking was huge in the first 35 years and
there are many reasons for this. Firstly the oil wealth brought in
the gulf had pushed forward the Islamic banking industry.
However the greater potential of this system was seen when after
the fall of the European economy it opened doors that there can
be an alternate system for growth and Islamic banking just
provided that because when many conventional banks were
closing down Islamic banks were actually still making profit.

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So the potential of Islamic banks is regarded to grow since Islamic

banks have not yet completely entered the Muslim communities.
For example India which has a huge population of Muslims do not
have an Islamic bank.

5) The reasons why people choose Islamic Banking?

There are many groups of people who would be interested in
doing their businesses in an Islamic financial way and there are
those groups who want to have a halal way and the other people
who would be interested in Islamic banking is because they have
the Islamic banks automated teller machines just next to their
houses.

6) What role do Islamic Banking play in Gulf Region?

It has a very powerful impact in this region because Islamic
banking has got a high push due to the oil wealth that was
discovered in Middle East. Also the Muslims in the Middle East
have got a platform to do their transactions in a halal (that is
permissible in Islam) way. However Islamic banking have not yet
completely spread in the Middle East. For e.g. Oman one of the
nations of Middle East opened their first Islamic bank last year
even though Dubai opened their first bank back in 1980s.
There is still much room for improvement in this region and
Islamic banking as being the alternative for the public is a plus for
the economy of this region because Islamic banks have shown
better growth than conventional banks.

7) What can you say about impact the economic crisis had on
Islamic Banking during?
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The fall of European economy opened doors that there can be an

alternate system for growth and Islamic banking just provided
that, because when many conventional banks were closing down
the Islamic law were actually still making profits. In a report
published by the World Bank in 2010 it said that Islamic banks
were the least impacted during the recession period. However it
is worth mentioning that Islamic banks are not hundred percent
immune to the crisis because the value of the assets of Islamic
banks are somewhat linked with their actual values so the Islamic
banks will surely have some impact but not in the way that it will
get closed down just as how many conventional banks closed
down in the world.

8) What kind of Instruments do Islamic Banking provide?

There are five most important instruments the Islamic banks
provide:
In Islamic banking we have the equity model (known
as Musharakha) where the bank actually have a
stake in your company which is like venture capitalist.
There is Mudhabarah where the bank does the
management of your money in which there is trust relation
between the lender and the bank because the bank invests
your money in a profitable business and then gives you the
returns.
There is Tawarruq which is like a personal loan where the
customer gets cash in hand.
There are two other instrument called Salam and Istisna
which are used in agricultural sector and for making
factories.

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6. Conclusion
As seen from the research above we can conclude that the
Islamic banking as whole is really influenced the Muslims and
not the non-Muslims in the gulf region and it plays a major
role in the gulf economies. There are many reasons why
banking consumers in the gulf decided to choose Islamic
Banking services. Basically, it is because Islamic Banking
consumers feel that religious factor had influenced them.
The responsibility of being a Muslim had played a major part
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in their selection of Islamic banks, which also led them to

avoid riba(Islamic term for interest) by earning a clean
income and to follow the Shariah principles. Despite these
many religious factor, there are some moderate Muslims and
non-Muslims who are also being identified as the customers
of Islamic Banking. The moderate Muslims are those Muslims
that are concerned by the time value of their savings.
Among the other reasons given by the moderate Muslims
and non-Muslims are to avoid the uncertainty by having a
fixed rate on their loans and therefore prefer the value of
investing in an Islamic Banking. Another reason for a wide
percentage of conventional bank users is due to them being
more exposed to conventional banking at a young age.
However many moderate Muslims and non-Muslims also
have recently selected Islamic banking due to it being well
known for profit sharing (known as Mudharabah) for which
the ratios are told beforehand, which are in favor of the
customers. And as for the conventional banks the rates
might not be as high for the service but the rates of interest
are not fixed.
Another reason for the people of gulf to choose Islamic
banking is because the branches of Islamic banks are
available close by without much distance.

7. RECOMMENDATION

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At the end, this report recommends the customers of

conventional banks to give Islamic Banks a chance as well
because and think of it as a bank for all and not a bank
which is directed to Muslims only. The risk of investing in an
Islamic bank is much lower than that of a conventional bank
because the customer is considered to be an owner once it
invest in these banks. The investment in Islamic banks will
surely be a new and great experience for many customers
because it comes a lot to offer as returns but with less to
offer as risk.

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8. REFERENCE
1. http://uk.reuters.com/article/2008/02/05/specialeventiiislamic-summit-quotes-dc-idUKL0446119020080205
2. Zaher, T.S. and Hassan, M.K., (2001). A Comparative
Literature Survey of Islamic Finance and Banking. Financial
Markets, Institutions and Instruments [online], 10(4) pp. 156199.
3. Hassan, M.K., Mervyn, K.L. (2007). Islamic Banking: An
introduction and Overview. In: Handbook of Islamic Banking,
Edward Elgar Publishing Press, UK, pp. 1-17.
4. Badreldin, A.M., (2009). Measuring the Performance of
Islamic Banks by Adapting Conventional Ratios. German
University of Cairo. Working paper No. 16[online]. Available
from: http://mgt.guc.edu.eg/wpapers/016badreldin2009.pdf
5. Molyneux, P. and Iqbal, M., (2005). Thirty Years of Islamic
Banking: History, Performance and Prospect. Islamic
Economics [online], 19(1) pp. 37-39.
Available from:
http://islamiccenter.kaau.edu.sa/arabic/Magallah/Pdf/19_1/19
1-BReveiw_11.pdf
6. http://eprints.lse.ac.uk/55281/1/Wilson-2009.pdf

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9.APPENDIX
A copy of Questionnaire
1. What is your Gender?
o Male
o Female
2. What is your Age?
o Under 18
o 18 24
o 25 35
o 36 40
o Above 40
3. What is your Profession?
o Student
o Employee
o Businessman
o Unemployed
o Other
4. What is your educational qualification?
o Primary
o Secondary
o Bachelors
o Masters
o Other
5. Is your religion Islam?
o Yes
o No

6. Have you ever heard about Islamic Banking?

o Yes
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o No

7. Which type of banks do you prefer?

o Islamic Banks
o Conventional Banks
o Type of Bank do not matter!!

8. Do you know the difference between Islamic banks and

Conventional banks?
o Yes
o No
9. What are the factors that led you to choose an Islamic
Bank?
(Answer only if you are currently using an Islamic bank)
o Religious belief
o There is no Interest in Islamic Banks
o Friends or Family
o Media
o Other

10.
o
o
o
o

When did you start using an Islamic Bank?

Recently
One years ago
Three years ago
More than three years ago

11.
What are the factors that led you to choose a
conventional bank?

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(Answer only if you are currently using a conventional

bank)
o Reliability of the Bank
o Fixed interest
o Media
o Other
12.
o
o
o
o
o

Reasons for not using Islamic Banking

Perception that Islamic Banking is for Muslims
Lack of understanding and information
Insufficient branch network for Islamic Banks
Lack of Investment opportunity
Other

13.
How satisfied are you with the services provided
by the Islamic bank?
(Answer only if you are currently using an Islamic bank)
o Extremely satisfied
o Slightly satisfied
o Its fine
o Slightly dissatisfied
o Extremely dissatisfied
14.
Would you recommend Islamic banking to anyone?
o Yes
o No

15.
Do you have any intention of using Islamic
Banking in the future?
o Yes
o No

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