DISSERTATION Final Amended Literature

8/22/2019 DISSERTATION Final Amended Literature

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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.


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CHAPTER 1

INTRODUCTION

1.1 Study Context

Islamic mortgage system and practices are briefly introduced in this chapter, as thesepractices 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 interms of finance as well, so the Islamic laws in this regard are being applied on thebanking systems of countries like Pakistan, Sudan and Iran, however, in some other partsof the world these Islamic banking services are being provided through traditionalbanking facilities. In the west part of the world in countries like US, UK and Australiathere is a great revolution in this field (Shanmugam, Perumal and Ridzwa, 2004). Thereis competitive environment between two high street banks of UK which are facilitatingtheir customers with the help of services which are based on Islamic Finance. IslamicBank 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 financialmatters. Islamic system does not allow interest to be a part of financial system as it cancause 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 basedsystem a lender while lending his money target the amount of interest more as comparedto money (Usmani, 2005) and it is the major flaw in that system. However, in Islamicbanking lender first purchase the required commodities for the borrower and then agreeson 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 inwhich risk of losses and financial burdens are transferred only on borrowers, it involveboth 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 arepurely based on Islamic Principles.In countries like UK people are more attracted towards traditional systems of financingand banking but Islamic modes of finance are also becoming famous on an equal groundsbecause these practices are not only useful for the Muslims of the world but as well as forthe mankind. These practices of Islamic Banking are so helpful for the society that incountries like UK where as discussed earlier that people were attracted towards

traditional mediums of finance such Islamic financing practices are grown just in fiveyears 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 tillthe year 2003. There was a doubling of the stamp fee on such agreements as the financialinstitution pays the duty when it purchase the asset for his client, moreover, client pay thesame duty when property in asset transferred to him completely. As this type of


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transaction or mortgage is in accordance with the rules and laws of Shariah, so, this needto done in two steps.

This double stamp duty was wave off by the Chancellor of the Exchequer, when thematter 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 Kuwaitwere dealing in Islamic mortgages before this major change of duty, however, LloydsTSB and HSBC also started dealing in the Islamic mortgages after this change regardingstamp duty.

The growth and development of Islamic Mortgages in UK is very certain as thepopulation of Muslim community is increasing with the passage of time in England thatis currently almost 1.8 Million. According to the result of the survey conducted at the endof 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 arealso dealing in routine mortgages that involve interest payment. There are manybusinesses in UK that are not in accordance with the law of Shariah and even theydisobey this. So, while selecting any institution for the mortgage it can be a concern forthe religious Muslim.

In normal situations, banks and other financial institution get finance for their operationalactivities from their depositors who provide them money at a lower rate which banks lendto its customer at greater rate and that difference between the interest rate is the profit ofthat banks or financial institutions. There are some financial institutions in UK likeIslamic Mortgage Institutions which does not collect their finance from the money marketbut get enough funds for maintaining their mortgage business. The reason behind this isthat a Muslim can safe his from the interest by adopting the Islamic modes of finance butstill the bank will have a link with those organizations which are interest based so peoplehesitate joining these banks.

On the other hand it is a fact that when interest rate varies in the capital market that alsocreate negative impacts on the Islamic Mortgage Market despite of the fact that thesemarkets are conceptually different from interest based financial markets. The financialservices providers cannot claim against the changes in the rates of interest as the Shariahdoes not allow that. So, that affects the profitability of these financial institutionsnegatively (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 from40 million to 1.4 billion during a period of 2002 to 2009. As there is a considerableincrease in the Muslim population in UK that is currently 1.8 million, so it is notabnormal that these people will impact greatly the property market of the areas wherethey are with high population like in London their population is 725,000 from total


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population of 7.2 million. Moreover, the monetary institutions working in highlypopulated 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 theproperty 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 in60,000 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 ascompared to other areas before the availability of Islamic Mortgages. As after theintroduction of Islamic mortgages more and more Muslims are availing this opportunityfor purchasing the houses for them and there value of total mortgage in respect ofproperty 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 systemas according to many critics the prices of properties are increasing in UK after theintroduction or familiarity of Islamic mortgage system. According these critics if therewill be any instability in the economy of UK that will impact equally the Islamicmortgage market as the Muslims will have fewer credit opportunities as compared toothers.

For the solutions of all the credit systems prevailing the markets of UK there is a need tounderstand the core concept and ideas of Islam as Muslims are no more a community inUK.

Despite of many threats attached with the Islamic mortgage market, the probability of itsgrowth is greater.

1.1.5 Islamic Mortgage

According to Shariah Muslims are not allowed to invest or borrow the finances which arebased on interest as they are strictly restricted under Islamic laws. So, following theirreligion Muslims of the world can not be a part of any transactions of interest bearingmortgages. This makes it difficult for the Muslims to purchase goods that they need fortheir domestic and business uses.

Hence, Islamic modes of financing are very helpful for the Muslims of the world as thebank or financial institution buy the required assets for the mortgagee and then these aresold back to him by any of these three methods. First option is that the bank may rent outthe property to the mortgagee against having payments against the original amount ofloans or he might purchase the amount of asset at increased price in shape of partpayments. At the time of payment of original amount and getting equity as the owner ofhouse give property on the rent which can be termed as lease to purchase. Creation of
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LLC is another alternative at that time purchaser of house get the ownership with the helpof 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 ofIslamic 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 defaultrate (www.thetruthaboutmortgage.com).

1.2 Theoretical framework

1.2.1 Types of Islamic mortgages systemIslamic 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 needto make some advance payment. In this type of mortgage the person who wants topurchase a property, after finding it, contact with the vendor to settle the price. Then hefind out a Islamic Mortgage Institution that is usually a bank dealing in Islamic creditwhich will purchase the property for him at a price that is being settled between theparties, moreover, he will agree with the financial institution that he will purchase it backto get its ownership. The client of the financial institution by entering into such a leasetype agreement get the right to live in such property against the some payments thatinvolve 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, heneed 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 bynot 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 opportunityof ownership for both the parties to a musharaka agreement. In case of ijara mortgage asdiscussed above the person who want to purchase a property, after finding it, takes thehelp of a financer for the purchase of that property with the agreement on price. Thefinancial institution provides financing services for its customer by purchasing thatproperty with an agreement that he will purchase it back. In musharaka customer of thefinancial institution get his ownership right on the basis of regular payments that he will
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make to the Islamic Mortgage institution against the asset. As much he will pay throughthe regular installments of the capital value as much he will get the ownership andproperty in those assets. At the end of the term when he clears the full value of the assethe becomes the sole owner of that asset.

So, in this way, same like Ijara mortgage the payment of interest which is against the lawof 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 itscustomer and sale this to him at comparatively greater price. In this method financialinstitution earns an amount of profit over the cost of the asset. When the credit periodexhausted customer purchase the asset as agreed. It is a main tool of interest freefinancing its other name is muabha.

Just like musharaka and ijara mortgage the potential purchaser of a property that will bepurchased by the financial institution for him at the present time promises to purchase itback at an agreed price in the future at the end of their mortgage agreement and willbecome owner of that asset completely. The monetary institution earn in this way profitthat is actually the difference between purchase and selling price. This type of financingis generally used for the purchase of home where the actual buyer pays the price of thatproperty in shape of installment that includes original cost of that asset plus agreedamount 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 ismuch literature available that regard interest based banking system and other systems asmore favorable for the creation of equality in the society and increases the contribution inthe equity (Chapra l982), but despite of all these reason interest has no place in Islam andstrictly prohibited in Islamic Societies.

Traditional banking system is relaying a lot on the investments by the Muslims andgetting a great share of profit due to their investments as it is working in most of the partsof the world whether these are Islamic Countries or Non-Islamic Countries and there isno doubt that drawing of these funds on the ground that these are interest based can causethreatIt is simply an accepted fact that there are sufficient Muslim investors and borrowers inboth Islamic and non-Islamic countries to warrant the attention of traditional banks whoseek to serve such clients and capture a potentially profitable slice of a still relativelyuntapped market. Just as interesting and useful for non-Islamic bankers are the lessonslearned from the innovation and creativity applied in meeting Islamic criteria.

1.4 Aim of the study


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To evaluate that whether System of Islamic Mortgage is satisfying UK credit marketneeds 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 creditmarket

To study the Islamic mortgages which can be able to enhance the investmentopportunities in the UK and whether it can play prominent role for the UKeconomy

To study the Islamic mortgage which has a potential to perform active role in theUK financial market and its growth in market development

To study that the affects of Islamic mortgage system in the UK environment forgrowth 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 aimof 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 financialmarket and its growth in market development?

Is there any affect of the UK environment (political, social and geographical) forgrowth 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?


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1.7 Scope of the research

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

1.8 Significance of the researchMisconceptions can lead to losses and present research has identified the significance ofdegree of aggregation and revealed the evaluation approach which may be formed withthe help of simple information.In order to understand that how present crises in the credit market appear, Is the riskypractices of lending of financial organization become a factor behind certain depressionin the developed and underdeveloped economies, furthermore, it is also essential tounderstand the history of this crises in detail. In this present study researcher willhighlight that how banks and other financial institutions can make changes in theirlending rules and regulations to overcome this present crises in the economy due to

collapse of credit market.

1.9 SummaryThis chapter has introduced and provides history of Islamic Mortgage System along withits impact on the credit market of UK, other countries around the globe and moreimportantly on the society. Researcher tried to summarize Islamic Mortgage System withits relevant classifications in few words. After introducing the system, researcherdescribed the aims and objectives of her research following by a comprehensiveevaluation of the mortgage system presented according to the basic principles ofShariah. In the coming chapters, basic fundamentals, systems, advantages anddisadvantages will be discussed in detail.


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CHAPTER 2

LITERATURE REVIEW

Islamic financial system is comparatively smaller as compared to the traditional systemsof finance and it is not easy to describe exactly that what is its size but this sector isgrowing at a high pace with the passage of time. At the end of 19 th century the size ofIslamic 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 areworking in Dubai which were only 34 in the year 1983 as it is reported by MohammadKhalfan bin Kharbash, Minister of Financial matters of UAE who is at the same timeworking as a Chairman of Dubai Islamic Bank, according to him assets of these financialorganizations are about $ 200 billion (Phillips, 2001). These Islamic bankingorganizations 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 totalassets of HSBC $569 billion in 1999 but the effectiveness of this financial system cannotbe denied (Azzam, 2000).

However, these systems of Islamic Finance are becoming famous day by day in countrieswhere either Muslims are in majority or minority. The size of Islamic Banking in MiddleEast could be realized with the help of facts that the total assets of this segment arealmost $18 billion along with equity of $1.8 billion. Bosnia International Bank wasestablished in March 2001 which has to cover the region of Balkan with its Islamicservices in retail and wholesale segments in Bosnia (Carvalho, 2001). Most of the IslamicBanks are enjoying good profitability along with a good growth rate. For instance, thereturn on equity of Al-Rajhi Banking and Investment Corporation was 25% in 1997 witha profit of $347 million in that year (Hamwi and Aylward, 1999). The profitability ofsmallest 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 ofinterest free banking services as reported in The Banker (2011). However, consideringthe needs of market Islamic financial products are designed in way that there importanceis increasing day by day and it is substituting conventional financial services in manyparts of the world since last ten years. The total assets of Islamic Banking Sector arealmost more than US$1 trillion till time and these are growing at a growth rate of 25% ona per annum bases, these Islamic Banks are growing speedily in Europe, Asia and MiddleEast (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 theircountries but after the publication of The Banker stating a list of 500 financialorganizations which purely engaged in the Islamic finance this sector is growing day byday. The assets which are according to compliance of Shariah and belong of Islamicfinancial 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 inhighlighting the strength of this segment. There are many techniques which arehighlighting the importance of this sector; however, online intelligence technique is a
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new one as it is comprehensive. It is become very easy for the investors to compare thefinancial organizations online with the help of this technique as there are 675 memberorganizations 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 theirprofitability, 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 500banking 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 thata considerable increase has been observed in the volume of activities of theseorganizations along with the increase in their number and products of this sector are verydistinct as compared to the products of traditional banking. There are numerous methodswith the help of which one can measure the size and limit of these financial organizationsbut it can be seen clearly without using these methods that there is a considerableincrease in their size and volume of activities.

Evaluation of the potential of this finance sector is the first method which could help inmeasuring the size of this sector but size in this case cannot be highlighted in terms offigures but the possible growth of this sector is just explained in terms of its potential inshape of comments (Jafri , 2006). According to the statistics and opinion of the experts ofbanking sector, Islamic financial system is becoming popular in the countries in which itis already operating and in those in which it is newly introduce and hence capturing a bigshare of the market. There is a considerable increase in the profitability, return on equityand worth of assets of these Islamic financial organizations and it is approximatelygrowing in banking sector at a growth rate of 15%, this figure tell all the story that howmuch attraction these services have for the customers (Jafri, 2006).

Simple averages, percentages or mean can be another medium for the evaluation of upcoming share of Islamic banks in the banking industry of the world, where savings willbe the base of such an evaluation which these banks already have and will get from theircustomers in the near future (Aayan Report, 2005). We cannot neglect the subjectiveimportance of this concept as no doubt it has attraction for the Muslims of the world andit is an expectation that volume of savings by the Muslims for these bankingorganizations will increase considerably by 40% to 50% in the coming decade (AayanReport, 2005).Another method which could be helpful in measurement of the size of Islamic FinancialServices is the comparison of financial indicators indicating size of this sector andevaluating 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 thisdid 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 thiscase.In this digital world, most of the human activities are being assisted by computers andelectronic products same is the case with the banking sector as the E-commerce is beingsignificant element of this sector, so considering it the role of these electronic commerceproducts in the Islamic banks cannot be denied as till the end of year 2006 the worth of
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this sector was $6 trillion (Khooja, 2006). The importance of this sector of the worldeconomy cannot be denied as it worth $ 1 trillion and it is becoming famous with thepassage 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 itsgrowth 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 tolarge banking organizations of US where their current assets are approximately $250billion, whereas current assets of Islamic Banking Sector are $300 billion but these aregrowth from 15 to 20% at an average (Boodai, 2005; Aloush, 2005). Furthermore, thesubscribed capital of Islamic financial Institutions is not greater than $25 million andthere is no Islamic banking organization which has subscribed capital of greater than 1billion. Assets managed by Islamic Financial Organizations are almost $400 billion to$500 billion and number of these organizations is growing but currently these are 300working 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 thissector and all these forecasts are based on present facts and figures and the data is notenough credible but still it can be said that sector is growing.International markets, Gulf countries and Kuwait are the three major markets for theIslamic Financial organizations. According to the statistics collected by central banks inthese countries like Central Bank of Kuwait (CBK) and many other financialorganizations working at the global level the size of these Islamic FinancialOrganizations is measured with the help of various techniques but there is not doubt thatresults have shown that this sector is growing, especially in insurance and investmentsector other than banking sector (IMF 2004; CBK 2004/2005). No doubt that this IslamicFinance industry is growing in different countries of the Gulf and providing equalservices as compared to conventional financial organizations. The researchers and expertof this sector are agreed on the fact that this sector is growing all around the world butstill there are doubts about its size in the world economy.

The growth of this Islamic banking sector in Gulf countries and in Kuwait is beingdescribed by Khooja (2006). The general expectation about the growth of this sector inGulf area is that its total equities were $210 billion till the end of year 2010. Investmentsector is becoming the main strength of Islamic finance industry as according to someexperts of this sector the industry will be in competition with traditional banks in thissector as it is growing very fast (Bahrain Monetary Agency, Governor 2006; Hassouane2004; El Qorchi, 2006).

The volume and size of Islamic Banking Services is increase considerably since last tenyears which shows the development of this sector and this sector is now becoming asignificant part of international economy (Al Bahar, et al, 2005). Countries of the worldare demanding more and more Islamic Financial Institutions as their confidence on thissegment is increasing with the passage of time because it is indicated by their investments


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in this sector as the size of assets of this sector is increased considerably by 24% sincelast 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 internationalactivities of this sector. For example, the facts and figures on Islamic financing across thetraditional borders are not available, moreover, there is no information about the

transactions that are taking place between different International Islamic FinancialInstitutions and there is also shortage of facts and figures about the investment of thissector in the real estate business. The growth and development of Primary and secondarysecurities can be affected by this shortage of information about the Financial Industry ofIslam. The managers in these Islamic Financial Institutions are not playing their role interms of publishing the facts and figures of their organizations which could be helping inmaking comparison of these Islamic Institutions with in the Islamic Finance Industry andwith the conventional financial services (El Qorchi, 2005). So, the discussions in thispresent research about the lack of financial information about the Islamic FinanceIndustry may evoke researchers to work on this issue and to gather more and more factsand 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 thissector that is sharing of profit and loss with the help of various modes of Islamic Financelike Musharakah in which equities are being shared for joint benefits and losses and amixed structure in shape of Ijara and Mudharabah. But all these investment modes havegreater risk as compared with other traditional modes (Ebrahim, 1999). An Islamic Bankis the bank which has to follow all the rules and regulations of the environment in whichit 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 legalsystem one is based on traditional judicial system and other is based on Shariah (Al-Bahar, 1996).

"Islam is deeply concerned with the problem of economic development, but treats this asan important part of a wider problem, that of total human development. The primaryfunction of Islam is to guide human development on correct lines and in the rightdirection. It deals with all aspects of economic development but always in the frameworkof 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 completelaw that guides in all the walks of life so it provide comprehensive guidelines about thefinancial 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 theinvestments, 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 thisamount in any business at a risk of loss but for earning profit. Without engaging fundsanywhere in any business against the risk the reward which a person gets against hisinvestments is regarded as interest (Ahmed, N., 2000).

As the base of Islamic modes of financing is sharing of risk about the assets andorganization it is for that reason there is a greater profitability observed in Murabahah ascompared with traditional loan facilities of the traditional banks, so, it can be said that


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Islam has different concepts of earning profit which are different from earning interestthrough traditional mediums (Iqbal and Mirakhor, 1999; Rosly, 1999). According toKaplan and Andrade (1998) interest is so worse for the economy of the world as it couldbring many disasters in the world like present credit crises which is merely caused by thecollapse 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 principleamounts. So, as the base of Islamic banking is on the sharing of risk, it is for that reason itseems to be based on a basic principle of equality resulting well fare of every oneengaged in a credit transaction. Kahf (1997) described the strength of Islamic Financialsecurities with fixed amount of profitability in shape of Ijara financing.

In Islamic management of finance the basic principle to reduce the risk of investment isbased 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 helpIslamic modes of finance as these are comparatively more reliable according to theirdevelopment and implementation.

There are many parts of the world which are still unaware about the Islamic financialservices like in Singapore where Muslims are minority; most of the population is stillunaware about it whether these are Muslims or Non-Muslims (Gerrard & Cunningham,1997). Moreover, the behavior of Muslims and Non-Muslims towards the use of theseIslamic facilities is also variable in many parts of the world as being a Muslim every onewant to avoid interest. For instance, in a survey it was inquired from the respondentsfrom the Muslim community that if the profitability in Islamic Banks decrease resulting adecrease in their share of profit 62.1% were in favor of retaining their investments in thatbanks, however, results were not surprising in case of Non-Muslims as according to theirresponse 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 fortheir depositors but these differ in terms of rewards as in Islamic banks the rewards arebased on risk of profit or loss, however, in traditional banking the reward is fixed in termsof interest (Dar et al., 2000). Moreover, the basic structure of Islamic banking facilities iscompletely different from traditional financing facilities but the organizational structureof 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 AnIslamic bank is a financial institution whose status, rules and procedures expressly stateits commitment to the principle of Islamic Shariah and to the banning of the receipt andpayment of interest on any of its operations (Al-Zuhayli, W., 2002).

There are many differences in the traditional and Islamic banking facilities and one isbecause of the introduction of Profit and Loss saving account which does not ensure fixedamount of profit as the deposits against these accounts are being invested in some sort ofbusiness 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 withreference to its assets in this context.

Islamic financial system is not a new one to the world but in fact it was introduced in


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seventh century but there are rumors spread by media in the west part of the world that itis a system which is still under development and introduced newly (Islamic Finance: AEuro 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 andequal distribution of income and wealth resulting an increase in the share of this sector inthe world economy.

The traditional banking services have a possible threat from its competitor from theIslamic financial industry as there is considerable amount of Muslims population in allthe parts of world whether these Muslims are a majority there or they are living as aminority but currently these traditional banks are earning a huge amount of profits fromthese investments of Muslims. Non-Islamic banks are working hard with all the creativityand innovation to invent the products which are similar to Islamic laws, however, Islamicbanks are using all their capabilities to expand their businesses more and more without aslice of interest.

There are some investments which are considered as more close to Islamic principles ascompared to other but in case of development of all these products the major issue that isneeded to be considered is interest is not allowed as it is earned without any efforts andrisk. Project investment finance are common equity investment are very similar to theIslamic financial services according to their structures (Bakar, M. D., 2000). The liabilityof the investor in case of these finance is not limited moreover there is no ensured profitsin this case. Islamic banking system is more close to Japanese, German and Spanishsystems where there is more trend of investing as compared to US and UK systems ofbanking 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 securitiesor discounted bonds to get capital gains instead of interest.

Islam did not only prohibited interest or Riba considering it unethical and injurious forthe society but it also forbid activities like gambling, narcotics and other things which arenot good for humans of the world. In many of west countries these things are also nowconsidered unhealthy for the society. It is natural that every one become greedy to getmore and more share in profits and want to avoid the risks as much he could but Islamneither allowed Muslims to be greedy nor it allowed to burden on party with all the riskof the transaction. However, there are some Muslim banks which are working moreclosely 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,


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Make investments in an ethical manner.The above discussion reveals that Islamic investments is all about investing money in anethical manner without exploiting the rights of other involved in the transactions and arebased on profit and risk sharing rather than on interest.

In the economies where Islamic banks are operating with other banks, conceptuallychanges 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 whichmost of the Islamic Banks base their financing facilities, interest rate risks are attachedwith Islamic Banks as normally interest rate changes with the variation in the forces ofdemand and supply. According to Rosly an increase in the rate of interest further increasethe Base Lending Rate and Bank rates of interest on deposit by the traditional banks andall these corresponds to the changes in the market rate. So, there would be no change inthe profitability of the traditional banks (Johansen, S., et al., 1990).

One the other hand the Islamic Banks as following the BBA profitability rules have staticinterest 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 tothe changes in the market rate (Obiyathulla I. B., 2004).

When there is tendency of increase in the rate of interest the repayments of the currentBBA mortgages have positive impacts on the asset side as these become less expensive ascompared with the repayments against the traditional financing. As a result the clientswho are attracted by the profits will select the BBA financing when there is a possibilityof increase in the rate of interest in the future (Hairetdinov, R., 1998). So, it will impactpositively 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 financesuch an increased demand as they not even have an alternate to take credit from Islamicinter-bank money market as it will be expensive for them.

The decrease in the rate of interest favors the traditional banking due to sustainableprofitability 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 ratesdirected by traditional banks in order to retain their deposits. This decision of Islamicbank is logical as it will help the banks in increase their profit margins by reducing theirrate of return on the deposits as the profit rate is fixed because of BBA principle. AsIslamic 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 ofinterest customers will like traditional credit facilities more as compared to Islamic creditfacilities that results an increase in the demand of traditional credit facilities and decreasein the demand of Islamic credit facilities.

Hence the after going through the theoretical concepts, it is clear that fluctuations in therates of interest create substitution effect on the demand of Islamic and traditional credit


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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 beconsidered 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 Islamicbanking system due to the changes in rate of interest and impact of these changes on theinvestment in Islamic banks (Sudin & Ahmad 2000). In the previous researches there isno discussion about this issue but in these researches the topic was just to evaluate theimpact of interest on the investments in Islamic banks so the present study will provideguideline in this context as well. The second reason is that in this research, researcher hadtaken the duration under consideration which belongs to financial crises in Asia in whichthe rate of interest was very low. It is observed by the researcher, that in any kind of thisperiod 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 bemore 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 theBBA will reduce in a period when such kind of interest is comparatively higher all theseshows that Islamic banking system could be tough competitor in a period where interestrate is falling (Rahmatina 2007).

Rosly (1999) provides the theoretical explanation of the impact of interest rate changeson Islamic bank performance in the dual system. He emphasizes that Islamic banks areexposed to interest rate risks and the root cause of this phenomenon is theoverdependence 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 tochanges in the market interest rate. As a result, the profit margin of the conventional bankwill not be affected.However, the Islamic bank cannot increase the rate of returns on its deposits because theBBA profit margin is fixed. As a consequence, Islamic deposits give lower returns. Thesubstitution effect comes into play where depositors prefer the conventional banks.On the asset side, customers may find that the installments for existing BBA financingare relatively cheaper than the installments for existing conventional loans during timesof rising interest rates. Hence profit motivated customers would choose BBA financing ifthey expect interest rates to rise in future.Hence, the demand for BBA financing would rise. However, the Islamic bank may not beable 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 moneymarket because the cost of funds in the money market is usually higher than that of bankdeposits.In the case of falling market interest rates, the conventional bank is able to adjust both thedeposit and base lending rates downwards hence maintaining its profit margin. It isinteresting to note that the Islamic bank would also reduce the rates of return on depositsin line with the conventional deposit rates. Since the profit rate of BBA financing is


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fixed, it is rational for the Islamic bank to lower the deposit rates hence widening itsprofit margin. In the case of Islamic financing, because existing BBA profit rates remainfixed customers would find that existing BBA financing is relatively more costly thanexisting conventional loans (Haron, S., et al., 2000). If customers expect the marketinterest rate to decline further, they would prefer conventional loans rather than BBA

financing. Hence, the demand for conventional loan increases while the demand for BBAfinancing falls. The above explanation theoretically shows that any changes in the marketinterest rate would, on the asset side, lead to a substitution effect between Islamic andconventional bank financing. It is recognized that the root of this problem is the structuralweakness of the fixed BBA mechanism. Hence overdependence on BBA financing by theIslamic bank has limited the banks ability to compete with the conventional bank in thedual system.

The objective of this study is to examine the impact of interest rate changes on Islamicbank financing. The main variables for the study are total residential property financingof conventional banks (RPFcv), total residential property financing of Islamic banks

(RPFis), and the base lending rate (BLR). Total residential property financing is chosenbecause 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 ofconventional banks.

In terms of the BLR, RPFis seems to respond readily to a shock in BLR and the responseseems to diminish by the fourth month. This finding suggests that given the fixed rate ofBBA financing, any change in the base lending rate would immediately influencecustomers decision in obtaining Islamic bank asset financing. This result is consistent

with the theoretical discussion that an increasing base lending rate would mean existingBBA financing is relatively cheaper and that would induce customers to obtain financingfrom the Islamic banks. On the other hand a decreasing base lending rate would inducecustomers 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 levelof Islamic bank financing. However, this study found that RPFis seems to respondpositively to shocks in RPFcv & BLR respectively.However the response to BLR shocks is relatively more immediate. This implies thatIslamic bank customers are profit motivated and their decisions to obtain BBA financingwill be influenced by the substitution effect based on the movement of the BLR (interestrates). During rising interest rates, BBA financing would be more popular and duringfalling interest rates customers would prefer conventional loans rather than Islamicfinancing. Hence they can conclude that because customers are profit motivated, Islamicbank financing in the dual system is exposed to interest rate risks despite operating oninterest free principles (Haron, S., et al., 2000).

Referring to the period of study, the BLR in Malaysia has been falling or remained at lowlevels during that period. This implies that Islamic bank financing has been relativelymore expensive than conventional loans during falling interest rates. It follows that the


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demand and growth of Islamic financing would have been slower relative to conventionalloans 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 detachthemselves 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 sectorperformance. Hence interest-rate is an exogenous factor in profit sharing. In the case ofleasing, the cost of financing is based on the rental rate which is flexible and not fixedlike 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 riskscompared to its ability under the BBA fixed rate system.

According to Kahf, M. (2002) though interest free banking disagrees with the interestbased banking yet interest free banks have the similar credit risk as by the conventionalbanks. Therefore Basel II has suggested that the calculation of the minimum capitalrequirement should be the same as required by the conventional banks. The Islamic

Banking is different in nature from traditional banking. This article first discusses theIslamic financial operations then analyzes the Islamic procedure which has beenintroduced in Pakistan since 1985. This article revealed that Islamization has moderateeffect on this sector because the banks adopted the system that is closely resembles totraditional 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 thepillar II of the new Basel Accord. The application of the said proposals does not createbarriers for the Islamic banking and finance (Kahf, M. 2002).It has been analyzed that conventional banking system is prevailed in all over the worldbut as the world is becoming global and innovations are required to survive in the globalmarket. According to this phenomenon the conventional banks have introduced Islamicbanking and some new Islamic banks have also been established in all over the world.Islamic banking is on the infant stage thats why th is vehicle is facing some challengesand problems (Ahmad & Hassan, 2007).

Another study has been conducted by Ahmad & Hassan, (2007) in Bangladesh regardingregulations and performance Islamic banking. The most important findings of thisresearch article are that there is lack of regulatory framework for its proper functioningaccording to Shariah. There is also lack of interbank money market which also affects theperformance of the Islamic banking. The discrimination has also been observed regardinglegal reserve requirements. The researcher suggested that in Bangladesh the independentbanking act should be constituted to control, guide and supervise the operations andpractices of the Islamic banking. So that the legal support to the stake holders may beprovided.The study has also been conducted in the United Kingdom regarding problems,challenges and opportunities facing by the Islamic banking. The data was collected fromthe senior officials of the banks. The main problem faced in the United Kingdom that isheterogeneous and potential clients. Furthermore the lack of expert staff and competitionfrom the conventional banks also faced in United Kingdom. It has been concluded thatthe e-banking can play pivotal role for the success of Islamic banking. There is need to sit


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together to the UK officials and Islamic banking representatives to discuss the challengesof the Islamic Banking (Karbhari, Naser & Shahin, 2004). There is need to recruitprofessional individuals who have know how about the Islamic banking. It is contendedthat the perceptions of senior. So that such problems may be resolved by using suchstrategy (Karbhari, Naser & Shahin, 2004).

According to El-Din, S, Abdullah N.I, (2007) Malaysia is the first country who playedthe vital roll in Islamic banking. It also introduced the dual banking as well as pureIslamic banking. In this article an innovation has been brought out that is hire purchaseand also known as alijara wa iqtana. The Islamic banking is going very successful butthere is still need to bring changes by the policy makers. To make strengthen the Islamicbanking transactions there is need to develop strong legal framework. There is alsoneeded to make strong both the operational regularity and substantive laws to resolveproblems 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 Islamicproducts(El-Din, S, Abdullah N.I, 2007). The government and other agencies should alsomake efforts for the new avenue of Islamic banking and hire purchase. The mostimportant is that the government should remove the uncertainty regarding Islamic hirepurchase (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 positiveaspect is that there is the movement of human capital and new technology amongcountries. On the other side of the coin the government is unable to control the flow ofcapital. The oil prices flourished the investment in GCC countries and also encouragedthe Islamic finance. There is no doubt that Islamic financial institutions having potentialfor growth but still there are certain challenges. There are two types of these challengesinternal and external. Internal challenges include that the customers still rely on theconventional banking system and the numbers of the current IFIs are not enough to meetthe requirements to international transactions. Furthermore the transaction system is stillpremature to attract new clients. There is also lack of unified regulatory system for theproducts and transactions (Garas, N.S, 2007).On the external side there is a gap between the IFIs due to which the products aredifferent in different countries. The IFIs should establish the effective communicationsystem 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 fromthe non Muslim countries. In the end the IFIs should introduce the training mechanism tomake expert their employees to attract the customers (Garas, N.S, 2007).

According to Khan, F.M (2007) the global growth of Islamic banking is takingadvantages of its uniqueness to meet the challenges of growth though the status of theIslamic banking is growing rapidly. But still the institutional arrangement is necessary totake part in the global economy. The Shariah compatibility should be judged by qualified


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Shariah scholar because for any medical problem the person will consult with the medicalspecialist 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 goodinstitutional structure may be developed. I believe it may be the right time to start simplywith 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 financialrecord of seven banks. The purpose of this article was to analyze the Islamic financialproducts viability to interest based contracts. It analyzes that Islamic banks pay Zakat andfinance economic activities according to Shariah. However it concludes that there isneed to make legal frame work so that the Islamic financial products may regulate in theIslamic financial market Samad, A. Gardner, D. & Cook, J.B.Another article has been written in which the author determine the determinants of theIslamic Bank Profitability. This article demonstrates that all sources of funds arecorrelated 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 significantvariation in earning between Islamic banks in competitive and monopolistic market.However there was strong evidence that benefit of the investors has been observed inmonopolistic market. The study demonstrated that banks performed well in competitivemarket then their counterpart. Therefore protectionism policy adopted by the Muslimgovernments is inappropriate and could distort future progress of Islamic Banking. In theend it has been recommended that establishment of more banks will make it more viableand 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 andIslamic economic system also abide by the Shariah. In 1950 to 1960 a study wasconducted in Egypt and Malaysia regarding interest free banking. But this study did notput any face value for Islamic banking. The first Islamic bank was established in 1994 inDubai and international Islamic Banks was established in 1976 and now it has 53 membercountries. 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 innumbers bit they are using Islamic financing. The purpose is to create strategic alliancebetween 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 rapidlygrowing world. There is also need to redefine the structure for success in future. TheIslamic banking has really been appreciated by the conventional banking and it alsofinding ways to become main stream banking. The Islamic banks should enhance theirefficiency to cope up new projects. Merger of the Islamic banks is compulsory for thesurvival in this era. There is need to increase the size, capital and should create ability tocreate assets (Kahf, M., 2002).Identify the determinants of the profitability are more important for the researches. Inpast decades the researchers has been found determinants for the profitability. But allprevious study has been conducted for the conventional banks. The Islamic banks are still


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


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CHAPTER 3

RESEARCH METHODOLOGY

3.1 Research design

A system which helps in inquiring and investigating is known as research. In this processof research, evaluations are conducted on the basis of certain phenomenon, moreimportantly it bring into knowledge emerging and developing ideas and concepts. Likeother researches, in this particular research, researcher also used different methods andincluded these in this chapter of methodology. It is proper way with the help of whichproper interrogations take place in shape of a process of inquiry. The prime questions tobe answered by exploratory questions start with the words how and why and target thosethings also which cannot be observed clearly with such methodologies. Moreover, thistype of research is useful where researchers need to link up theoretical ideologies withparticular phenomena and describes interconnections and informality. In case of

descriptive research, which is also a type of methodology, researcher needs to find out theanswers 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 independentvariable is checked with reference to another phenomena which is regarded as dependedvariable in quantitative type of research. The design of a quantitative research may eitherbe empirical or descriptive. In case of empirical researches, researcher at first measuresthe 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 toinclude in his sample. However, in case of empirical research 10 respondents may beneeded. If participants are being selected on random bases from the population and ifthere is greater involvement rate, all this will lead to un-biased study of relationshipbetween the variables. If the respondents are treated on random bases the results ofempirical 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 selectingthose individuals who are less varied from each other and measuring the distinct featuresof their personalities and involving the results during analysis stage of the research. Incase of an empirical research, measurement of variables needs to be done in a way whichcould 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 varioustechniques of statistics like measurement of correlations, highlighting the distinctions


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between mean values or evaluating relative frequencies, all these techniques help inmeasurement of variables of the research in which subjects may be cells, individuals,tissues or animals. During this present research researcher also used the statistical toolsfor the data analysis and her emphasis is on the structure of quantitative research. In thebeginning 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 hercapability of commenting about the correlations between variables in a given populations.Moreover, researcher had applied different techniques for the selection of sample size. Inthe 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 otherin order to determine the relationship of variables with reference to cause-and-effect. Incase where there is no existence of any correlation between the variables the researchmay 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 afundamental link. It is for that reason when there is questioning that researcher shouldpursue for a design or not a case control or cross-sectional research is better in suchsituations. The coming levels of research are more complex and difficult but theseprovide outcomes which enough influential to prove the relation between cause andeffect. In case when researcher is to determine the affect of one variable on anotherempirical researches are proved to be a best selection.

In descriptions researches which aim to determine a relationship between cause and affecta major issue is confounding. When any single or all variables associated with each otherare 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 anactivity based on a habit and various kinds of degenerative disease. As a relationshipbetween people with old age and their efficiency in context of their diseases can beestablished easily because it is pre-assumed that people with old age are comparativelyless efficient as they have more diseases as compared with youngsters. To control thisissue there are confounding elements on which we need to focus like while selecting theparticipants 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 allthe conclusions, findings and suggestions are based on it. There are numerous tools thatare being used by the researchers but most of them are not in accordance with the realworld 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 relativelysmall as compared to the depth of the issue, it is for this reason the data collection was


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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 wholepopulation of the research; it is therefore, researchers select a sample for their researchinvolving participants possessing all distinct features of the population. The major issueis that people are no more interested in the samples as they have their major interest inthe population. So, considering it researcher should select a sample which possesses allthe features of the population with the help of random sampling technique. In order toensure that all the demographic features like age, sex, races and religion are available inthe 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 thefeatures 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 thestatistic and the selection of sample is biased. Socioeconomic position and age are themajor factors which help in highlighting biases in the sample. So, in order to avoid biasesthere is a need to greater compliance rate showing that greater number of individualswere being contacted to participate in the research which become respondents for theresearch 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 regardedas biased and the effect of the treatment may vary. Researchers want to get the result ofthe treatment that they applied on a research so there should not be any biases whileselecting the sample, researcher while allowing individuals to form their groups or whilemaking their groups should considering that he could have the result of his treatmentrather than just having differences in the groups. So, balanced groups possessingparticipants having similar features like age, sex and performance, can provide effect ofthe treatment.

The value of dependent variable before test is most significant value. While makingdesigns for the research and in the process of selection of the participant researchers tryto minimize the differences between the participants in terms of their features andattitudes. The focus is to get the required effect of the treatment. There is an issue withthe method that affect of the treatment could be generalized only on the participantswhich belong to a specific sample having similar features and attitudes. There need to bea balance between accuracy and application in accordance with the nature of research. Ifwe have greater focus on the application than there is a chance that features andbehaviors 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 herresearch and has included people belonging with the both sex, customers of the banks,


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experienced employees, business people, shopkeepers and individuals that live near toher 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 selfadministered questionnaire. Researcher was administered the questionnaire herself andwas helped the respondents in filling up the questionnaire. All the customers of Islamicand 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 tocollect the desired information for this research. Moreover, she was also enclosed a coverletter indicating the aim of the research.

Scale or Type of samplingThe measurement of responses is an important step in the research process which is donewith the help of a proper measuring scale. During this present research researcher hadselected Likert Scale to collect the responses against the questions:

1. Strongly disagree2. Disagree3. Indifferent4. Agree5. Strongly agree

3.2.4 Sample size

What number of subjects should be involved in the research? This process can be assistedwith 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 suitablemethods 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 itsinterpretation.

3.4 Data validity and reliability


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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 wasnot truly measuring what we purport it to measure. After all, we are relying on the resultsto show support or a lack of support for our theory and if the data collection methods areerroneous, the data we analyze will also be erroneous.

Test Validity: Validity refers to the degree in which our test or other measuring device istruly 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 toperform basic addition. It becomes less valid as a measurement of advanced additionbecause as it addresses some required knowledge for addition, it does not represent all ofknowledge required for an advanced understanding of addition. On a test designed to

measure knowledge of American History, this question becomes completely invalid. Theability to add two single digits has nothing do with history.

For many constructs, or variables that are artificial or difficult to measure, the concept ofvalidity becomes more complex. Most of us agree that 1 + 1 = _____ would representbasic addition, but does this question also represent the construct of intelligence? Otherconstructs include motivation, depression, anger, and practically any human emotion ortrait. If we have a difficult time defining the construct, we are going to have an even moredifficult time measuring it. Construct validity is the term given to a test that measures aconstruct accurately and there are different types of construct validity that we should beconcerned with. Three of these, concurrent validity, content validity, and predictivevalidity 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 oppositeconstruct. It allows us to show that our test is valid by comparing it with an already validtest. A new test of adult intelligence, for example, would have concurrent validity if ithad a high positive correlation with the Wechsler Adult Intelligence Scale since theWechsler is an accepted measure of the construct we call intelligence. An obviousconcern relates to the validity of the test against which we are comparing our test. Someassumptions must be made because there are many who argue the Wechsler scales, forexample, 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 bea valid basic addition question. Would it represent all of the content that makes up thestudy of mathematics? It may be included on a scale of intelligence, but does it representall of intelligence? The answer to these questions is obviously no. To develop a validtest of intelligence, not only must there be questions on math, but also questions onverbal reasoning, analytical ability, and every other aspect of the construct we call


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intelligence. There is no easy way to determine content validity aside from expertopinion.

Predictive Validity: In order for a test to be a valid screening device for some futurebehavior, 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 inbusiness 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 validitybecause without it, they would be worthless.

We determine predictive validity by computing a correlation coefficient comparing SATscores, for example, and college grades. If they are directly related, then we can make aprediction regarding college grades based on SAT score. We can show that students whoscore 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 andweighing 140 pounds only to find that our weight on the same scale changes to 180pounds an hour later and 100 pounds an hour after that. Base don the inconsistency ofthis scale, any research relying on it would certainly be unreliable. Consider an importantstudy on a new diet program that relies on our inconsistent or unreliable bathroom scaleas the main way to collect information regarding weight change. Would we consider theirresults accurate?

A reliability coefficient is often the statistic of choice in determining the reliability of atest. This coefficient merely represents a correlation, which measures the intensity anddirection of a relationship between two or more variables.

Test-Retest Reliability: if a test is being administered differently but the results oroutcomes of that test remain same such a consistency shows test-retest reliability. If thereis a need to check the reliability of this type an experiment should take place at twodifferent timings with the help of same participants and the similar results will be anevidence of reliability. Moreover, there is a need to high association between both thetests conducted at different timings.

The effect of memory is another significant problem that may appear in case of test-retestreliability checking. If the timing of administrations is very close this might havenegative impacts on the results. For instance, if in test participants were asked to answerten 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 thesequestions so without going through in detail in all the questions participants will justmark the answers which they did previously. In this kind of situation no doubt there willbe high association between the results of both the tests conducted but such anassociation will be artificial and unable to prove test-retest reliability. Hence, in such kindof experiments, memory can be regarded as a significant element.


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Parallel Forms Reliability: I order to avoid the effect of memory there is need to designpretest and posttest in a different manner. However, there should be similar evaluation ofthese two tests as these require measuring the same ideas. The results of both these testsshould be similar to present the reliability of these tests which were being conducted withthe 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 isobservation so the reliability of these observations is considerable. A method which couldhelp in this case is to assign more than one observer the task to observe the sameparticipants and than there is need to compare the results of their observations by ratingthese and by associating these with each other, this would help in getting reliability. Forinstance if the first observer rate that a student was aggressive in six attempts and thesecond one also rate in a same manner this would result that observations of the both arereliable. But in case of the second observer rate that he was aggressive ten times, it doesnot show reliability. However, both the observers should have similar methods of

observations.

During this present research, both reliability and validity were considered by researcherand 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 theresearcher. Like in case of different type of researches the number of participants arerequired differently, for instance in case of descriptive researcher, there might be a needof 100 respondents to highlight little impacts, however, in case of empirical researchesthere might be a need of only ten respondents as these are usually one-tenth as comparedwith descriptive. Hence, with different type of research designs the need of number ofparticipants 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 themeasure of research study are not that influential this would require more participants tobe involved in the study resulting increase in the sample size. How much the measuresare reliable and valid that shows the accuracy. If a construct is measuring up to the markas it was assumed that it will measure it will depict its validity. In case of descriptiveresearch validity is really significant so in such results if the variables are not that validthere will be a need of approximately ten times greater respondents. The consistency inthe outcomes of an experiment shows its reliability, if the measure of a research study iscomparatively more reliable there may be need of fewer amounts of respondents in suchstudies.

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


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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 privacypolicies of the organizations from where researcher had collected the responses for herresearch, moreover, she consider and respect the rights of respondents towards her andfocus on following points:

She contacted only the individuals who have some relation with her researchstudy.

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

Activities 1 2 3 4 5 6 7 8 9Introduction andbackground of the study etcReview of previous studies(Literature review)

Research design andmethodologyData collection throughsurvey questionnaireAnalysis of surveyquestionnaireTable, interpretations andgraph drawConclusion andrecommendations

1st draft

Editing and final draft


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CHAPTER 4

DATA ANALYSIS

4.1 FINDINGS OF DATA ANALYSIS

Table No.4.1

Gender

Sex Frequency Percentage

Male 9 45Female 11 55

Total 20 100


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Figure No.4.1

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

0

10

20

30

40

50

60

70

80

90

100

Male Female Total

9 11

20

45

55

100

Frequency

Percentage


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Table No.4.2

Age group

Age in years Frequency Percentage

Below 22 1 5

23-30 7 35

31-40 7 35

41-50 4 20

Above 50 1 5

Total 20 100

Figure No.4.2

According to above Table No.4.2 and Figure No.4.2 the most of 35% respondents were inbetween 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.

0

1020

30

40

50

60

70

80

90

100

Below

22

23-30 31-40 41-50 Above

50

Total

17 7 4

1

20

5

35 35

20

5

100

Frequency

Percentage


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Table No.4.3

Education level

Frequency Percentage

Matriculation 1 5

Intermediate 3 15

Graduate 4 20

Post graduate 11 55

Other 1 5

Total 20 100

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 matriculationand also 5% were obtained technical education.

0

10

20

30

40

50

60

70

80

90

100

1 3 4

11

1

20

5

1520

55

5

100

Frequency

Percentage


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Table No.4.4

Religion of respondent


Christian 9 45

Muslim 6 30

Other 5 25

Total 20 100

Figure No.4.4

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

0

10

20

30

40

50

60

70

80

90

100

Christian Muslim Other Total

9

6 5

20

45

3025

100

Frequency

Percentage


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Table No.4.5

Islamic mortgage is better because service creativity and profitability in Islamic

banks


Strongly disagree 0 0

Disagree 6 30

Neither agreed nor disagree 0 0

Agreed 11 55

Strongly agree 3 15

Total 20 100

Figure No.4.5

According to above Table No.4.5 and Fig

Documents

DISSERTATION Final Amended Literature