This research focuses on the research
question: Can conventional banks in the UK apply valuable experiences of
Islamic banks and their pursuit of satisfying the public interest? This will
involve exploring several sub-questions including:
is the public interest in banking?
peculiarities of Islamic banks can satisfy the public interest?
Islamic banks more sustainable than conventional banks? (comparison of
any policies, procedures or practices of Islamic banks be adopted by
conventional banks to help them to satisfy the public interest?
The question of the public interest in the
operation and regulation of the banking sector is an enduring issue. However,
since the Financial Crisis of 2008 it has been a matter that has been
increasingly important. The public interest in banking needs to be pursued if
we are to avoid a repeat of the excess and poor governance that fueled the most
recent banking meltdown. This research asserts that the public interest is
served by a sustainable banking system. Therefore, the research is important in
highlighting the good practice within Islamic banking which can help inspire
and influence policies within conventional banking towards sustainable banking.
Relation to previous research (Theoretical
The Financial Crisis of 2008 highlighted
the need to focus on long-term sustainability (Banerjee and Velamuri, 2015). The point that should be
noted is that the public interest in a banking system is presented as a
sustainable system (Catalyst, 2015). According to the Global Alliance for
Banking on Value and Finance Watch (2017), financial institutions should focus
more on the public interest by developing systems which are sustainable in
relation to assessing assets, capital requirements, financial assets and
sustainability training. The assumption is made in this research that a
sustainable banking system is one that necessarily serves the public interest.
Islamic banks are presented as markedly
different to conventional banks in terms of governance structures and
accountability mechanisms and their sustainability (Abdelsalam et al., 2016). A
study by Zaharuddin in 2007 found that Islamic banks were based on Islamic
Sharia while conventional banks were founded upon man-made principles. Further,
Islamic banks aim to maximize profit with restrictions unlike conventional
banks. Islamic banks prioritize the public interest whereas conventional banks
pursue private interest and uncontrolled growth. However, the same study
indicates that in certain respects, the public interest may not be served in
part. For example, accessing capital is more difficult with Islamic banks.
The fundamental difference between Islamic
banks and conventional banks is that Islamic banks’ activities are built on the
partnership and the principles of Islam (Sharia), which implies transparency,
responsibility and a different approach to banking as a whole. Islamic
financing principles prohibit financing under interest. The profit should be
associated with investments in production and all financial operations should
be backed by real assets. Islamic banks do not lend money to clients for
interest, do not reward depositors as a percentage but invest in projects with
subsequent distribution of profits. Moreover, Islamic banks share the risk of
ownership with the clients they finance. At the same time, Islamic banks
observe ethical principles and norms of Islam and pay close attention to moral
values and cannot finance activities that do not conform to the norms of
Sharia. Another major difference between Islamic banks and conventional banks
is that Islamic banks are not interested in imposing fines and penalties for
late payments. Fines are used as an instrument for regulating the discipline of
clients rather than generating income. Therefore, these funds cannot go to the
income of the bank but go to charitable funds. Moreover, in case of clients’
insolvency, the bank will work to improve the situation together with the
client. On the other hand, traditional banks force clients to pay fines,
penalties and additional interest.
Islamic banking aims to ensure social
prosperity through efficient capital allocation as well as decision-making
which seeks to promote growth and development (Khan, 1986). Furthermore, Islamic banks are expected to
contribute to the social well-being of a community (Chapra, 1992). Islamic
banks aim to satisfy the maqasid objectives
which include educating individuals, facilitating social justice and protecting
the public interest (Amin et al., 2015). Mohamad et al. (2016) record that
Islamic Banks in Malaysia, for example, are actively promoting maqasid in the country with a particular
focus on ensuring the public interest is satisfied. Further, Islamic banks
limit speculation and complex securities which are considered detrimental to
the public interest (Zaman, 2009).
Darrat (1988) argues that Islamic banks
have greater stability and have more effective policies than conventional banks.
This has been confirmed by Hassan and Aldayel (1998). In addition, Hasan and Dridi (2010) note that
in a sample of 120 banks, Islamic banks were more profitable than conventional
banks. The same study shows that the credit and asset growth of Islamic banks
was at least double that of conventional banks.
This research aims to examine whether it
can still be said that Islamic banks are more sustainable than conventional
banks. There is a dearth of literature which compares the sustainability of
Islamic banks and conventional banks. Consequently, this research will fill
that gap by exploring whether Islamic banks are more sustainable than
conventional banking systems in the modern banking climate.