the performance of western and islamic banks through the recent economic downturn : a comparative...
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Msc DISSERTATION, SUPERVISED BY KEITH BROCKBANK.TRANSCRIPT
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UNIVERSITY OF WALESTitle page
The performance of Western and Islamic banks compared through the Recent Economic downturn? A comparative
study of Mortgage lending practices 2005 -2010
Dissertation submitted in partial fulfilment of the requirement for a degree of
MASTERS OF BUSINESS MANAGEMENT
IN FINANCIAL MANAGEMENT
By
DAUDA OLUSHOLA MUHEEBDEEN
FEBRUARY, 2011
TABLE OF CONTENTS
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Title page.............................................................................................................................................
List of Tables And Diagrams..............................................................................................................
Acknowledgements............................................................................................................................
Abstract..............................................................................................................................................
Abbreviations.....................................................................................................................................
CHAPTER ONE INTRODUCTION
1.0 Background for the study.........................................................................................................
1.1 The Aim of the Research..........................................................................................................
1.2 The Objectives of the Research.................................................................................................
1.3 The Rationale for the Research..................................................................................................
CHAPTER TWO LITERATURE REVIEW
2.0 Overview of the Recent Economic Downturn.........................................................................
2.1 Introduction.............................................................................................................................
2.2 The Causes of Recent Economic Downturn.............................................................................
2.3 The Effect of the Economic Downturn on Mortgage Lending Practices..................................
2.4 The effects of Economic Downturn on Banking Systems.........................................................
2.4 The Performances of Western Banks...........................................................................................
2.4.0 Introduction.................................................................................................................................
2.4.1 The Financial Perspective............................................................................................................
2.4.2 The Business Process Perspective...............................................................................................
2.4.3 The Customer Perspective........................................................................................................... 2.4.4 The Learning & Growth Perspective..........................................................................................
2.5 The Performance of Islamic banks.................................................................................................
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2.5.0 The Business Process Perspective.................................................................................................
2.5.1 The Financial Perspective..............................................................................................................
2.5.2 The Customer Perspective..............................................................................................................
2.5.3 The Learning & Growth Perspective............................................................................................
2.6 Mortgage Lending Practices in Western Banks..............................................................................
2.6.0 Introduction........................................................................................................................
2.6.1 The Theories of Mortgage Lending practice in Western banks....................................................
2.6.2 The operations and structure of Mortgage lending in Western Bank...........................................
2.6.3 The challenges of Western mortgage lending practices................................................................
2.7 Mortgage Lending practices in Islamic Banks................................................................................
2.7.0 Introduction..................................................................................................................................
2.7.1 The Theories of Islamic Mortgage lending practices..................................................................
2.7.2 The operations and structure of Islamic Mortgage.......................................................................
2.7.2.1 Murabaha (The sale at a determined mark-up............................................................................
2.7.2.2 Ijara (Lease financing,................................................................................................................
2.7.3 The challenges of Islamic mortgage lending practices................................................................
CHAPTER THREE RESEARCH METHODOLOGY
3.0 Introduction................................................................................................................................
3.1 The Research Philosophy............................................................................................................
3.2 Research Strategy: Quantitative and Qualitative Approaches....................................................
3.3 Data Collection: Primary Data.....................................................................................................
3.3.1 Interview....................................................................................................................................
3.3.2 Questionnaire..............................................................................................................................
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3.4 Benefit of the Primary Research......................................................................................................
3.5 The Research Population..................................................................................................................
3.5.1 Sample Size...................................................................................................................................
3.6 Triangulation.................................................................................................................................
3.7 Research Ethics...............................................................................................................................
3.8 Limitation to Methodology............................................................................................................
3.9 Pilot study......................................................................................................................................
3.10 Summary for the chapter..............................................................................................................
CHAPTER FOUR PRESENTATION OF FINDINGS
4.1. Introduction....................................................................................................................................
4.2. The Research Case Study: Lloyds TSB and Islamic Bank of Britain............................................ 4.3. The Research Findings and Analysis..............................................................................................
4.3.1 The General Respondents Information..........................................................................................
CHAPTER FIVE RESULTS AND DISCUSSIONS
5.1. Data Analyses for finding............................................................................................................
5.2.1 An insight into the availability Islamic Mortgage lending system................................................
5.2.2 Table 7: The opinion based on the awareness of Islamic mortgage lending practice...................
5.2.3 Table 8: The opinion on the activities of the Western bank through the economic downturn.....
5.2.4 Table 9A opinion of the respondent on the performance of the western banks...........................
5.2.4.1 Customer satisfaction:..................................................................................................................
5.2.4.2 Financial performances
5.2.4.3 Business processes
5.2.4. Learning and growth 5.3. Table 9b: The opinion of the respondent on the performance of the Islamic banks
5.3.1 Customer perspective
5.3.2 Financial performances
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5.3.3 Business processes
5.3.4 Learning and growth
5.4 Table 10: The opinion on whether the activities of Islamic bank practices has impact on the economic downturn
5.5 Table 12: The opinion of the respondent on Integration of Islamic bank into western bank and how it has assisted in recovery of mortgage lending from economic downturn 5.6 Table13: The opinion of the respondent on the awareness of the potentiality of Islamic bank could benefit global mortgage lending practices.
CHAPTER SIX CONCLUSION AND SUMMARY
6.0. Conclusion
6.2. Recommendations
6.2.1 Western banks
6.2.2 Islamic banks recommendation
Bibliography
Appendixes
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List of Tables And Diagrams
Table 1: Response grouping according to gender
Table 2: Distribution respondents according to age
Table 3: Distribution of respondents according to marital status
Figure 3 shows the chart representation on the marital status of the respondents
Table 4: Distribution of respondents based on levels of education with the Banks
Figure 5 Distribution of respondents according to years of relationship with the Banks
Table 6: Distribution of respondents Involved in the survey based on their relationship with the bank levels
Figure 6 Distribution of respondents Involved in the survey based on their relationship with the bank levels Table 7: Distribution of respondents’ opinion based on the awareness of Islamic mortgage lending practice
Figure 7 shows the diagram of the opinion on the availability of Islamic mortgage lending practices in Lloyds TSB and Islamic mortgage lending practice
Table 8: Illustrates the respondent opinion on the activities of the Western bank through the economic downturn
Table 9A opinion of the respondent on the performance of the western banks
Table 9B: How will you rate the performance of the Islamic bank through mortgage lending practice over the last five years?
Table 10: the respondents’ opinion on whether the activities of Islamic bank Practices has impact on the economic downturn
Table 12: the opinion of the respondent on Integration of Islamic bank into western bank and how it has assisted in recovery of mortgage lending from economic downturn
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ACKNOWLEDGEMENTS
First and foremost, I am most grateful to God for His mercies, without which nothing is possible. He
has been the one that gives me the strength and wisdom needed in my career, as well as given me the
opportunity to complete this research work at Masters’ level.
I would like to express my gratitude to my able supervisor, Keith Brockbank Managing Director,
Brockbank Plaut Consulting Limited, for his intellectual advice and criticism that made this research
a successful one.
I express my gratitude to my mentors and as father, Professor D.O.S Noibi, and Professor Isi’aq
Oloyede who inspired this work and a role model indeed. May Allah preserve his life and give them
good health. Equally, a special appreciation goes to my sponsors, Engr. Wasiu Adeleke, the
Executive Director of Twab Nigeria Limited, and Honourable Sodiq Abayomi of Lagos House of
Assembly.
My special thanks also go to Debbie Maxwell, the Doctorial Co-ordinator, David Fisher, Nick
Barnett, John threlfall, Brian Buckley and Roger Cox, and other staff of Greenwich School of
Management, University of Wales both teaching and non- teaching staff. Also my appreciations go to
my school fathers and mothers: Sheikh Taiwo. A. Hambali, Alhaj Lateef Ayinde, Mr and Mrs Lapite,
and Mr and Mrs Yusuph.
There is no encouragement greater than the affection of friends and family members. I, therefore
place on record my appreciation of the following: Mr and Mrs. Adebolu Adewoyin, Dr Hakeem
Ajongbadi, Mr & Mrs Tosin Joshua, Mr Lateef A Ganiyyu, Colleague Abbey Eleru- of their
assistance, Hajj Abiodun Kazeem, Lawyer Saheed Sodiq, Lawyer Fatai- Dove Solicitor, Bro.
Badirudeen, Mr Bello, Mr Razaq (my good ally), Mohammed Samani, and Ademola Surajudeen.
I am highly indebted to my loving parents, Khalefah Dauda Ishola Alasia and Alhaja Khadijah
Kubrah Dauda Alasia, and my lovely Wife Dauda Temitope and Son Dauda Yunus I remain forever
grateful to them.
Finally, I am grateful to my external work editor and as a Father Adviser. Prof. Badurin Moshood,
Head of School of Law, SOAS University of London, and Dr Raymond Ogunade, Assistant Director
(Operations), Centre for International Education, University of Ilorin, Nigeria.
May Allah help and guide you all in your endeavours. I am extremely grateful to you.
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Abstract
The study provides comparative analysis of Western and Islamic banks’ performance through
economic downturn, specifically measured by mortgage lending practices between 2005 and 2010. A
Balance scored it a strategy to assess and examine the important of the differential activities in
internal business processing and the financial perspective of Banks towards mortgage lending
practices.
However, the literature review has revealed the real precipitation of the economic downturn as result
of inadequate financial practices and principle in the market activities. That led to high lending,
excessive leverage, which resulting to eviction, and unnecessary vacancies. That resulted to the
crackdown of main business, and also led to the falling down of housing securities rates across the
global markets.
Nevertheless, the conclusion of this research has revealed that as a matter fact the Western banks,
which known as the interest-based, already have several advantages of been a very long experience,
huge capital, spread widely, technologies advancement, and expertise skilful engineering in the
financial institutions .
The report explained further that with this potential of western Banks be integrated into Islamic banks
the interest–free, that also has the huge capital potential and the inherent strengths to invest directly
and indirectly into the stock market with their ethical principle of finance.
Certainly, this will help shape the new benchmark, to reject the speculative activities and assist
mortgage lending practices recovery from the recent economic downturn to form a sustainable
growth in financial sectors and institutions.
Keywords: Western and Islamic banks performances, Economic downturn and Mortgage lending practices.
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CHAPTER ONE
INTRODUCTION
1.0. Background for the study
Mortgage lending has become a topic of particular interest to researchers because of the role played
by mortgage lending in the USA in triggering a global banking crisis. There are surely salutary
contributions by various authors who have studied the Islamic and Western Banks over the years
(Iqbal et al, 2005) and (Yaquby, 2005). Writers have investigated banking theories and practices; the
challenges of the legal and regulatory frameworks; the evolution and historical development and the
differentiation in Western and Islamic banks systems (Sole, 2007). Also, the growth of financial
markets in both Islamic and Western countries has been explored (Roslyn, 2007) and (Mian et al,
2008).
The Western banks have wider spread and acceptability in the western oriented countries, Islamic
banks also have upper hand in the Shar’iah-based economies and non-Islamic countries alike, while
some economies have the combination of the two banking systems running side by side.
At the time of economic downturn within 2003 to 2005 the global phase of mortgage lending is well
underway. In 2004 and 2005, the innovation in the mortgage lending market also helped the growth
of the mortgage lending practices. Many mortgage products were introduce to the market, such as
Adjustment Rate Mortgage (ARM), balloon loans, interest-only loans, piggy back loans. Reasonably,
the borrowers with poor credit in the conventional standard also get loans in the subprime segment of
the home mortgage market. While comparing the period of 2005 to 2008 shows a fall in sale prices
(Gwilym and Nigel, 2009). The researcher report further that the Transaction volumes of England
and Wales have fallen dramatically from around 111,000 sales per month between 2007 and 45,000
sales per month between 2008, that recall a fall of 60 per cent. In this particular year it was recall
that Mortgage approvals had fallen by 44 per cent, this resulting in a substantial fall in housing
demand and this cause the reluctance of banks to offer new loans (Graeme, 2009).
However, it must be noted here that from series of argument that global economic downturn was
triggered by the mortgage lending practices of the western banks system (Peterson, 2009). This
resulted in overvaluation of asset in banking system across global in mortgage lending financed.
During this period, it was recall that a lot of home financing were slump down that leads to both
residential and commercial housing crackdown. This was regard as the high rate of economic
depression since 1930s (Julio, 2009). This contributing to substantial markets declines in financial,
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customer revenue and economic performance that the cause was referred to government while these
significant risks threat still remain with the world economy till date.
The meltdown in mortgage lending practices was traced through bank solvency, this really damages
housing securities ranges and caused investors lose their focus, while the values of securities and
credit availability suffered during 2008 and 2009 in the financial markets across the global.
Economies worldwide slowed during this period as credit tightened and international trade declined.
Critics argued that credit rating agency and investors failed to accurately price the risk involved with
mortgage related financial products. Governments and central banks responded with unprecedented
fiscal stimulus, monetary policy, expansion, and institutional bailouts (Steven and David, 2008).
Due to all these financial difficulties, Islamic finance analysts have argued to challenge the concept
of modern banking by introducing Islamic banking as a solution to the economic downturn.It is
argued that the practices of Islamic banking is predicated on the basis principle of Islamic law; which
in essence requires ethical and socially responsible investments and discourages interest-
based banking and investments. That may lead to sustainable growth of economic development, and
may lead to realization of socioeconomic justice and well-being (Saiful, 2007). At a time when global
economic forces are facing great hardship of economic downturn for people around the world, it
presume that Islamic Banking may serve as a means of re-imbuing modern Banking with ethical
norms, and try to make it a concept anԁ products be acceptable for ethically minded Muslims,
Christians, Jews and others who are engaged in housing lending transactions (Charles, 2009). Islamic
Banks have been marketing their services aggressively in the Western world, to extent that
Western Banks may have has direct competition with the purely Islamic Banks begun
offering Islamic structured products to their clients through Islamic banking windows.
The case studies, however, will reveal the operational system of Islamic and Western mortgage
banking and equally indicate the fact that Western and Islamic banks have not yet tapped some of the
sources of funds, nor have they used the variety of financial instruments adequately in accordance
with the precept of global economic needs.
All these issues were looked into critically in this study. Although the adoption of Islamic mortgage
system by the Western Banks with the concept of interest-free housing finance is still under criticism,
thus the term "mortgage" is used here in the sense of collateral and as having the title of the property
in the names of those who provided the fund. The precursor to today's Islamic housing finance deeds
was a simple two page document that spelled out the shared equity and rental terms and they claim it
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has Islamic system of mortgages and banking investment. All shall be given adequate and scholarly
attentions on how both will collaborate together to subdue mortgage lending from the economic
downturn and to avert a recurrence.
1.1. The Aim of the Research
The Aim is to compare the performance of Islamic and Western banking principles and practices, for
delivering the moral and ethical aspects and correcting the flaws in mortgage lending practices
through recent economic downturn.
1.2. The main Strategic Objectives of the Research:
To critically evaluates the activities of Western and Islamic Banks through the recent
economic downturn (2005 – 2010)
To examine critically the operations, theories and challenges of Islamic and Western
mortgage lending practices (2005 – 2010)
To investigates the effect of economic downturn on Islamic and Western Banking practices
(2005 – 2010)
To examines the impacts of economic downturn on Mortgage lending practices within 2005
– 2010
To examine how the integration of Islamic Banking system into Western Banking practices
will assist mortgage lending practices recovery from the recent economic downturn (2005 –
2010)
To assess how the increased awareness of Islamic banks has benefited the global mortgage
lending practices
1.3. The Rationale for the Research
This work is aimed at comparing the activities of Western and Islamic Banking practices, for
correcting the flaws in mortgage lending practices, and creating an awareness across all financial
disciplines through integration of Islamic and Western Banks practices by incorporate moral and
ethical aspects in all dealing, so that mortgage lending practices will be prevented and escape from
the recent economic downturn.
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Therefore some of theory expert has been considering the importance that Western and Islamic
Banking need to create very conducive financial environments in order for mortgage marketing to be
successful. So, this dissertation focuses on the marketing strategy that can be used for effectiveness
of mortgage lending practices within the context of policy maker and banks.
This can be achieved through creating a sound business internal security of customer awareness; in
line with the Balance scorecard to examine the multiplier effect of their operation with the special
focus on the different measures of how to evaluate and manage the symptom of Recessions by
improving investment in company start-up capital, inculcate training ability, understanding of social
needs and maintain moral and ethical aspects in all dealings of mortgages and finance system. Hence
a comparative assessment of the Western and Islamic banking system as a new approach in the
financial operations will be investigated. Therefore within the context of this objectives and the its
capabilities of contribution to knowledge by providing solutions to the problem facing the mortgage
banking, this project will be consider worthy of committing time and resourcing.
However, the evaluation of the Western and Islamic banking performance with the critical attention
on the different measures of mortgage lending characteristics would be identified and incorporated
into the questionnaire. Interview will be explored to capture unstructured questions; all would be
done through convenient sampling techniques that would be carefully drafted so that the true picture
of target sampling population within the policy maker and the banks will be reflected, so that the
special consideration to the research ethical issued, and all the necessary materials sources to be
implemented within the context of the mortgage banking lending operation.
Therefore, this research will be of benefit to stakeholders, policy maker and both Islamic and
Western Banks, Muslim and non- Muslim on their understanding and perception towards proper
ethical mortgage investment within banking and financial sectors.
CHAPTER TWO
LITERATURE REVIEW
2.0 THE RECENT ECONOMIC DOWNTURN: AN OVERVIEW
2.1 Introduction
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The global economic growth moved towards fluctuations by 2000, tilting toward downturn. It regards
as the high rates of economic downturn ever experienced. These recent economic mess was linked
with a recession in U.S, Company production in 2001. This damaged the U.S. dollar, which attracted
and contributed to an exceptionally large global housing deficit. This has been traced initially to
monetary excesses as the main cause of boom and resulting to downturn. The drastic declined in
financial sector from 2007 to 2009, through the peaked of recent economic downturn that also cause
a horrible effect of significant decline in the mortgage lending system, though Banks are known as
the major lenders for unfunded lending marketers (Bernanke, 2010).
In report of Victoria and David (2009), the UK financial crisis was also associated with a dropped
sharp in the U.S. dollar value exchange in relative to other world currencies, which led to dampen
competitive among the U.S., UK and across the globe. Carmen and Kenneth (2008) has investigated
that mortgage mess was characterized by an unpredicted excessive fraction of subprime mortgages
that boomed in 2005 which led to delinquent and foreclosure. They explain further that there was a
dilapidation of lending standard and deterioration in the mortgage lending escalated during the 2005-
2009 period. Edward, et al. (2010) attributed the origin of the mortgage lending downturn to higher
demand for private-label mortgage backed securities (MBSs) by the foreign and domestic
shareholders. He pointed out that it also attributed to loan characteristics, borrower characteristics,
and macroeconomic conditions.
The recent economic downturn has already resulted in serious sub-prime costs for many nations. The
crisis spurred massive media and the politicians’ attention on the downturn’s severe effects on
politics and businesses. While there has been question on how it has impacted mortgage lending
practices, questions are asked on how mortgage facing a decline in lending operation can be
recovered? And whether mortgage has been forced to reduce their services?
2.1.2 The causes of recent economic downturn
In discussing the causes of the economic downturn, it is essential to distinguish between the
particular factors that precipitate the crisis and the structural weaknesses in the financial system that
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propagated and amplified the economic downturn. In the report of Markus, (2009) he reported that
the basic factors that contributed to the current financial crisis can be reduced to two things:
1- The loans of money to high risk consumer such as(mortgage marketing) and
2- The debiting markets of certain commodity (Collateral Debt Obligations, Mortgage Backed Securities)
Masood et al, (2009) Chapra, (2008) and Richard (2008) argued further that the occurrence of
economic downturn is as a result of greediness, high level of risks, over-exuberant, currency
degradation, stock depreciation, deregulations in management, lack of liquidity, macro-economic
shocks, auditing maladjustment, overexposure and excessive imprudent lending by banks. Many
argument have been mooted as the root cause of a sub-prime crisis that originated in conventional
banking and had a direct and profound impact on global financial markets: these include mortgage
lending to customers with a poor or no credit history, hedging on asset, property in this case, price
increases, bundling of mortgage assets into debt form, creating sophisticated structures with or
without credit rating and selling them on to investors (Bernanke, 2010)
York (2009) pointed out that the structural weakness in the financial system before economic
Depression wave a large investing in the stocks market that prompt to unnecessary increase in high
rates of stock. These cause the driver of the shares that already being used as collateral for loans to
purchase more assets. He argues further that when the economy share price was stumble, these led to
an extensive huge damage. The investors lost their focus values and the loan on them "crackdown",
which throttled down a mess in the financial system and consequently affects mortgage lending
system.
2.1.3 The Effect of the Economic Downturn on Mortgage Lending Practices
In a recent report Giwilym and Nigel (2009) have investigated the impact of recent economic
downturn on mortgage practices. They used empirical research to demonstrate that in UK average
house prices in reality rose during the downturn and this linked this with the fact that real interest
rates were remarkably low.
However James (2009) reported that it was not until March 2008 that initial of rapid slowdown in the
real and nominal levels of housing sector emerged. He held that in the housing market survey,
mortgage rates had deteriorated to the backdrop. On this account Goodman (2008) pointed out that
the approvals had fallen by 44 percent. He demonstrated further that nothing new about downturn in
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housing cycles is as a result of an intrinsic aspect of capitalism, and it was concern about the market
restriction for producing the potential of promised benefits and as well as the implications of
widening inter-generational wealth inequalities.
Recently, Barth (2009) investigated that the increase in current account deficits has had subsequently
pushed up in external debt, which caused an adverse impact on the strength of the US Dollar in their
foreign exchange markets. This led the mortgager transfer the whole risk of default to the ultimate
purchaser of the loan security.
In this regards, Laura and Renee (2010) recall that, subprime debt crisis and the financial mess of
subprime borrowers, looking at crisis in the U.S. financial system in which the spill-over effects have
affect across the global. In view of this, Peterson (2009) substantiate that the economic downturn has
cause throttled down instead of steeping up the house benefits for most people across the global. He
pointed out that home officers and jobs provider makes it unbearable for those in low skill, low
income and temporary contract employer to retain a stake in housing sector, while the homeowner
also found it very harder to maintain their payment during a downturn. In another recent report
Stephens (2009) have demonstrated further that in UK housing market, the low income household
find it very touch to offer them loans on favourable condition without collateral requirement.
However, Richard (2008) reported that mortgage lending practices bearing a strong economic
consequence rather than just financial services, this called for a turnaround of the economic sectors
and the financial sector adjustments at the middle of the crisis to be appeared inevitable. He argues
further that the initially real impacts displayed in residential building and property lending not only in
the United States but notably also in the United Kingdom and Ireland, these were spread across
economies worldwide with substantial implications for future levels of output, investment and
employment. On the account of FSA (2009) reported that the resulting closures brought an excess
lenders to the market that caused residential rates to stumble, that caused another mortgage crisis
which inhibiting refinancing of unaffordable mortgage payments. As the market value of mortgages
collapse, many banks and other financial sectors was called into attention, which postulate the
wholesale banker and banks plea for the Federal government Reserve, required them for bailout
system, which billions of dollars in liquidity was offered in 2008.
On the similar report, Laura and Renee, has investigated the consequent impacts in the residential
sales market has estimated to at least half of the 80,000 estate agents were unemployed. The high
rates of repossessions in the housing market as high as 90,000 in 2009, and additional 3.5 million
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households fell into arrears. Most of the 85 Housing Associations which build estates heavily lay on
private residential sales to subsidise their rented apartments. With over 10,000 homes standing empty
and unable to commercialise during the downturn, a lots of Housing Associations are under threat of
foreclosure. The report goes further that the effects of the economic crisis have been felt severe in
specific sections of the mortgage markets (2010). They showed empirical evidence that downturn in
the housing market has seen a reduction in the number of new housing development projects which
has resulted in a decline in the creation of work. The shrink in jobs within lending has displaced a
number of lender and lending into neighbouring homeless, and jobless such as landscape, resulting in
a proliferation of foreclosure and redundancies within the residential marketing sectors.
A new study of Graeme (2009) highlighted some the regulatory problem that caused the crisis: that
the lapses in tax structure of mortgage regulation, the start-up capital demanding for bank is too
minimal, the excessive underwriting risk of marketing speculation that end up to credit default, and
the collateralized-based obligations on the securities debt were highly slumped. This led Bankers to
exorbitant repayment packages, while the response of the government also exacerbated and create
moral hazard because of not met up with market expectation by big banks that crash the incentives of
investors to risky assets increment.
In the recent report Gorton explain that in the event of huge volume of mortgage defaults 2006- 2007,
the whole chain breaks down, the originators fail to collect the payment from the borrowers, hence
profits drop, investors sell out their bonds, the stock holders of the third parties sell their stocks, the
third parties face illiquidity. By 2008, the range of capital losses of bank were initially estimated to
$150 billion and a large number of specialized mortgages lending institution had been sold while
some went bankruptcy (2009).
However, in the report of Chapra (2010) it is argued that despite the impact of the downturn, that
some financial sectors that dramatic and contrasts still have some relative fortune of the banking
sector and in the financial markets. They argue that the economic downturn is much more sector and
sub-sector specific effect in the some marketing fields. In a very useful account, the FSA, (2010)
pointed out that downturn also have some differential effect on financial services, assets, and lending
as a result of backdrop demand in some specific set of economic sectors. Even within mortgage
markets the effects of the downturn can be juxtaposed, for example the residential assets marketing,
and the residential lettings market still experience a pushed up in rates.
Nevertheless, there are various arguments that Islamic banking also hits by the financial crisis. This
has been critically debate by some economists that, once there collateral based agreement in Islamic
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banks, and also they possessed more property assets even than Western banks do, and they were also
dealing with counter-part customer automatically they share from the mess. Though, Islamic banks in
the Gulf area are not yet rattled with the mess due to the fact that their property ranges still progress.
But if those markets were to dive, certainly the system will crash (Faisal, 2009). In another argument
Islamic banker, (2009) revealed that Islamic investments are also sprinting along with high streets of
Western sectors across the global market. On top this Standard & Poor’s’ (2010) substantiates that
there are bleak drop of Shar’iah-compliant stocks markets value 23 percent, compared with a 25
percent setback for non-Shar’iah-sanctioned stocks during the first three quarters of 2008. They
analyse clearly that Shar’iah compliance markets, just like conventional financial markets, is
vulnerable also reflects on customers’ creditworthiness.
2.1.4 The effects of Economic Downturn on Banking Systems
In this section, this is examined through the sectional effects of Islamic and Western banks during the
recent global economic downturn. That brewing for a certain period, it really started to show its
effects in the middle of 2007 and into 2008. The global financial markets have stumble, large stocks
markets have crackdown and bought the panic to the banking sectors, thinking on the way out led the
governments in the wealthiest nations come up with rescue packages in order to sustain their
financial markets. (BBC, 2010)
2.1.4.1 The effect on Western Bank
At first glance, the popular severe recession across the global, threw economic into downturn as a
result of banking panic that fall around 2008. The seeds of this panic were sown in the credit boom
that peaked in mid-2007, followed by the downturn of sub-prime mortgages and all types of
securitized products (Richard, 2008). This downturn raised concerns about the solvency and liquidity
of financial institutions, becoming a full-blown banking panic following the failures of Lehman
Brothers and Washington Mutual; this led the government takeovers of Fannie Mae, Freddie Mac,
and AIG (Bruce and Deirdre, 2009). Although the panic subsided in the first half of October after a
variety of government actions to promote the liquidity, solvency of the financial sector, the prices of
most asset classes and commodities that fell drastically.
Also to curb the cost of corporate and bank borrowing that rose substantially, and financial market
volatility that also rose to levels that have rarely ever been seen. (Steven and David, 2008)
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However, it was recall that the rates of lending that has drastically low in fourth quarter of 2008 was
47% lower than it was in the prior quarter and 79% lower than at the peak of the credit boom 2007.
Lending fell across all types of loans: investment grade and non-investment grade; term loans and
credit lines; and those used for corporate restructuring as well as those used for general corporate
purposes and working capital. (Standard and Poor’s, 2010)
2.1.4.2 The Effect on Islamic Bank
In the recent report, Standard & Poor’s has investigated the negative rating of Islamic banks that
reflect their adverse changes (2009). They pointed out the fact that Islamic banks didn’t invest in
structured products and so haven’t suffered from the drastic fall in some of instruments’ values
through the downturn. However, Masood et al, (2009) investigated the effect of the global economic
crisis on Islamic banks and came out with the following findings; Islamic banks were least affected.
He reported further that the Islamic banking system was not affected due to the fact that they were
protected from interbank liquidity problem associated with western banks money markets and
mergers and acquisitions. Secondly, there is absence of investment risks rating rather its investments
were protected because of reduced risks, the banks’ mortgage sector has no plight with fluctuation in
the stock values, and no fear of sub-prime mortgage.
More recently, Paul (2010) have argue that no matter how it is the knock-on effects of the recent
economic downturn have, some Islamic financial institutions have their conventional counterparts.
They pointed out that the deepening economic downturn in many countries through scarce liquidity,
stock market declines, and plummeting real estate prices in some countries have hit the profitability
of Islamic banks, especially in Gulf Cooperation Council GCC countries, for example of Kuwait and
Dubai and even in Western countries in their direct and indirect effects on the real estate and also in
equity markets.
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2.2 THE PERFORMANCES OF WESTERN BANKS
2.2.0 Introduction
The comparative nature of this study dictates that the general scope of performance of Western and
Islamic banks be explored in order to achieve the objectives of this study. The balanced scorecard
was used to achieve this since it has been argued to be an effective planning and management tool
that is used extensively in business and industry to prevent business from derailing from its stated
vision and strategy. It is also used to improve internal and external communications and to monitor
organizational performance and productivity vis-a-vis the strategic goals. The essence of the balanced
score card is to give policy makers the opportunity to have a broader view of the performance of their
organisation in relation to long term goals. It serves as a benchmark that gives a clear picture of
performance and also serves as a guide against future hitches in planning (Brewer, 2004).
In addition, it assists organisational players in executing their strategies to the latter. Furthermore, the
Balance score card can also be used to identify weak and vague management approaches that have
been used in the past and also proffer ways to avoid a recurrence in the future engagement while
maintaining a positive financial standing in the process. It gives those organizations that adopt it the
opportunity to match their vision with actions and performance instead of mere rhetoric as obtainable
in non-performing organisations. It is designed to provide feedback for policy makers on both the
internal and external business processes and outcomes in order to have a cutting-edge advantage as
business continues, and to evaluate the decisions that need to be made to influence future products
and services (Kaplan and Norton, 2005).
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VISION AND STRATEGY ANALYSIS TABLE
OBJECTIVES
MEASURES
TARGETS
INITIATIVES
FINANCIALINTERNAL BUSINESS PROCESSLEARNING AND GROWTHCUSTOMER
2.2.1 The Financial Perspective of Western Banks
Previous studies in the literature review have demonstrated the orientation of western banks towards
profits making by purchasing deposits from the depositors at a low-interest rate, then reselling it to
the borrowers at higher interest rate, based on its competitive advantage on gathering information and
underwriting risk (Suarez, 2009).
However, Mahmud investigated banks financial reports using empirical research to demonstrate that,
in 2008, the Deutsche Bank of German recalls net loss of £3.5 billion, while the Citi also revealed a
loss of $27 billion respectively. In the report of Lloyds TSB that they sealed the sum £10.4billion, at
that point in term US, despite being one among the bigger investor in Western Banks still incurred
bailouts up to $2.98 Trillion towards the end of 2009. Looking at the slumped of HSBC over 60%
which affect the pre-tax income, most problem were minimise through fund raising that up to $18
billion in the beginning of 2009.
In another report, BBC reported that the UK mortgage approval fell in June as tighter lending
conditions and weaker confidence curbed housing demand. The report further noted that the loan
granted was 48,000 pounds, compared with 51,000 pounds in May, 2010 among the central Bank’s
panel of six major lenders, by looking forward, to their demanding for secured lending to be flat over
the rest of the year (2010). They analysed further that the Council of Mortgage Lenders said in a
separate report that gross mortgage lending rose 15 percent in June from the previous month to 13.1
billion pounds ($19.9 billion). In addition, it found out that government’s spending-cut program
announced in 2010 will slice 85 billion pounds from expenditure; equivalent to 5.7 percent of gross
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domestic product, all this data is based on reports from Santander SA, Barclays Plc, HSBC Holdings
Plc, Lloyds Banking Group Plc, Nationwide Building Society and Royal Bank of Scotland Group
Plc. The performance of the western banking has been encouraging especially in terms of wealth
creation through high level profit and return on investment. However the activity of the western bank
has been focussing on profitability as the sole objective that therefore seem to have concentrate more
attention on the profitability. The sharp drop in financial performance has been indicated to be among
the factors accrued to economic downturn.
2.2.2 The Internal Business Process Perspective
This is the real internal processing of banks to retain their profitability of getting attraction of their
targeted customers and able to meet the requirements of shareholders about financial revenue. It was
also indicated that any existing managers need to concentrate on customer need and satisfaction in
order to achieve their focus on the internal measurable control of banks. Arguably, through some
viewer reported that banks only pay attention to their existing customer through single process in
order to improve the existing operators, but it was advisable that should consider customers need and
shareholders requisition as a clue to be followed (Yansheng, 2009). In this regard, western Banks
enjoy several advantages due to a very long history and experience; they do not share loss with
clients nor ask for guaranteed collaterals in most transactions. They enjoy very huge capital, have
much more developed technologies, and have entered Islamic banking market with such banks as.
Citibank, Bank of America, Deutsche Bank, and HSBC, in both theoretical and empirical operations
(2010). They used empirical research to demonstrate further that Western banking have experienced
rapid assets growth nearly tripled between 2003 and 2008. Over the recent time, the banks have been
successfully implemented series of innovation, powered by technology and more profitable ideas,
product and services across the world.
2.2.3 The Customer Perspective of Western Banks
The main focus of western banks is to create a management strategy, and make availability of variety
products to meet the customer need, which is real assessment of managers to enhance market of
competition's customers through market segments which required participation of customer. This will
allow banks to achieve the set goal through market share, customer retention rate, customer
satisfaction, and customer profitability level (Laudon and Laudon, 2010).
Robin et al 2002 argued that even though general banking activities have been changing and
widening well, banks are still showing very themselves as important player in the mortgage markets
of the world economy. The banks have this capacity because of their innovative trend which seems to
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be moving them away from their traditional activities of handling deposits and providing loans to
business. More importantly, banking activities have become easier to operate but also come with a lot
of risks.
Because banks have to diversify their investment, they went into the exploration of hybrid products
in mortgage finance which eventually lead to the sudden collapsing of the world economy. Despite
the critical global economic downturn, it could be said that conventional banking had been
performing better in terms of customer satisfaction and range of product varieties that are appealing
to customers within the different financial capabilities. In a different view it could be argued that
western banks had not been fair in terms of risk sharing, it means that in case of any default the
customers would face the consequences alone. .
2.2.4 The Learning & Growth Perspective
This shows ability of banks’ investments to determine the growth of organization and the process that
banks embark upon to achieve long-term activities of the banks, this including the ability of
employees to project, learning, and productivity fashion. In a recent study Austin (2008) reveals that
Western Banks have raised the performance level of banking and this has been translated into the
increasing financial success. The balanced scorecard was used to achieve this since it has been
argued to be an effective planning and management tool that is used extensively in business and
industry to prevent business from derailing from its stated vision and strategy. It is also used to
improve internal and external communications and to monitor organizational performance and
productivity vis-a-vis the strategic goals. The essence of the balanced score card is to give policy
makers the opportunity to have a broader view of the performance of their organisation in relation to
long term goals. It serves as a benchmark that gives a clear picture of performance and also serves as
a guide against future hitches in planning (Brewer, 2004).
In addition, it assists organisational players in executing their strategies to the latter. Furthermore, the
balance score card can also be used to identify weak and vague management approaches that have
been used in the past and also proffer ways to avoid a recurrence in the future engagement while
maintaining a positive financial standing in the process. It gives those organizations that adopt it the
opportunity to match their vision with actions and performance instead of mere rhetoric as obtainable
in non-performing organisations.
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2.3. The Performance of Islamic banks
Prior studies have examined banks performance used financial ratio method, this compensate and
removes the disparities in sizes but cannot capture general overview and long-term (Dewi etal, 2010).
In which the Balance Scorecard could be used to generalise the depositors, investors, Bank Managers
and regulators. The performance evaluations of Islamic banks are important for all parties. In a highly
competitive financial market bank performance provides signal to depositor-investors whether to
invest or withdraw funds from the bank. Depositors may also be interested in evaluating the
performance of the bank as they are not entitled to fixed returns and the nominal values of their
deposits are not guaranteed. Managers are keen to know the outcomes of previous management
decisions as well as to evaluate whether to improve loan service or deposit service or both to improve
its finance. Similarly, it also help Shar’iah Supervisory Boards and other regulators to understand the
performance of banks and to ensure only transparent and clear information is available and used.
Finally it helps investors to identify chances and investment opportunity and ensure that the best
decision regarding use of funding is being taken, since Islamic banking practice is now uncharted
territory for most practitioners and policy-makers. (Yansheng, 2009)
2.3.1 The Business Process Perspective of Islamic banks
In this study, an attempt have been made to investigates the performances of Islamic Banks, though
there has been a paucity of empirical studies in BSC Islamic banking as it is a fairly new and small
industry in comparison to the western banking system. It was recall that financial markets throughout
the world have plummeted caused by the US credit crunch from 2007 and the subsequent world-wide
financial crisis from October 2008. Yet annual reports of most Islamic banks show encouraging
results. They became the biggest winners in the world financial system as many of the Western banks
endured massive losses in share prices and profits. (Abdel-Hammed, 2008)
Hanudi et al, (2009) and Masood et al, (2009b) have reported that Islamic financial institutions began
expansion about 20 years ago. And have since become an important player in the global financial
system, international economies and the social sectors of the countries that operate them strictly on
the principle of Shar’iah. However, the rapid expansion of the Islamic banking system was a result of
the need and desire to expunge interest rates. Islamic banks were founded under the profit and loss
sharing system (PLS), they demonstrate further that basic responsibilities of Islamic Banks are to
ensure that the banks’ products, instruments, mode of operations, orientation and management style,
are Shar’iah compliant.
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New study reveals that due to the rapid development of the Islamic banks across the world, an
attempt has been made to examine bank’s comparative performance by focusing on its efficiency in
profitability, increase in fund to be managed, bank size, market power asset quality, better services at
reduced charges and lower bank’s risk through the increase in retained earnings/liquidity (Dewi,
2010).
However Khanfar have reported that the way the Islamic financial system has progressed so far is
only partly, but not fully, in harmony with the Islamic vision. It has not yet come out of true picture
of Western finance (2009) He demonstrated further that the use of Equity and PLS modes has been
insignificant, while that of the debt-creating sales and lease based modes has been predominant. He
argued further that in the case of debt-creating modes, all Islamic banks and windows of conventional
banks may not necessarily fulfil the conditions laid down by the Shar’iah.(Islamic Law)
However, Al-salam (2009) opined that the strategies adopted by Islamic banks are the reason for its
maintenance of strength, increased banks’ financial position while maintaining increasing market
share. These have eventually led to the optimisation of the profits of shareholders and depositors and
also maintain and increase the ethical practices, performance standards, and retention of customer
confidence, etc. This practice comes with gradual adoption of the necessary tools to maintain market
leadership, increase customer patronage, while aggressively creating more awareness about the gains,
performance and the varieties of Islamic products available for customers for their future securities.
The adoption of modern Information Technology, improved training for staff support the banks quest
for improved development and performance. Al-salam (2009) reiterated that the availability of highly
skilled personnel from the western banking sector provide added advantage for Islamic banks to tap
into. They are as well supported by the public and the private sectors.
2.3.2 The Financial Perspective
In a recent report Jobst argued that many Islamic financial institutions appear to have
been insulated from the global financial crisis, which is likely attributed, to their
Islamic principles that prohibiting interest, and also didn’t invest in structured
products (2009). They used empirical study to investigate that the total assets of
Islamic financial institutions in Gulf Cooperation Council (GCC) countries grew
continuously between 2003 and 2008, representing $288.2 billion at year-end 2008.
In this regards, Paul have investigated further that the emerging GCC dual banking system (Islamic
and Western), of most sophisticated regional Bank (2009) He pointed out that a 66% drop in net
income down to $541m from $1.6bn in 2007, largely because of their $586m provisions and $316m
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goodwill costs. He used empirical evidence that Samba and Riyadh banks have experience smaller
falls in profitability as they reported drops of 7.6% down to $1.18bn- and 13.3% -down to $704m-
respectively.
Islamic Banker (2008) has actualised the fact that UK, a largely Christian, albeit secular country, has
done more for facilitating Islamic banking and finance in the UK than many Muslim countries have
done in their own jurisdiction. Explain further that the British financial expertise with the Muslim
world and the Commonwealth, has married well with Islamic banking and finance, forming indeed a
formidable partnership. Now, there are at present 22 banks offering Islamic financial products in the
UK, including five that are fully Shar’iah- compliant.
It was recall that over the last five years UK Government has made series of reforms to establish a
level of amendment in tax and regulation between conventional and Islamic banks. These include
products such as Shar’iah compliant Mortgage, Individual Savings Accounts and Child Trust Funds,
with depth of skill, experience and connections all around the world (Standard and spoors, 2010). In
addition, Minister McCarthy-Fry, also have reported that there are some key principles underpinning
Islamic banking and finance that could help shape to the new benchmarks, to reject the speculative
activities and encourage an ethical approach to financial market and sustainable growth. (Islamic
banker, 2010)
2.3.3 The Customer Perspective
In another survey, Mosood (2010) found that Islamic banks fill an efficient and effective gap in
developing the economic and social activities of Muslims and non-Muslims alike. He showed
empirically that the growing number of people who deposited their earnings with the Islamic banks
help the banks in channelling these deposits towards bigger investments, future securities, job
creation and community development. The growth rate of the customers who took part in in the
banks’ interest-free loans rose to about 144,000 in 2009 in Uk alone, while the value of the loans
given reached over 90.91 million pounds. He pointed out further that with the mission of the bank
which is to reach all citizens of the UK, definitely, the banks will grow further as the years pass by.
FSA, (2010) revealed that Islamic banks have grown in size and capacity leading to a network of 22
branches that offered Islamic products. Worthy of note is the fact that the Bank of London & the
Middle East plc (BLME), the wholesale Shar’iah-compliant bank authorised in 2007 by the Financial
Services Authority (FSA) in the UK, closed a UK£6.8m in mezzanine financing on Murabaha
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transaction in 2010. In addition, the Bank has successfully established correspondent relationship
across the globe.
In the recent report Siddiqui argue that human resources and expertise in Islamic banking are
somewhat scarce and lacking behind (2009). He demonstrated further if not for the fact that Western
bankers and financiers expertise couple with the backgrounds that brought Islamic banks sector
forward. He reveals further that one of the common complaints that Islamic customers have is that
turn-around-times are slow.
On another account Islamic Banker pointed out that documentation requirement from customers is
traditionally high in Islamic banks and this led to the biggest causes of credit approval delays and
customer heartache. (2010)
Recently, Muhmud (2010) substantiates that the main objective of Islamic banks besides making or
maximizing profits, their aim is to achieve economic and social welfare stability without undue and
unnecessary exploitation of the customers.
This is indicating in the work of Dewi pointed out that Islamic Bank of Britain offers saving
accounts, terms deposit accounts and treasury deposit accounts and they invests their money into
trade in Shar’iah-compliant investments (2009). He demonstrates that customers are fully satisfied
with investment criteria of bank officials. He pointed out that profits and risks from investments are
mutually shared between the bank and its customers, which ensure equitability and also repose
confidence in the customers. These services are also offered to the non-Muslims alike who wishes to
avoid such industries as tobacco and alcoholics.
However, Mosood (2009) et al reveals that Islamic bank of Britain is the first of its kind in the west
to starts providing basic Islamic financial products. Keeping in view the increasing demand in Islamic
banking have opened windows with many conventional banks such as the Saudi British bank and
other big players in the global financial sector (HSBC, Citibank). They have opened Islamic banking
units in their various branches across the world. Mossod explained further that bank like Lloyd TSB
also increase the need of customers by expanding their Islamic banking services capacities to fsatisfy
the yearnings many of their customers in the UK. Many varieties of account were made available for
those interested in Islamic banking. They include Islamic current account, home finance products,
and all are fully designed to meet Shar’iah law. The Islamic current account is operated such that the
banks do not pay interest to account owners who is in credit they are denied the opportunities of
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overdrafts. For home finance the bank uses diminishing Musharaka (co-ownership share) and Ijarah
(Leasing) scheme to complete property purchase agreement.
2.3.4 The Learning & Growth Perspective.
In a study by Al-Salem (2009), it was reported that Islamic banking spread from the Arabia Gulf and
proceed to England during the late 70s and the early eighties. Most of the international and national
Islamic banking institutions were established around this period. Al-Salem stated further that during
this period, the USA’ and Europe’ branches of these banks, including those of Asia have been
opened. In other countries such as Iran, Bahrain, as well as Sudan, the activities of the entire banking
operations was converted to the Islamic mode of banking. This was reported, as one the boost to the
spread and the growing number and sizes of the banks globally. He used empirical research to justify
that the growth and accelerated rate of Islamic banking which was reported to be an annual rate of
15% in the last five years. He associated the growth of the Islamic banks to their successful
operation. It is worthy of note to state categorically that Islamic banking system is part of banking
system of the countries where they operate and are therefore subject to the country’s standard and
same banking rules and regulations.
In another vein, Faisal et al (2009} reported that it is not only Islamic Banking of GCC that have seen
positive net income figures. The largest UAE bank, the National Bank of Abu Dhabi in western
world enjoyed a 20% increase of net income +$821m. Recently from the wider market, another
report from Masood show that number of 180 Islamic Banks based on Islamic principles operating in
Asia, Europe, America and Africa (2009), also reveals that the growth rate for the largest 100 Islamic
Banks was 26. 7 % as in outstanding growth shown by Islamic Banks is $350 billion in 2008.
In a recent report Jobst, showed empirical evidence that Islamic banking interest rate currently is
more than US$ 800 billion worth of deposits and investments lodged in Islamic Banks, mutual funds,
insurance schemes and Islamic branch of western banks. (2009) He illustrates further the concept,
scope and principles of Islamic banking around the globe is a universal concept in the conventional
banking and specifically in the United Kingdom, which is in effective operation with many Islamic
products in many banks in the UK such as Islamic Bank of Britain, HSBC, including Lloyd TSB.
More recently, Islamic banker, (2010) has reveal that due to hurdle in financial engineering expertise
in Islamic banks, the London-based chartered institute for securities & Investment(CISI) has signed
an agreement with the Securities Industry Development Corporation(SIDC) of Malaysia to become a
training partner for CISI’s Islamic Finance Qualification, by structuring and offering tailored Islamic
finance educational and training course.
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2.4. Mortgage Lending Practices in Western Banks
2.4.0 Introduction
The mortgage lending market has grown rapidly in the past decade. It debt has reach percentage of
GDP from 40-50% in 1990s to more than 70% in 2003 and 2004. The growth is attributable to the
homeownership encouragement policy that the government adopted. Several programs were
established to foster mortgage lending, construction and encourage home ownership. (Stephens,
2009)
In the traditional mortgage process, the lending institutions (banks and non-banking financial
institutions) lend money to home buyers directly from the deposits received from customers. The
lending institutions were very prudent in the property valuation and borrowers credit status. They
lend money only to prime borrowers who are qualified with all necessary criteria. However, if the
borrower of a mortgage loan defaults on loan repayments the lender will institute legal action to
obtain a court order to repossess the relevant property and to auction it to any prospective buyer at a
forced sale price to recover the loan and costs in the recovery. (Suarez, 2009)
2.4.1 The Theories of Mortgage Lending practice in Western banks
Existing studies on this area reported that there are two feature of public law that overlapping the
regulation of mortgages, one of them function under the Financial Services Authority (FSA) through
the Financial Services and Markets Act 2000 (FSMA). Mortgages monitor by the FSA are known as
regulated mortgage contracts (RMC). The second system is operated by the Office of Fair Trading
(OFT) under the Consumer Credit Act (CCA) (Suarez, 2009)
In the recent study Bernanke has pointed four features that accrue to mortgage lending practices:
market determination, public awareness, and securities of consumers and the deterred of financial
crime (2008). He demonstrate further that the effectiveness in mortgage market
began in 2005 considered lending requirement in term of sub-prime, interest
rate, self-certified Mortgages, retirement of lending and the consumer’s
assessments to afford a mortgage, in order to raise standards of the industry.
However, standard and spoors in their report highlight the FSA regulation that comprises mortgage
lending practices, including mortgage administration, counselling on mortgages, and arranging
mortgages. He explained further that in order to determining the most appropriate way to regulate,
the FSA identified the variation in markets forces which might inhibit the achievement of its aim. In
the mortgage transactions, FSA have highlighted the main reason for enforcing the senior
management responsibility because of poor provision and the lack of accurate information about
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mortgage lending practices, which caused confusion to customers on the market risk benefit and its
products. This intervention will restore transparency and create lucid information about the cost and
ensure competitive efficiency through the authorization of FSA and their proper counselling on
mortgages endowment.
2.4.2 The operations and structure of Mortgage lending in Western Bank
In this regards McAuslan (2008) reported that there is a banks charges on any provision of fund that
lender gives out in advance to the borrower. The lender must present the evident for the source of
income, references to that Credit and within 65 birthdays the loan must be return. On this study, Peter
substantiates that there long duration of property values are always determine by the many lender
that stipulated up to 125% of the assets (2009). He held that they lay more emphasis on Life
insurance and assets frequently, despite that the property not yet in possession of the lender within
the 40 years of the instalment period, the payment has Multiples Up to 5times of primary yearly
income of the applicant, on the basis of £500 fee usually agreement depend on the Banks policy. He
explain further that in western mortgage system the customer owns the property and it is provided as
a security on a first or second mortgage basis to the institution. The implication is that it will incur
less of a huge of money to be repaid, but is a matters of interpretation. On a similar work Yilan and
Jipeng pointed out the contract to be held on the mortgage lending agreement (2010). He explains
that A contract is a ‘regulated mortgage contract’ if, at the time it is entered into, the following conditions
must be met:
The provision of credit must be from lender to trustee and also as the custodian of contract files contract
The contract comprises the legal rules and regulation on the occupant of the property based on the schedule payment.
At a point and during the completion of agreement, minimum of 40% of the property will still be in used or intended in the hand of the borrower in possession of the property.
In the modern mortgage lending practices Sinnakkannu (2008) reveals the banks stand as the
intermediary between the house purchaser and the investor that was incur of mortgages
documentation through Collateralized Debt Obligations (CDOs) of the markets securities bond that is
already buy from the banks. Through this process the banks and lending institution are generate a
large lending fund to numerous home buyers.
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He illustrates further the steps in the new home mortgage process are as follows:
In many occasion banks provides loan to the borrower through broker. Once the agreement is reached between the banks and the customer, it likely culminates the future consultation from the Mortgage Broker.
After the MBSs or CDOs sustained a mortgage from the banks, then they set-up the instalment repayments through an appointed officer in charge.
The Issuer sells the MBSs and CDOs in the form of securities to investors in the securities and bond market. This can be ease through the aids of the sale officer, the Credit securities Provider and the officer in charge of securities rating transaction at the initial stage.
The issuer of mortgage documentation received the arrange payment from Servicer. collects monthly repayments from the Borrower and remits the payment to the Issuer. The rules and regulation that bases the loans are bind between the officer and the trustee as it set in the Servicing and Pooling Agreement.
2.4.3 The Challenge of Western mortgage lending practices
The challenge to interpret the high subprime rate or mortgage lending lies in the absence of the credit
information and the loan outcome information. The high prices charged by the lenders could be
legitimate risk premium for high-risk borrower pools, or compensation to the long distance
associated with increased transaction fees, monitoring and servicing costs, or it could be the
discrimination from the lenders. Without proper information such as borrowers’ credit scores, loan
delinquency, default and foreclosure, the true credit quality of the loans cannot be distinguish. (James
et al, 2009)
Similarly, standard and spoors (2010) revealed that Western banks’ lending secured by collateral
substantially divorces bankers from their clients’ risks, and causes heavy conflicts of interest. They also
skew the provision of funds to those who are already rich, while the Poor people with good ideas but no
collateral often fail to attract finance under this system, with the result that wealth inequality increases
from one generation to another.
In another work, Adrian et al (2008) argue that the most powerful destabilising challenge in modern
mortgage markets is the activities of money creation by the Western banking system. By creating money
out of nothing and putting it into circulation. He explains further that the Entrepreneurs and western banks
do increase excessive risk, and then insulate themselves from it, in order to increase their return on
capital. This practices consequences make their clients suffer the inflation and boom-bust cycle of
interest-based banks system.
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2.5. Mortgage Lending practices in Islamic Banks
2.5.0 Introduction
Acquiring a mortgage is among the first financial decisions that an individual makes in order to lead
an economically secure life. It has immediate influence on health, education, and environment,
political and social life of the society. The Islamic mortgage lending practices is new to many people
across the world especially in the western country, and its emergence has brought a new set of
challenges, especially given the global economic downturn that resulting from the widely criticised
practice of western mortgage lending practices (Dar, 2003).
However, Islamic mortgages that also known as Shar’iah or Halal mortgages practice were
introduced to combat the interest rate charge problem and provide a method of obtaining finance
from a lending institution without paying interest (McAuslan, 2008).
In contemporary, mortgage lending was mostly bought by cash, or by using consumer and
commercial loans. Previously, only government sponsored mortgages Banks lending and it is only
since the late 1990s, that private institutions entered the playing field, resulting in a wider choice and
greater volume of mortgage finance (Islamic banker, 2007).
Similarly, it was recall that Islamic mortgage industry has been growing at a rapid pace with the
broader growth of the Islamic finance sector. This trend has been particularly significant in the GCC
and recently in western country due to the much talked about boom in the economic and real estate
sector. The aim of Islamic mortgage lending practice is to promote affordable home ownership by
making housing more available for the country’s middle and lower income population in Shar’iah
compliant residential mortgage (Standard and spoors, 2009).
2.5.1 The Theories of Islamic Mortgage lending practices
More recently, Islamic mortgage is defined as a type of financing that is secured by real property and
provides a schedule of payments of profit rate and repayment of the principal to a bank. The
researcher demonstrated further that Islamic mortgage provides profit rate instead of interest rate and
that the pricing policy is considered as fixed and higher at the commencement of a contract between a
customer and the bank, whereas the rate will not fluctuate, even during inflation. (Hanudin, et al,
2009)
In a recent report Robin (2009) have investigated the difference between the market price [cost
price] and the mark-up price [selling price] is the profit for the bank, which is permissible in an
Islamic home financing context. In view of this, McAuslan (2009) recall that charging interest is not
permissible in an Islamic home financing context, as it leads to an inequitable distribution of income
in society, that why Islamic banks promote a more equitable pricing to their customer.
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More importantly, there are exists scarce study that investigating choice criteria for choosing Islamic
mortgage providers selection. In this respect, Hanudin et al found that the banks service quality is the
most important element for lending criteria. (2009)
However, Graeme have reported that Islamic mortgage is considered to be only sub-set of
conventional mortgage system (2009). He maintained that Islamic banks’ mortgage financing is the
standard method appropriate for commercial and residential mortgage financing without the payment
of the full value of the house upfront. In the further report of Masood et al, investigated that Islamic
mortgage were considered as painstaking in its early days, they have investigated that there was only
Halal mortgage providers in UK (2009) they demonstrate further that until 2002 that customers
realise that to select their mortgage providers by looking at product attributes, access, interest rates,
loan availability, communication, and previous relationship with the bank.
In a recent research Mosood et al, argue that Islamic mortgages are more expensive than
conventional mortgage (2009). They find out that it was due to the allocation of funds in Islamic
bank that is not obtained from investments in non- Shar’iah industries. Masood also pointed out the
view of Paul Sherrie, held that, Lloyds Islamic financial services, who maintained that Islamic
mortgages are costly due to the nature of Islamic banks risk-sharing and Shar’iah complaint
mortgage. He also reported that due to the many high street banks that have started the operation of
Shar’iah complaint mortgage financing and the remover of the double stamp duty in 2003, with the
changes in the Gordon Brown’s budget speech in 2004 that cost Islamic mortgage more competitive
and cheaper in the market.
2.5. 2 Operations and structure of Islamic Mortgage
The Practitioners, Researcher and the Banker have pointed out that, the activities of an Islamic
financial institution benefited from additional operational checks and balances in comparison to a
Western financial institution. That Islamic Mortgage lender operates irrespective of whether they are
in Islamic or western country in basic principles of prudent lending practices to mitigate risk,
assessing the customer’s ability to pay and security, with credit risk and management techniques.
(Islamic Banker, 2009)
Generally, Islamic mortgage lending practices is structured into two contracts, viz; Murabaha- (cost
plus profit margin) and Ijara-( leasing, that grouped in contract Ijara and Diminishing Musharaka--
(co-ownership plus rental concept) both model are designed and structured in order to avoid the
payment of interest. (Masood et al, 2009b)
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In this respect Khanfar (2008) have investigated that in Islamic mortgage lending practices, the
bank’s customer specifies the house he wants to acquire and the banks purchases the house from the
supplier/ developer at its normal price, for cash and resells it to the client at a higher price in which
the mark- up is applied, while the customer then pays back the price on an instalment basis.
In the report of FSA, (2009) that Islamic mortgage lending practices is based on the principle that the
transaction must be backed by an asset, i.e. the property must be owned by the lender prior to
providing mortgage finance for the customer. This is exactly contrary to the situation in conventional
banking where money is given as loan and the asset may be used as security, depending on whether it
is a secured or unsecured loan. As a real asset underpins Islamic mortgage finance, the end result of
the funds can be more clearly appreciated.
2.5.3.1 Murabaha (The financing of a sale at a determined mark-up)
In the recent report Islamic banker, explain that in case of mortgage lending practices the purchaser
(customer) finds a property and agrees a purchase price with the seller in the usual way. The bank
then purchases the property on behalf of the buyer and immediately sells it to the buyer with an
agreed profit, added it to the actual price or cost (2009). Held further that a percentage of the
purchase price (the deposit) is paid to the bank immediately and the remainder is paid in monthly
instalments over the term. The instalments are fixed over the life of the term. Masood et al
substantiates further the advantage and disadvantage of the Murabaha type of mortgage lending
practices (2009). They explain that the payments are fixed throughout the period of the term and
there is no change of agreement in case of sharp rise in interest rates and customer found default in
the install payment as well no benefit from any decrease in it. Also pointed out further that there is
minimum deposit of 17- 20% depending on the value of the property and the status of the customer.
The period of outstanding balance repayment is between 5- 15 years at any given time in term of the
arrangement.
2.5.3.2 Ijara (Lease financing. The purchase of the leased asset at the end of the rental period is optional.)
In the principle of Ijara this refers to ‘transferring the usufruct of a particular property to another
person on the basis of a rent claim from him’ (Masood et al, 2009). In a similar work, Islamic Banker
has investigated the operation of Ijara in case of Islamic mortgage lending (2008) the work
demonstrates that the Ijara involves a lesser (Banks) purchasing a specified property and thereafter
renting it to a customer (lessee) with an agreement on a specific period.
However, it has been argue that Ijara are more flexible than Murabaha because it characterised the
lease financing and hire-purchase arrangements. It was regard as most attractive method of property
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finance that the customer to repay the mortgage early payment or overpayments. (Islamic Banker,
2008)
In a recent study, Masood et al pointed out that the two types of Ijara practices: Contract Ijara and
Diminishing Musharaka are particularly useful in mitigating the risk to the finance institution in the
event of customer default (2009). He explains further that Contract Ijara is structured in such a way
that the financial institutions (lesser) usually transfer the ownership of the property to the customer
(lessee). Diminishing Musharaka is a shorter term leasing which the financial institution and
customer are partners: both keeping the possession proportion of the property and commensurate
with the amount of their contribution. This substantiates further that Ijara type, payments are
reviewed annually and will increase and decrease in line with interest rates.
In a recent work, FSA reported that the Finance Act of 2007 is a breakthrough of Ijara Mortgage into
the government regulatory framework and followed by Murabaha type of Mortgage. In their
analyses, Ijara Mortgage refers as a type of equity release product, and it was designed for elderly
homeowners to enable them to survive and enjoy their home value without foreclosure. In their
further report, it was argued that Murabaha- based Mortgage have the same risk as that of
conventional mortgage practice where the risk is weighted at 50% . While the Ijara-based Mortgages
risk is weighted at one hundred percent which makes it a bit more expensive compared to the
conventional Mortgages.
2.5.4 The challenges of Islamic mortgage lending practices
In a recent work, Masood has investigated the element of psychology traces in Islamic Mortgage
practices (2009b). He argues that as the customer does not own the property at the time of financing,
they may harbour a ‘fear’ that the property, which is often for their own personal use, does not
belong to them and that they may lose it. In a similar work, Robin et al analysed the greater
challenges of Islamic financial institution on mortgage lending that has similar benefit in comparison
to a conventional institution in the aspect of additional operational checks and balances. They
explained further that as all its activities are reviewed or monitored by a Shar’iah board, as well as a
Shar’iah auditor. These additional layers of control make it difficult for an Islamic financial
institution to step outside its framework of predetermined rules and regulations on mortgage lending
practices (2009).
However, for the entire Scenario, Islamic mortgage lending faces definite challenges. The most
obvious is one of maturity and sophistication. As comparative new comers, Islamic financial
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institutions lacks standardisation in terms of what constitutes of products and services in
Shar’iah compliance. In addition, the full-fledged of managerial and technological system of Islamic
mortgage were lacking, which are standard for the industry. There is a concern of far greater long-
term that threatens the core of Shar’iah compliance itself, because of the element of differences in
religious interpretations (school of thought) (Issam and Robin, 2009).
Recently, discussions have been taking place with the Bank of England and the financial services
authority (FSA) on the issues HSBC (Amana Finance) can begin offering Islamic financial products
in year 2003. On that note it was pointed out that the joint document signed by Barclays Group,
HSBC, Union Bank of Switzerland, Ihilal UK, and United Bank of Kuwait lists the following major
barriers to provision of Islamic mortgage lending practices in the UK: Islamic banker, 2009)
(a) Through current regulations on lease agreements, the product has to be 100% risk weighted to risk
weighting of only 50%, bringing them on par with Western Mortgage (b) While the Western
mortgage, as set a strategy plan through English law that require two sets of solicitors due to the two
conveyances documentation. Institutions of Islamic finance, are requesting an exemption from the pr
-requisite to have a second set of solicitors. (c) Double stamp duty was great hinder to Islamic
mortgage development, which the UK Treasury removing the provision due to the fact that the
Shar’iah compliant structures involve a double conveyance. This makes Ijara contract uncompetitive
and costly compared to the Western mortgage because these taxes have paid by the house purchaser.
But as soon the law has been rectify it now sufficient to make them an economically- viable niche
product to reflect the reality of the scheme (Islamic banker, 2010)
CHAPTER THREE
RESEARCH METHODOLOGY
3.0 Introduction
The concern of this choosing topic of this research work is mainly about what will be a befitting
research methodology? Since the idea of incorporation of western and Islamic banking operation is a
newly growing industry across the globe, as we trying to compare their performances through recent
economic downturn with a focus on mortgage lending practices. It was deduced from literature
review that there is a scarce of research done on the business and the market performances of both
banking on the mortgages lending practices, especially at the financial crisis. Thus, this research has
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been arrived on what will be an accurate marketing strategy for mortgage lending practices across
global, in order to recovered mortgage from the downturn during the economic recession.
The research work focuses on some banking sectors and the policy maker from Islamic and western
Banks branches in UK. It has been argued that perfect marketing strategy has been traced through
creating internal process strengths of customer awareness and awaking the mortgage lending
practices within the context and the result could be useful for both the banking sector and the policy
maker.
For the purpose of achieving the set objectives of the research question, the research aims and
objective that was raised must be able to justified the adopted methodology, also corroborate and
juxtaposed the literature review and as well answering the research question, that was highlighted in
chapter one of the study. Furthermore, this chapter will give details of the selected topic and explain
how the research question was propounded in conform to objectives, as well educating how the data
is collated. This section will also discuss the population and the sample size techniques to be carried
out in the research work, as well the limitation and benefit of the methodology
3.2 The Research Philosophy
Mark, et al 2008 argued that: The relationship between data is an issue that has been hotly debated by
philosophers for many centuries, and failure think through philosophical issues such as this research
work, that if not cater adequately, can seriously affect the quality of management research and they
are central to the notion of research design.
Research paradigms are of two main types; phenomenological and positivistic. Brockbank explains in
class lecture that, alternative terms could be used by different authors to describe these main
paradigms in different time. Though the most commonly and alternatively used of these terms are
quantitative research methods and qualitative research method for positivistic and phenomenological
method respectively (2010). The positivistic paradigm originated from the natural sciences to
increase understanding of natural phenomena, hence the confirmatory and deductive nature. The
phenomenological paradigm came out from the social sciences to facilitate the researchers
understanding of social and cultural issues leading to its exploratory and inductive nature
(Brockbank, 2010).
The methodological approach of these studies will make use of tow data strategy for conducting the
research methods as sources of evidence: i-e phenomenological - qualitative data collection, and
positivistic- quantitative data collection. The paradigm is very important because it gives you a right
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path to use the right methodology. Mark et al (2007) stated that “Regardless of the type of paradigm
employed, attention must be paid to the features and to avoid contradictions and deficiencies in the
methodology”. In this research the paradigm are quantitative research methods for positivistic and
qualitative for phenomenological. The use of phenomenological in this research is because it tends to
produce qualitative data. Therefore the quantitative research is objective in nature that involves
analysis of numerical data by applying statistical tests (McMament, 2003) While the qualitative
research is much more subjective in nature, both are concerned with generating the insight, the
opinion and the theories of the Western and Islamic Banks and this can be used to generalized the
customer understanding and perception of the phenomenon and positivistic to compared the
performances of western and Islamic Bank through economic downturn on the mortgage lending
practices.
3.3 Research Strategy: Quantitative and Qualitative Approaches
In qualitative and quantitative research methods it is easy to get detailed, conceptual and rich ideas
because these methods provide the results that how respondents feel and what they think because
they feel comfortable to all the provided information because the participants feel no hesitation or
coercion to discuss matters in details on any specific subject matter. In this work, it is comfortable to
make use of both quantitative and qualitative method due to the relationship to banks operators and
banking customers. The interviews with banks operators give access to easy information about the
performances and growth of Islamic and western banks and as well understanding of the cases of
mortgage lending practices between banks and customers. This generalisation information will be use
full for both the banking sector and the policy maker as well. Due to some demerits in qualitative
research methods, being unable to produce the exact figures on the number of people of a society
have awareness of Western and Islamic Banking performance on mortgage and peoples’ expression
is also difficult (http://marketing.about.com). The nature of qualitative research method is difficult to
collate and it is also time consuming. Therefore these researches will heavily lay more emphasis on
the quantitative that is positivistic of the research that emphasizes the views and the opinion of the
consumer perceptions, policy maker and behaviours on the performances of both banking towards
mortgage lending practices.
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3.4 Data Collection: Primary Data
3.4.1 Interview
For the collection of primary data, in-depth interview will be used. Interviews was conducted across
the banks that gave a clear facts and figures about their performance towards mortgage lending
practices with such Muslims and non- Muslims who are customers of the western and Islamic banks.
This activity facilitated the research by providing the information on why they took up Western and
Islamic banking, advantages and disadvantages of this system, including the scope and extent of
Islamic banking operations in the UK. In case of Muslims and non-Muslim that are not using Islamic
banking product, it was helpful to investigate the reason for the decision not to take Islamic banking
product despite being the outcome of their faith.
I spoke to the non-Muslims who were using the Islamic banking products that will provide the best
information for the performances, growth and principle of Islamic banking, as well as Western
banking. The interviews were conducted by sending questionnaires and emails to bank authorities,
customer services department, market traders, pastors, Imams, cab operators, students and lecturers.
In taking interviews from customers and non-customers of the western and Islamic bank, the
interviewer used poster advertisement in the mosques, churches, colleges, libraries and bob arena.
The interviews went ahead with the permission of organisation head in order to record their views
with the use of the voice recorder.
3.4.2 Questionnaire
To get a general insight and opinion that will be generalized on this subject matter. The research shall
also emphasis on the views of customer understanding and perception towards mortgage lending
practices during the economic downturn using different measures of western and Islamic banking
characteristics which are identified and incorporated into the questionnaire.
3.5 Benefit of the Primary Research
Secondary Data: The using of secondary data is to solve design problem of the research through
critical depicting of different information that will explore general clue of the finding. This includes
both raw data and published materials, which comprise written documents that include: minutes of
meeting, diaries, reports of shareholders and also contain journal, books, magazines articles, web
sources and newspapers. The secondary data also includes non- written materials such as voice,
picture, drawings, television and film. Its main advantages is create heavily saving of sources, remain
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quality sound and reliable, it save time and money, similarly it useful to help triangulation to
discovered fact through interviews and questionnaires. It also used to justify the report of primary
data because of the usual constraints in time and lack of accurate figure and fact of information due
to the privacy policies of many firms and banks.
The theoretical approach of secondary data was explored in order to blends inputs from different
disciplines relevant to understand and deal with the subject matter of this thesis, including value
creation and capability-building literature, technology implementation literature, mainly books,
article, published journals, internet, seminars, conferences, official website of selected banking sector
and to made an attempt to peep their business privacy for some crucial findings of different Western
and Islamic banks and some involved once, such as Islamic Bank of Britain Lloyds TSB, Hsbc, and
Beckley .
3.6 The Population of the Research
The study pursuit the primary and secondary design through the choosing Lloyds TSB and Islamic
Bank of Britain (IBB) as a case study being financial based organisations.
UK bank, Lloyds TSB was chosen because it was regards to be the first high street Islamic business
financing and Banking services window. Equally, claimed to be one of the UK’s largest fourth banks,
with a wide variety offer from both national and international since the 1970s in banking services. It
covered almost 2,700 branches in UK and approximately 500 branches across the global. And with
the total workforce estimated value of £21,394 million, Lloyds offered two variations of the account,
one for business with a turnover of over £2 million that eligible for Islamic business Account, and in
the Murabaha facility in estimation of over UK£ 100 million. While Islamic bank of Britain is the
first British bank claimed to be structured and practices with fully Shar’iah compliant banking and
finance system. As at end of 2006, its customers totalled 30,814, increasing by 120% from the
previous year. With the start-up capital raise of £14 million by 2003 (Islamic banker, 2009)
As a matter of fact that both case studies is operating in line with more of financial and marketing
research problem of the subject matter. Therefore, this research method concentrated more on bank
employees and the customers of both Lloyds TSB and Islamic Bank of Britain (IBB). These formed
the target population which was identified to the research question.
3.7 Sample Size
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This study adopted a convenient sampling technique. Its adoption involves the selection of a large
population from where the sample was determined (Mark et al, 2009). In case of some restriction that
were encountered through (time, money and access) the need for this type of selecting samples
methods will provided a series of technique that assist in reducing the quantity of information that
were collated. In which one hundred (100) people across the different departments of the categories
were accurately sampling. This is the sample size obtained through the convenient sample techniques
adopted for the study.
3.8 Triangulation
This method is used to counter the critique levelled at researchers for their approach and also provide
the method through which analyse the motive of some suspicion people will be disclosed (Myers and
Klein, 1999) This need to be cognisance about the biases speculation between the researchers and the
respondents in order to reduce cohesion and mis-representations Elayen et al, (2010). When research
is been design and interpretation is been stipulated; the questions and propositions are key logic links
of the findings that need to be considered worthy while developing research method.
3.9 Research Ethics
Mark et al (2009), describes research ethic as referred to an appropriation tool forgetting access with
the right of the population used for the study and that determined the success of research outcome.
For the purpose of this type of research finding, the deontology and teleology are the two dominant
standpoints. It has been argued by the deontological perspective that the finally justification of any
researcher yet to be adequate used of proposal which is considered unethical. This connotes the
ineffective and deceptive of data to implement the fact and figure. Teleological views on the other
hand stated that the end justifies the means. This implies that a cost-benefit analysis is conducted on
any research, and the cost does not matter once it serves a good benefit (Saunders et al 2007). For
this dissertation, the deontology view was applied so as to strengthen the validity findings. And
through politeness approach in contact the individual views were also used to produce a credible
result.
3.10 Limitation to Methodology
The methodological approaches propose to get an accurate data that is capable of providing
information. However, getting a clear instinct of people opinions is not ease to discover. This method
does not representing the selected sampling of the target population (Golfshani, 2003).
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The bulk of the data gathered were secondary reports from the existing literature so as to establish
understanding of the different strategies employed by the Banks concerning the subject matter of this
research work. This will give a clear cut for an improved, effective and sustainable performance of
the banks and policy makers. Though the over excessive use of information could result to a
formidable dilemma to the study. Therefore no restriction of time limit in order to come out with the
real fact of the data required. (Cowton, 1998).
Similarly, it can also encounter a limitation of the challenges of getting across to the banks in order to
extract any useful information for the research work. This has been classified as a confidential
documentation, that how it very difficult to access. Also the use other materials such as journals,
median and films can only be accessible through subscription, permission from operators. Even the
limit time to this work also contributed to constraints.
3.11 Pilot study
A pilot which is also known to as feasibility study represent the small fraction of research questions prepared to test the methodology adopted in testing for logistic and gathering of information before to the main research work in order to create room for further improvement, quality of and efficiency. It is capable of exposing the lapses in the question designed before the resource and time are assigned to it in the real research. Through this, the capability of the research question in term of ability to offer solution or supplying data required , address ethical issues that could affect the validity and to detect the flaws of the research methodology in good time. When piloting the questionnaire it will check that the instructions given to respondents, looking at correctness of question in term of structures and respondent time management Lancaster GA, Dodd S & Williamson PR (2004)
Piloting of the questionnaire was carried out through some of the academic staff and some research students in the Greenwich school of management and also in my branch of banking. Valuable comments were received because is a contemporary study that epidemic across the global, I opportune to approach one of the banking staff that is my colleague, she is soundly loaded and familiar with the research topic. Some of the academic staff and my project supervisor also provided support in drafting the content and analysis of the questionnaire. David and Sutton et al, 2004).
Other respondents from the piloting questionnaire reacted to the length of certain questions and suggested an elimination of certain questions which were similar to existing ones. Thus some questions were which had similar meaning to existing ones were discarded from the questions in order to reduce the length to an acceptable level. Another important change concerns the ambiguity found in the questions relating to the Banks’ Mortgage lending financed offered. The pilot questionnaire did not indicate the mortgage lending in which the respondents were supposed to give their opinions on. As trainees may have taken more than one training and development programme and with possible different outcomes, it was necessary to be more specific. Also the second phase of the pilot study was done in London.
Ten questionnaires were mailed each to some selected samples for the pilot survey at the Lloyds
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TSB and Islamic Bank of Britain, these samples included one branch manager, two operation managers, two marketers, three account officers, and two members of staff from the administrative department. The questionnaires were returned and four respondents gave their views. Comments from the director matched those already revealed that the questionnaires were asking repetitive questions, just as specified from the MSC students in the school. Two respondents (admin staff) noted that the questions could be simplified to specify more clarity in order to reduce ambiguity based on the questions on mortgage lending practices. In general all sample selected gave perspective views based on the pilot study. However these piloted respondents were excluded in the real sample of the main study.
3.12 Summary for the Chapter
This section provided an elucidatory strategically processes to be familiar with for this research.
While the subsequent chapter will test and discuses the presentation of finding for the research work,
through a deep cognisance feedback and reviewer outcome on how integrated of western and Islamic
banks has assisting recovery from mortgage lending practices through recent economic downturn.
CHAPTER FOUR
4.0 Presentation of findings
Introduction
This section analyses the presentation of findings that collected from the respondents at Lloyds TSB
and Islamic Bank of Britain. Prior to the actual survey, a pilot research study was conducted to assess
the views of the respondents through the use of questionnaires, to discover the unexpected incidences
and obstacle encountered at the point of assignment.
4.2 Lloyds TSB and Islamic Bank of Britain: As Case Study of the Research
Britain has many banks, of which Lloyds Bank PLC is the fourth-largest. This bank, through its
affiliates, offers a wide array of banking services, including international banking and essential
innovations in financial services. It has been providing these services for over four decades. It has a
multiple streams of revenue obtainable from the different services provided. The sources include
interest and fees on a broad range of financial services products, current and savings accounts,
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personal loans, credit cards and mortgages, loans and capital market products, including commercial,
corporate and asset finance customers; life pensions and investment products. It also specialises in
private banking and asset management. The bank has over 2500 branches across the United
Kingdom, with its international focus in 47 countries, including the world’s major economies like the
United States, Japan, and Brazil. http://www.referenceforbusiness.com/history /LLOYDS-BAN k
Lloyds TSB Bank Group adopted a very strong market strategy which is built on strong customer
franchises and in-depth customer relationships which eventually led to achieving good sales growth
and improved productivity and efficiency. As a result of this strategy, the bank’s core business values
have continued to perform well, taking a larger chunk of market shares in many important business
areas. Lloyds TSB, is the first high street Islamic business account in the country. The bank has
Islamic business account, corporate account across all its branches in the United Kingdom. Its
services also include other Shar’iah compliant products, including Murabaha facility, Islamic current
account, student account, mortgage and investment fund. (Islamic banker, 2009) Islamic Bank of
Britain plc, on the other hand is registered as a commercial bank in the United Kingdom. It was
formed by a coalition of investors from the Middle East in 2002 to offered shar’iah compliant
financial service (FSA) products specially designed for British Muslims and non Muslims. There are
six branches Islamic bank across the United Kingdom ranging
from London, Birmingham, Manchester and Leicester. It is the first bank in Britain claiming to
operate, in its entirety, shar’iah principles.
The bank has a start-up capita l raise of £14 million by 2003, with 120% and 76% increment in the
number of customers and deposits growth respectively, while the total customer financing advanced
by 131% within the same year. The bank runs on four core values of faith, value, convenience and
trust. The bank was granted by the Financial Services Authority (FSA) in August, 2004, while being
incorporated and registered in England and Wales with the aim of providing a friendly, inclusive and
personal service for all its customers (Masood, 2009).
Islamic banker, has reported that several other banks are offered Islamic mortgage including Lloyds
TSB and Islamic banks of Britain (2007) pointed out that both offering it off the shelf Alburaq
Diminishing Musharakah products (co-ownership shares) (2010).
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4.3 The Research Findings and Analysis
4.3.1 The Respondents Information
One hundred well-constructed questionnaires were design and despatched to the London branch of
Islamic Bank of Britain and Lloyds TSB. However, within the collection periods, a total of eighty
(80) i.e. 80% were adequately filled and returned. The rate of response, coupled with the opinions
was design in form of tabulation charts and apparatus. This indicated by numbers and showed in
percentage. Below, the tables present distribution of questionnaire according to different specified
areas including respondent’s main characteristics, academic qualifications, stakeholders approach and
perception and other specified areas of the questionnaires in-line with the objectives of the research.
The questionnaires were sub-divided into different categories. The questionnaires contained open
ended and closed ended questions. The figures were presented in percentage in order to reduce large
numbers in print.
Section A
Respondents’ characteristics
This section is aimed at collating information on the respondents’ demographic characteristics in
order to have an insight into the gender, age and the educational attainment dominating the
organisations used.
Table 1: Response grouping according to gender
Gender/ SEX No. Respondents Percentage
Male 50 62.5
Female 30 37.5
Total 80 100.
Figure 1. Shows the gender percentage of the respondents in pie-chart
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The above shows that 62.50% (50) of respondents were male, while 37.5.0% (30) of respondents was
female. Essentially this data shows that male represent a larger percentage of the respondents than
females which further indicate that more male are likely to be taking mortgage than female.
Table 2: Distribution respondents according to age
Age Number of respondents Percentage
Below 21 years 6 8
21-30 years 15 19
31-40 years 35 43
41 and above 24 30
Total 80 100
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Table 2 above shows that 8% (6) of the respondents fall below the age of 21, 19 % (15) of the
respondents fall under ages 21-30, 43% (35) respondents fall under ages 31-40 while 30% (24) of the
respondents fall fewer than 41 and above age group. This table clearly displays that bulk of the
respondents are within ages 31-40 group. It further indication of the age bracket base of our research
bank. This age seem to be age at which people think of mortgage except where the mortgage
ownership is passed to the respondent through inheritance.
Table 3: Distribution of respondents according to marital status
Marital Status No. Respondents Percentage
Single 18 23
Married 37 46
Divorced 20 25
Widow 5 6
Total 80 100
Figure 3: Chart representation the marital status of the respondents
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Table 4.4 shows that 23% (i.e.18) of the respondents are single, 46% (i.e. 37) of the respondents are
married, and 25 (20) of the respondents are divorced, while 6% (5) of the respondents are widows.
There were no separated among the respondents. Thus, this table certainly shows that majority of
respondents are married.
TABLE 4: Distribution of respondents based on levels of education
Education level Frequency Percentage (%)
SSCE/ A Level 25 31
College /University Degree 42 53
Masters and others 13 16
Total 80 100
Figure 4 represents table 4 with graphical interpretations
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Table 4 shows that 31% (25) of the respondents have SSCE/ A Level qualification, 53% (42) of the
respondents / college/University and other tertiary education while 16. % (13) of the respondents has
their master’s degree and other higher educational qualifications. From the table above, it is clear that
majority of respondents are literates.
Section B
Respondents’ Activities
This section aims to gain an insight on various factors including the years the employees have spent
in the organisation as employees who have spent longer period of time would be able to give quality
information about the organisation. It also looks at the respondent’s opinion based on their perception
to Mortgage lending Practice
Table 5: Distribution of respondents according to years of relationship with the Banks
Years of employment Frequency Percentage
6 month - 1yr 19 24
1yr – 5yrs 16 20
6-10 yrs 23 29
11-15 11 14
16 & above 11 14
Total 80 100
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Figure Distribution of respondents according to years of relationship with the Banks
From the table above, 24% (19) of the respondents can be said to have spend less than one year and
20% (16) said they have spent 1 - 5 years. Also 23% (29) of the respondents said they have spent 6 –
10 years, while 14% (11) of the respondents said they have spent 11 – 15 years. 10 of the respondents
i.e. (14%) claimed to have spent 16 and above years with the company. The table shows that workers
who have spent less than one year are the lowest in the survey, while those that have spent 6-10 years
are the largest population of the respondents.
Table 6: Distribution of respondents Involved in the survey based on their relationship with the
bank levels
Managerial Status Frequency Percentage
staffs 9 11
Customers 25 31
Investors 19 24
Policy makers 27 34
Total 80 100
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Figure 6 Distribution of respondents Involved in the survey based on their relationship with the
bank levels
This table clearly shows that majority of the labour force took part in the survey. At least 11% are
staff, 31% are customers while 24% of the respondents are classified to be investors while 34% of
respondent are policy makers.
Section C
This section aims to gain an insight into the availability Islamic Mortgage lending system for the use
by respondents and also to analyse the opinion of the respondents on the activities of both Western
banking and Islamic Banking on Mortgage lending practices. It also analyse the level of involvement
of the Western banks Mortgage lending practice in the economic downturn.
Table 7: Distribution of respondents’ opinion based on the awareness of Islamic mortgage
lending practice
Are you aware of the existence Islamic mortgage lending practices?
Respondents Percentage
Yes 70 88
No 10 12
Total 80 100
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Figure 7 shows the diagram of the opinion on the availability of Islamic mortgage lending practices
in Lloyds TSB and Islamic mortgage lending practice
The table 7 and Figure 7 above signify the level of awareness of Islamic mortgage lending practices.
70% of the respondents aimed to be aware of the Islamic mortgage while 10% of the respondents are
not aware. Though the awareness those not represent the view of the opinion of whether they have
taking mortgage policies or not, but the awareness was base on mere information through
advertisement and other medium
Table 8: Illustrates the respondent opinion on the activities of the Western bank through the
economic downturn
The activities of the western banking practices has impact on the
economic downturn
Respondent Percentage
Strongly agree 8 11
agree 9 13
Disagree 32 46
Strongly disagree 18 26
Cannot say 3 4
total 70 100
.
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The table shows the respondents opinion on whether The activities of the western banking practices
has impact on the economic downturn 11% of the respondents strongly agreed while 13% are
agreed. 46% disagreed with 26% disagreed. Only 4% of the respondents are not sure
Table 9A opinion of the respondent on the performance of the western banks
How will you rate the performance of the western bank through mortgage lending over the last five years
Very
effective
effective Fairly
effective
Non effective
Not sure
Customer satisfaction 7 15 28 11 9
Financial performances 11 16 29 5 9
Business processes 28 30 11 1 -
learning and growth 15 28 15 8 4
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The table and the diagram above are used to assess the performance of the western banks on mortgage lending
using balance score card approach.
Customer satisfaction: only 7% and 15% of the respondents opined that customer satisfaction has been
very effective and effective respectively, 28% are of the opinion that it has been fairly effective with 11% of
the opinion ticked not effective and 9% not sure of their view.
Financial performances: respondents that of the view of fairly effective are of the highest percentage with
29%, the total 27% of responding are of the view that their performances in term of financial assessment had
been either very effective or effective. 5% argued not effective while 9% are not sure of their views.
Business processes: the greater percentage of the respondents agree that performance of the western Banks
had been effective with 30%, 28% opined of the performance very effective in term of business processes
with 11% agree fairly effective only 1% are of the view of not effective
Learning and growth: 15% of the respondents argued that; the performance of the western bank in term of
organization learning growth has been very effective with the support from the 28% opined that it has been
effective,11% agree it has been fairly effective while 8% argue it not being effective with 4% not sure
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Table 9A
How will you rate the performance of the Islamic bank through mortgage lending practice over the last five years
Very
effective
Effectiv
e
Fairly
effective
Non effective
Not sure
Customer satisfaction 6 16 26 13 9
Financial performances 26 18 18 5 3
Business processes 10 15 28 9 8
learning and growth 30 20 12 - 8
The table and the diagram above are used to assess the performance of the Islamic banks on mortgage lending
using balance score card approach.
Customer satisfaction: only 6 and 16 of the respondents opined that customer satisfaction has been very
effective and effective respectively, 26 are of the opinion that it has been fairly effective with 13% of the
opinion ticked not effective and 9 not sure of their view.
Financial performances: respondents that of the view of fairly effective are of the highest percentage with
18. The total 44 of responding are of the view that their performances in term of financial assessment had been
either very effective or effective. 5 argued not effective while 3 are not sure of their views.
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Business processes: the greater percentage of the respondents agree that performance of the Islamic Banks
had been effective with 15, 10 opined of the performance very effective in term of business processes with 28
agree fairly effective only 9 are of the view of not effective with 8 of the opinion that are not sure
Learning and growth: 20 of the respondents argued that; the performance of the Islamic bank in term of
organization learning growth has been very effective with the support from the 30 who opined that it has been
effective. 12 agree it has been fairly effective while 8 of the respondents are not sure
Table 10: the respondents’ opinion on whether the activities of Islamic bank
Practices has impact on the economic downturn
The activities of the Islamic bank practices has impact on the economic
downturn
Respondent Percentage
Strongly agree 17 24
Agree 23 33
Disagree 13 19
Strongly disagree 14 20
Cannot say 3 4
Total 70 100
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Table11: the opinion of the respondent on the integration of the Western banking and the Islamic bank
mortgage lending practices
The Islamic mortgage lending practices should be integrated with western
mortgage practise.
Respondent Percentage
Strongly agree 23 33
Agree 17 24
Disagree 13 19
Strongly disagree 14 20
Cannot say 3 4
Total 70 100
This table show that 33% of the respondents strongly agree that the Islamic mortgage lending
practices should be integrated with western bank mortgage practices the view is supported by another
24% who are also agree. 19% or the respondents disagree in their opinion with 20% strongly disagree
with 4% who cannot say
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Table 12: the opinion of the respondent on Integration of Islamic bank into western bank and how
it has assisted in recovery of mortgage lending from economic downturn.
Integration of Islamic bank into western bank has assisted to recovery
mortgage lending from economic downturn
Respondent Percentage
Strongly agree 15 21
Agree 23 33
Disagree 14 20
Strongly disagree 13 19
Cannot say 5 7
Total 70 100
.
This table I and the pie-charts use to collate the respondents’ opinion on whether the integration of
Islamic mortgage lending into western bank has assisted the recovery of mortgage lending form the
economic downturn. 21%are strongly agree with 33% agree. 20% and 19% disagree and strongly,7%
of the respondents cannot say
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Table13: the opinion of the respondent on the awareness of the potentiality of Islamic bank could benefit
global mortgage lending practices
The awareness of the potentiality of Islamic bank could benefit the
global mortgage lending practices
Respondent Percentage
Strongly agree 20 29
Agree 22 32
Disagree 15 21
Strongly disagree 3 4
Cannot say 10 14
Total 70 100
This table and the bar chart are used to interpret the respondents opinion on the awareness
potentiality of Islamic bank could benefit global mortgage lending practises. The total 61% of the
respondents are strongly and agree respectively, 21% disagree and 4 strongly disagree while 14%
cannot say.
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CHAPTER FIVE
5.0 Results and Discussions
5.1 Data Analyses for finding
This section related, juxtaposed and compared the research of the primary sources finding with the
secondary data (literature review) in order to establish actual position for comparison between the
findings and the views of the other researchers which had been reviewed at the chapter two of the
study, to evaluate the performance of Western and Islamic banks on Mortgage lending practices
during economic downturn. The objective behind this section aims to gain an insight into Islamic
Mortgage lending system as observed by respondents and also to analyse the opinion of the
respondents on the activities of both the Western and Islamic Banking on Mortgage lending practices.
It also discussed the level of involvement of the Western and Islamic banks on Mortgage lending
practice through the economic downturn.
Table 1, 2, 3,4 ,5, and 6
The findings from the table 1 to 4, show the personal characteristics of the respondent’s in terms of
age, gender, educational status.62% of the respondent were male while 37.50 of the respondents are
female. These confirm the ethical standard of the research in terms of gender equality. It also
revealed that male are likely to be taking mortgage than the females. Though, it seems to be part of
the fundamental objective of the research work. It could serve as source of information in
investigating the accessibilities of the mortgage facilities among the genders. This might also have an
effect on the Islamic lending practices when considering the ethical issues on the women in Islam on
entering into financial activities with the full consent of her husband irrespective of their financial
capabilities which have tendencies to influence Islamic, mortgage lending practices (quran)
The finding from the table two indicated the age distribution of the respondents, 62% of the
respondents which are aware of the mortgage lending practices are between 21 years to 40 years of
their age except where such ownership is due to inheritance. In examining the implication of marital
status on the mortgage lending practices, Table 3 revealed that greater percentage of customers on
mortgage lending are single and divorces while only 23% are married. This reflects the family
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situation of the mortgage lending customers which could be argued to be the result of reflection of
the societal situation in term of marriage and civil partnerships in UK.
Table 4 the level of education attainments among of the mortgage customers and how it reflects in
their approaches in differentiate of their opinion on the western bank and the Islamic banking system.
Though the table indicates that the greater percentage of the correspondents are graduate which
implies that they are likely to have full knowledge or basic understanding of mortgage lending this
seem to support the finding in table seven as the level of education reflected on their awareness of
mortgage lending practices. However the scope of this research work seem not to make further
clarification on whether the level of circular education influence the awareness of Islamic mortgage
lending practices. Table 5 and six indicate the relationship with the Bank, the table; indicate 29%
percentage of the staff years in mortgage lending practises are within 6 to 10 years. This seems to
confirm the level of staff retention in the mortgage department which could be argued to be due to
sustainability in the sector. This further supported in the analysis of table six where the involvement
of the targeted population based on their relationship with the bank are analysed
Table 7, 8, 9, 10, 11, 12, and 13
Section C
5.2.1. The objective behind this section aims to gain an insight into the availability Islamic Mortgage
lending system for the use by respondents and also to analyse the opinion of the respondents on the
activities of both the Western and Islamic Banking on Mortgage lending practices. It also discussed
the level of involvement of the Western and Islamic banks on Mortgage lending practice through the
economic downturn.
5.2.2 Table 7: Distribution of respondents opinion based on the awareness of Islamic mortgage
lending practice.
Figure 7 shows the diagram of the opinion on the availability of Islamic mortgage lending practices
in Lloyds TSB and Islamic bank of Britain. The table 7 and Figure 7 above signify the level of
awareness of Islamic mortgage lending practices. 70% of the respondents are aware of the Islamic
mortgage while 10% of the respondents are not aware. Though the awareness does not represent the
view of the respondents’ opinion on whether they have taking mortgage policies or not, but the
awareness was base on mere information through advertisement and other medium of information.
Equally, the research view that the increasing awareness of the inherent strengths of Islamic banks on
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Islamic mortgage lending practices and its tremendous potential for advancement has ignited interests
in the global financial community to venture such as Lloyds tsb, and Hsbc, into this new sphere of
finance was immediately during the trigger of a global banks crisis. (Islamic banker, 2009)
5.2.3 Table 8: Illustrates the respondent opinion on the activities of the Western bank through
the economic downturn
To receive the required findings about the activity of the Western banking practices, the questions to
interviewees is about the impact on the economic downturn, and how they rate the performance of
the western bank through mortgage lending over the last five years?
The table shows the respondents opinion on whether the activities of the western banking practices
has impact on the economic downturn 11% of the respondents strongly agreed while 13% are agreed.
46% disagreed with 26% strongly disagreed. Only 4% of the respondents are not sure. The highest
respondents disagreed on the activities of Western banks has no impact economic downturn. This
finding from the result is almost against the arguments of Markus due to the fact that impact of
western banks in lending money is high risk to the customer and also the trading style of debt as a
commodity has basic contribution to the downturn (2009). This is also subsequently result to banking
panic in 2007-2008, threw economics around world into severe recession, the cost of banks
borrowing rose substantially and financial market volatility rose to unreasonable level (Steven and
David, 2008). The response from the majority may of the opinion that also corroborate the argue by
Chapra, (2010), that impact of the downturn the financial services of Western bank sector has
dramatic and contrasts relative good fortune in the finance function, proven that economic downturn
has much more of sector and sub-sector in specific impact. The argument of the FSA (2010),
substantiate the chapra that the impact of residential property sale market and the residential property
lending market continue to grow even as other sector like financial services, economic sector, and
mortgage lending contraction as a result of reduction at the level of demand.
5.2.4 Table 9A opinion of the respondent on the performance of the western banks
The information in table 9A, are used to assess the performance of the western banks on mortgage
lending using balance score card approach.
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5.2.4.1 Customer satisfaction: only 7% and 15% of the respondents opined that customer
satisfaction has been very effective and effective respectively, 28% are of the opinion that it has
been fairly effective with 11% of the opinion ticked not effective and 9% not sure of their view. The
28% most rated was indicating the fairly performance of bank that may be due to the fact that the
strategic plan of Western banks to restrict for producing the market potential of promised benefits
and the entire risk of default to the ultimate purchaser of the loan security. That equally led to the
average house prices rose and deteriorated to the lowest point, the homeowner find unaffordable
mortgage payment that resulting to the lender and lending into neighbouring homeless, and
proliferation of foreclosure and redundancies within the residential marketing sectors (Barth, 2009,
Laura and Renee, 2010). The reason behind this may be that, low income household found it difficult
to find lender without prohibitive collateral pre-requisite, which led to given attention to ricer than
poorer. This finding is also in line with the view of Robin that 7% and 15% of the respondents
claimed that customer satisfaction of bank has been effective because of the fact that Western bank
quickly response to offering range services to their customers within different financial capabilities
by providing loans for customer gradually (2002). More so, bank calls for Federal Reserve to bailout
system for their customer with several hundred billion dollars in liquidity 2008 (FSA, 2009)
5.2.4.2 Financial performances: respondents that of the view of fairly effective are of the highest
percentage with 29%, the total 27% of responding are of the view that their performances in term of
financial assessment had been either very effective or effective. 5% argued not effective while 9%
are not sure of their views. This could be understood from the point of view of the respondents that
financial performance of Western banks has been fairly effective, this may be correspond with the
argument of Suarez (2009) that Western banks has been focussing and concentrating on the
profitability, on only wealth creation through higher interest rate, based on their competitive
advantage on collation of information and underwriting risk. This has been arguing further in relation
to BBC, that it was one of the factors that led to downturn, tighter lending conditions and wreaking
confidence in mortgage demand. This was indicated that the mortgage loan granted was 48, 000
compared with 51,000 in 2009 (2010). The second part of respondents are of the view that the
financial assessment of western bank is either effective. The finding is in supports of FSA that the
residential property sales market and residential property lettings markets are performing credibly
growing. However, the opinion of respondents that they are woefully, can be juxtaposed with the
view of Standard and poor (2009), that the volume of lending drastically low to 47% from 79% at
peak of the credit boom in 2007 to 2008.
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5.2.4.3 Business processes: The greater percentages of the respondents agree that performance of the
western Banks had been effective with 30%, 28% opined that the performance has been very
effective in term of business processes. This seems to concur with standard and spoors overview that
due to the fact Western Banks have several advantages of a very long ages and experience, and their
policy of not share loss with clients, also ask for guaranteed collaterals in most transactions, with
large capital, spread wider, have technologies advancement, and have also enter Islamic banking
market successfully, with this they were able to dare and curb the downturn shortly.(2010) While
11% that agree fairly effective only 1% are of the view of not effective, this may be traced due to the
fact that Western bank customer bear the highest level of risk, and given privileged to the rich than
the poor (Harvey et al, 2010)
5.2.4.4 Learning and growth: 15% of the respondents argued that; the performance of the western
bank in term of organization learning growth has been very effective with the support from the 28%
opined that it has been effective, this has been relates to conceptual framework of Austin that western
banks has raised the high level in the financial sector, improve product quality and asset turnover into
the ultimate success. Nonetheless 11% agree it has been fairly effective while 8% argue it not being
effective with 4% not sure. This can be substantiated with the fact that seven of 91 western bank
failed British banks pass recession stress test aimed at measuring their strength in case of up- coming
economic downturn (Cole, 2010)
5.3. Table 9b: The objective behind this research is the opinion of the respondent on the
performance of the Islamic banks
The table and the diagram above are used to assess the performance of the Islamic banks on mortgage
lending using balance score card approach.
5.3.1. Customer perspective: This test the respondents opined that customer satisfaction of which
only 6 and 16 has been very effective and effective respectively. This opinion of the respondents
seem to established the fact that Islamic bank increase its network to reach citizens that have interest
in Islamic banking and products and to ensure that there is no exploitation of the customers in
financial sector, and that profit from investment must be share between the Banks and its customer
(FSA, 2010). While 26 are of the opinion that it has been fairly effective, this can be relates to the
report that human resources and expertise dealing with customer in Islamic banks are scarce and
lacking behind. This view may led to the 13% of the opinion ticked not effective and 9 not sure of
their view due to the fact that customer complaint about the turn- around –time of Islamic banks are
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very slow, and it seem that traditional documentation styles of Islamic bank is high that led to the
biggest cause of credit approval delays and make customer uncomfortable (Siddiqui, 2009).
5.3.2 Financial performances: The response from the respondents that shows fairly effective are of
the highest percentage with 18. The total 44 of responding are of the view that their performances in
term of financial assessment had been either very effective or effective. This view seem to support
the argument that Islamic banks appear to have insulated from the global financial crisis, due to the
fact that they didn’t invest in structure products, and also the principle of prohibiting interest (Riba)
in any transaction, that led them maintaining the strength of the bank’s financial position and also
increase the markets share (Jobst, 2009). While 5 argued not effective and 3 are not sure of their
views. This can be related to an empirical analysis of Paul argument that scarce liquidity, stock
market declines and plummeting in real estate prices have also hit the profitability of Islamic banks
(2010).
5.3.3 Business processes: the greater percentage of the respondents agree that performance of the
Islamic Banks had been effective with 15, while 10 opined of the performance very effective in term
of business processes with 28 agree fairly effective. This means that the finding is in line with a
analysis that Islamic bank has played an important role in financing, economics and social sectors in
compliance with the principles of Shar’iah rules and regulation. This finding seems to support the
view of Masood et, al that the abolition of fixed interest rates and the Islamization system of
financing was a main reason why Islamic banks were founded under the profit and loss sharing
system (PLS), they demonstrate further that basic responsibility of Islamic Banks is to making sure
that all the products, instruments, operations, practices, management, are with Shar’iah compliance
(2009b).
However, the opinion of the respondents has proven beyond a reasonable doubt that the triumph
incur by Islamic bank through a reduce charges and lower bank’s risk by increase retained
earnings/liquidity and also increased their customer base, the Islamic banking products, by adopting
all the new financial and investment tools, IT, training for their employees through hiring skills staff
from western banking that make them became the biggest winners in the world financial system (Al-
salam, 2009). While only 9 are of the view of not effective with 8 of the opinion that are not sure due
to the fact in relation conceptual literature that Islamic banks system has progressed so far is only
partly, but not come out in fully picture of western banks, and that the use of Equity and PLS modes
has been not effective, while that of the debt-creating sales and lease based modes has been
predominant. This also marched the argument of Khanfar, (2009) that, in the case of debt-creating
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modes, Islamic banking and Western banks operating on the windows of Islamic mode may not
necessarily fulfilling the conditions laid down by the Shar’iah - Islamic Law
5.3.4 Learning and growth: 20 of the respondents argued that; the performance of the Islamic bank
in term of organization learning growth has been very effective with the support from the 30 who
opined that it has been effective. The opinion of respondents corroborate with the report of Jobst
that Islamic banks has sign an agreement with the securities industry development corporation
(SIDC) for learning and development in financial engineering expertise, in order to become a training
partner of Islamic finance education in CISI’s ‘Islamic finance Qualification’. This means that the
greater percentage still indicate the fact Islamic banks showing outstanding growth within the
concept, scope and the principles, till it’s become universal concept in the western banking around
the global, which most high street banks stand in better example: (HSBC, Lloyd TSB and as well as
Islamic Bank of Britain) (Jobst, 2009). The 12 agree that it has been fairly effective while 8 of the
respondents are not sure. This opinion pull could be generalised and applicable to virtually all the
business factor of both banking sector during the economic downturn. This could be argued to be true
about Islamic banks because, is still new in the banking venture.
5.4 Table 10: The objective behind the respondents’ opinion on whether the activities of Islamic
bank practices has impact on the economic downturn
Table11: show the opinion of the respondent on the integration of the Western banking and the
Islamic bank mortgage lending practices. The Islamic mortgage lending practices should be
integrated with Western mortgage practice.
This table show that 33% of the respondents strongly agree that the Islamic mortgage lending
practices should be integrated with Western bank mortgage practices. The view is supported by
another 24% who are also agreed. This seems to substantiate the fact that the rapid grown of
mortgage lending practices is attributed to the homeownership encouragement policy that was
integrated by the government (Stephens, 2009). This also supports the report that the British financial
expertise with the Muslim world and the Commonwealth, has married well with Islamic banking and
finance, forming indeed a formidable partnership. Equally this also relates to the Islamic mortgage
enjoyment under UK Government reforms establishment that level the amendment of tax and
regulation between conventional and Islamic banks on mortgage lending practices (Islamic banker,
2008). This seems also illustrate the report of UK Treasury removing the provision for double stamp
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duty on Islamic Ijara mortgages and reducing the risk weighting to 50percent on par with Western
mortgages. While 19% respondents disagree in their opinion with 20% strongly disagree with 4%
who cannot say. This result show the respondents opinion may be of the view that the principles of
the shar’iah law concept may not easily understand by the western due to the lack of familiarity and
also the lack of uniqueness in interpretation of the Islamic law by Islamic school of taught may
hinder the integration.(Siddiqu, 2009)
5.5 Table 12: The set objective behind the opinion of the respondent on Integration of Islamic
bank into western bank and how it has assisted in recovery of mortgage lending from economic
downturn. Integration of Islamic bank into western bank has assisted to recovery mortgage lending
from economic downturn.
This table I and the pie-charts use to collate the respondents’ opinion on whether the integration of
Islamic mortgage lending into western bank has assisted the recovery of mortgage lending from the
economic downturn. 21% strongly agree with 33% agree. This seems to be related to Table 11 report
that Government have work hard to create a level of integrated field between Islam and western
banks by amending tax legislation to avoid panelising Islamic finance models and to introducing new
regulation to govern product such as Islamic mortgage (Masood, 2009). The report seems support the
view of Stephen that Islamic mortgage is set to grow hugely with long-time opportunities in western
world, due to fact that Muslim are showing interest and increasing readiness to invest in the stock
market and pumped cash into Islamic equities and other products. He further explained that Islamic
mortgage are not for only Muslims but for all ethically- minded investor, banking and borrower.
While 20% and 19% disagree and strongly respectively, 7% of the respondents cannot say, may be
due to the fact that Western bank is meant for profitability as the
Paramount objective that led their customer bear the highest level of risk, while Islamic bank are
concern about the maturity and sophistication, it was relate further that Islamic banks lacks
standardisation in term of full-fledged of software in product and services (Robin, 2009).
5.6 Table13: the opinion of the respondent on the awareness of the potentiality of Islamic bank
could benefit global mortgage lending practices.
The awareness of the potentiality of Islamic bank could benefit the global mortgage lending practices
This table and the bar chart are used to interpret the test of respondents opinion on the awareness
potentiality of Islamic bank could benefit global mortgage lending practises. The total 61% of the
respondents are strongly and agree respectively, however, this seems to relates the view of Masood
that when the global market crashed by financial meltdown, Islamic banks are unaffected by the
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global crisis, due to the fact that the rating of complete investment risks instead of mere credits. This
postulate the report of Minister McCarthy-Fry, also have said that there are some key principles
underpinning Islamic banking and finance that could help build to the new benchmark, to reject the
speculative structure and encourage an ethical approaches to financial market and sustainable growth,
since the increasing awareness and appreciation of the inherent strengths of Islamic finance this was
re-iterate in table 12 also, and that it tremendous potential for advancement have ignited interest
among the global financial community to venture into this new sphere of global financial crisis
(Islamic banker, 2009). However 21% disagree and 4 strongly disagree while 14% revealed that they
cannot say. This may be related to the report that Western banks concentrated on the financial
speculation and the Islamic operational terminologies system is ambiguous due to the different
opinion of Islamic thought (McAuslan, 2008).
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CHAPTER SIX
6.0 CONCLUSION
In this work, is an attempt at compared the performance of Western and Islamic banks through
economic downturn on Mortgage lending practices across the world between 2005 and 2010. This
work comes out with the result that the western banks performed worse during the recession. The
causes has been arguably emphasized that the role of banking systems more exposed to the U.S. fared
worse and reach across the global. The results emphasize the principle and operation of Western
banks that are interest- based–finance which really focussing on the profitability and their policy of
not share loss with clients, also ask for guaranteed collaterals in most transactions that fragile banks
mortgage financed lending to downturn.
By late 2005, however, the combination of higher interest rates and higher housing prices finally
triggered into mess. Within the period of two years, sales starts plummeted, prices stumble, and
mortgage market crackdown. By 2006, existing home sales felt drastically. These declines
accelerated in 2007 as falling home prices and the recession deepened the crisis. By early 2008,
housing market decay had spread across the global. The back drop in home building, the excessive in
the credit and stock markets, and the impact of falling home prices on borrowing and consumer
spending all contributed to the downturn. In the early 2008, there was decline in job that strip out to
redemption and repayment, and there is increment in risks that couple with high price delinquencies.
During this period the caused the conduction deep cracked that result falling in supplier of new
building, this put numbers of housing held closure and escalating that put consumer spending a
tighter squeeze across the global.
In a recent report, it revealed that mortgage lending hits new low as prices slide in 2010 and advance
are expected to slump further during 2011, net lending, which strips out redemptions and repayments,
totalled just £8.15 billion during last 2010 down from £11.33 billion in 2009 into lowest level since
Bank of England records began 1987. See Metro, Wednesday, February 2, 2011.
However, this downturn has been linked with the activities of Western banks that impacted of high
risk of lending and also the trading style of debt as a commodity that has subsequently result to
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banking panic in 2007-2008, threw economies around the world into severe recession. This
precipitated the quickly response of Western bank to offering range of services to their customers
within different financial capabilities by providing loans, and also calls for Federal Reserve bailout
system for their customer with several hundred billion dollars in liquidity.
Nevertheless, this new sphere of finance led to increasing awareness and integrated of the Western
banks into the inherent strengths of Islamic banks on Islamic mortgage lending practices that have
ignited interests in the global financial community ventures such as Lloyds TSB, and HSBC,
immediate after the trigger of a global banks crisis and downturn.
However, Islamic bank is the component of Islamic finance that still new in financial sectors. it
appeared that is not affect through the global rescission, due to the fact that they didn’t invest in
structure products, and also the principle of prohibiting interest (Riba) in any transaction, this
strengthens their financial position, such as Islamic mortgage which is the product of Islamic banks
that was structure under the Ijara ( leasing), Mudaraba (Make –up profit) profit and loss sharing
system (PLS), to making sure that all the products, instruments, operations, practices, management,
are with Shar’iah compliance not for only Muslims but for all ethically- minded investor, banking
and borrower in a global market.
Brockbank, opined that Islamic mortgage is preferable for residential while Western for commercial
transaction. However, this finding so far has been arguably proved that Islamic mortgage was good
for both the residential and commercial purpose, due to the fact that since its network has improve to
reach globally and they ensure that there is no exploitation of their customers. Also the profit from
investment must be shared between the Banks and its customer which could promote long
relationship and stability and high rate of customer retention, also, the removing of hurdle of the
provision for double stamp duty on Islamic Ijara mortgages has reducing the risk weighting to 50 per
cent on par with Western mortgages. In culmination view, it seem to be no much different between
the two banking approach regarding the classification base on residential and commercial purposes of
mortgage practices as both of banking system are now targeting the profitability, with ethical
standard as the only shifting ground which could be addressed.
However, if this potential principles underpinning Islamic banking and finance that could be
integrated into western banks, which already have several advantages of been a very long history and
experience, occupied a large capital, spread widely, maintain high technologies advancement and
expertise skilful engineering that has raised them to high level in the financial sector, improve
product quality and asset turnover into the ultimate success. Couple with the readiness of Muslim
world to invest in the stock market and pumped cash into equities, certainly, this will help shape the
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new landscape, to reject the speculative activities and encourage an ethical approach to assist
mortgage lending practices recovery from the recent economic downturn in financial market and
forming indeed a sustainable growth.
6.2 RECOMENDATION
6.2.1 Western banks
Western banks has enjoys a very long experience and spread wider across the global and the real
player in the field of expertise. But due to the unpredicted crackdown in mortgage lending have
awake series of way-out and bailout. It is recommended that; they need to shift from concentrating on
quantitative analysis of market profitability, liquidity and safety, but need to create effective
qualitative analysis about bank risk control, internal management, customer service levels in the
services of the bank management. In order words the financial analysis should not be based on
calculation figures and integration of monetary variables.
Hence the adoption of balance scorecard based on the conclusion, the interest-based system cannot be
used to create long-time activities with customer or clients in business transaction, but collaboration,
and co-operation in order to create sense of business venture is recommended, this will create mutual
understanding that would enhance long term relationship and stability and high rate of customer
retention.
Also, it is recommended that Western banks need to inculcate in their financial services the habit of
healthy and ethical operations, that will requires qualitative share of profit and loss or compensation
in order to maintain customer retention and forming a sustainable growth in financial markets to be
closely integrated.
More importantly, it is highly recommended steps in Western to embracing Islamic finance products
into their system and the Islamic mortgage in particular, it is also advisable to liaisons with more
specialists from legal and Islamic financial term to have more insight in academic background and
its practicability with the specialist in that field ( Islamic bankers).
It will be an advantage to establish an umbrella organisation here and across the world to co-ordinate
and regularise the legal and financial system in respect to the Islamic and Western mortgage.
6.2.2 Islamic banks recommendation
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Islamic banks are still at a relatively lower competitive edge with the western banks and that makes it
in term of internal business process there is no bases of comparative between them. As matter of fact,
series of report have proved beyond reasonable doubt that, there are lot of advantages in Islamic
banking system, as result of which efforts need to be made to reach out to existing and potential
banking customers in regarding to the benefits of the various product and services. Islamic Banks
need to boost their reputation by appealing to customers. In order to do this, they can take steps such
as advertising by various forms of media, increase in staff strength particularly in the area of
Marketing, customer services and Information technology.
However, Islamic bank need to place better consideration of market competition strategy into a sound
management structure and planner, in order to improve in real picture of the bank's operational
development through the bank's market share, mortgage acquisition rates, and customer retention. Of
course, they should constantly updating and improve the means of communication and security
techniques, this will enhance Islamic banks to maintain a sustainable innovation of new trend
financial products, and this will enhance them inescapable transformation in service pattern and able
to meet-up with the modern trends of competitiveness across the global.
Similarly, Islamic banks should speed up and increase the standard of supervision in financial
operation in order to conform to standard of the new banking system and able to curb with changing
in marketing environment. The financial institutions also need to maintain the transformation of
service delivery pattern, to speed up the momentum of mixed services between Western banks in
order to enhance international competitiveness and operational integration.
In addition, both banking sector (Western and Islamic) with the aids of Balanced Scorecard can
relates the potential risks of services, to create effective future plan for the banks, this will enhance
the long-time development of banks into account, and eventually it will place banks have into a high
esteem of adaptability and long-term strategy through the rejection of speculation in market and be
honestly adhere to ethical approach towards financial market by creating and maintaining financial
stability with an equal consideration to all other stakeholders perspectives.
Finally, the financial institutions and government should improve and presents more accurate Islamic
mortgage product with uniform information and database materials for Muslim and non- Muslim. As
well create an avenue in order to of familiarize and agree on consistent terminologies of Islamic
financial products. This will facilitate better understanding and solid integrated between Islamic and
Western banks through mortgage lending practices.
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