Introduction
Islamic banking can be regarded as an alternative to conventional financial services industry because this approach is based on the rules and restrictions that are derived from religious tradition, rather than legislation only. This paper is aimed at discussing the main features of this model and its adoption in non-Muslim regions such as Europe. Moreover, it is important to look at the challenges and obstacles that prevent further development of Islamic banking in countries when the laws of Shariah are not officially recognized. These are the main questions that should be examined. Overall, the main problem lies in the differences between the local legislation and the rules that Shariah banks have to follow. However, this issue can be addressed by legislators and managers of financial institutions. In the future, the role of Islamic banking will only increase because the percentage of Muslim population in different countries will grow significantly.
The main features and activities of Islamic banks
Overall, there are several distinguishing features of Islamic banking. First of all, one should say that the laws of Shariah completely prohibit the payment or reception of interest (Shah, Raza, & Khurshid, 2012, p. 1019). So, financial institutions in the Muslim world are not allowed to loan money to a person and receive a surplus of the borrower (Shah, Raza, & Khurshid, 2012, p. 1019). In turn, this is one of the most widespread practices among conventional banks in Europe or the United States. This is the most important peculiarity that people should take into account. Moreover, a client, who deposits money in the bank, also cannot receive the interest from this organization. Secondly, Islamic banks are supposed to act as responsible investors. In particular, they must not invest capital into enterprises that may be engaged in the production of alcohol, pork, or tobacco (Kettell, 2011, p. 24).
Therefore, this is another restriction that should be considered because conventional banks do not have to cope with these restrictions. Additionally, it should be mentioned that Islamic banks are opposed to futures contracts. For instance, these institutions may not allow the transfer of goods that have not been already produced. In other words, every financial transaction should be supported by existing assets such as collateral (Volk & Pudelko, 2010, p. 193). Thus, the rules of Shariah do not accept gambling or uncertainty, while this policy is fully accepted by the managers of conventional banks (Kettell, 2011, p. 24). However, one should not suppose that Islamic financial institutions do not make profits. For instance, these institutions can purchase property for a customer and re-sell it at a higher price (Kettell, 2011, p. 24). In turn, the customer will have to repay this money in separate installments. In this case, the bank uses this house as collateral that can later be resold. Additionally, the rules of Islamic banking treat a depositor as an investor who has a stake in a business project, and this person shares risks and profits with the bank (Saeed, 1996, p. 101). These are the main aspects that should be considered.
The adoption of Islamic banking in non-Muslim countries
Currently, Islamic banking is widely adopted in non-Muslim countries. Currently, such institutions can be found in such European countries as the United Kingdom, Germany, France, the Netherlands, Spain and other countries (Volk & Pudelko, 2010). The trend can be explained by the growing Muslim population in the European Union, Australia, or the United States. For instance, in the United Kingdom there are five Islamic banks and 17 conventional banks that offer financial products and services that are compatible with the rules of Sharia (Volk & Pudelko, 2010, p. 193). Some of their services enjoy significant demand among the local population. In particular, many Muslim people want to receive mortgages that are based on the principles of Islamic banking. This situation can be observed in the United Kingdom where legislators have simplified the rules regarding the purchase of property. However, one cannot say the same thing about the deposition of money.
Obstacles to the development of Islamic banking
Nevertheless, there are several challenges that Islamic banks face when they operate in non-Muslim countries. First of all, the work of these organizations should comply with local laws that are not based on religious traditions. The policy-makers in European countries pay close attention to the security of deposits. The problem is that according the principles of Islamic finance, a depositor should act as an investor and he/she shares the profits with the bank (Aldohni, 2012, p. 197). However, there is no guarantee that client will receive compensation if the investment is not successful (Aldohni, 2012, p. 197). This person can receive some compensation only if he/she proves that the investment was poorly managed by the bank (Aldohni, 2012, p. 197). However, this is not always possible and the rights of customers can often be unprotected. Therefore, European legislators require Islamic banks to develop contracts and other agreements that protect the safety of customers’ savings (Volk & Pudelko, 2010, p. 199). This problem exists in many non-Muslim countries such Germany, England, or the United States (Volk & Pudelko, 2010, p. 199). In some cases, the customers can openly refuse the insurance and fully comply with the rules of Shariah. Yet, now many Islamic banks sign contracts that guarantee the compensation to the clients. Overall, this policy can make Islamic banks more attractive to many Muslim customers and resolve many legal disputes.
Additionally, taxation laws can be an important barrier for the development of Islamic banking in non-Muslim regions of the world. In particular, in Germany, every acquisition of property has taxed and this prevents clients from taking mortgage in Islamic banks (Volk & Pudelko, 2010, p. 199). The problem is that according to the laws of this country, a financial institution has to pay the tax, when it purchases a house for the client, and later the client has to pay the tax once again when he/she buys the house from the bank (Volk & Pudelko, 2010, p. 199). So, the cost of a loan rises significantly and Muslim people can choose conventional banks. This problem can be resolved by eliminating the extra taxation as it was done in the United Kingdom. It seems that other countries can also adopt this solution.
Moreover, conventional financial institutions do not want to serve Muslim banks according to the rules of Islamic banks they want to retain the loyalty of their non-Muslim countries (Volk & Pudelko, 2010, p. 196). This situation can be explained by the fact that many people in Europe can be prejudiced against Muslims, and the managers of banks of other financial institutions want to appeal to these people (Volk & Pudelko, 2010). However, the tendency can become less important in the future because the number of Muslim people will grow both in Europe or the United States and the policies of many financial institutions can change.
Apart from that, one should take into account that many European banks lack experience in Islamic finance, and they believe that these initiatives will be very risky. They think that in this way, they can imperil their financial performance (Volk & Pudelko, 2010). Moreover, the rejection of interest is hardly acceptable for them. So, they do not want to provide banking services that are compatible with the principles of Islam. This is another challenge that Islamic banking faces in Europe. Nevertheless, this problem can be eventually resolved because the proportion of Muslim population increases, and conventional banks can change their policies in order to gain the loyalty of customers.
Conclusion
On the whole, this discussion indicates that Islamic banking differs from a conventional financial service industry in several ways. One can distinguish several distinguishing features of this model such as complete rejection of interest, ethical investment, risk-sharing, and low tolerance toward gambling and uncertainty. So, these financial institutions have to face more restrictions than conventional banks. There are different problems that are related to the development of Islamic banking in Europe. One of them is the difference between local, especially European laws and the principles of Shariah. Secondly, many conventional banks are experienced in Islamic finance. However, these challenges can be overcome through the efforts of policy-makers and executives.
Reference List
Aldohni, A. (2012). The Legal and Regulatory Aspects of Islamic Banking: A Comparative Look at the United Kingdom and Malaysia. London: Routledge.
Kettell, B. (2011). The Islamic Banking and Finance Workbook: Step-by-Step Exercises to help you Master the Fundamentals of Islamic Banking and Finance. New York: John Wiley & Sons.
Shah, S., Raza, M., & Khurshid, M. (2012). Islamic Banking Controversies and Challenges. Interdisciplinary Journal Of Contemporary Research In Business, 3(10), 1018-1026.
Saeed, A. (1996). Islamic Banking and Interest: A Study of the Prohibition of Riba and Its Contemporary Interpretation. London: BRILL, 1996.
Volk, S., & Pudelko, M. (2010). Challenges and opportunities for Islamic retail banking in the European context: Lessons to be learnt from a British-German comparison. Journal of Financial Services Marketing, 15(3), 191-202.