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1. Introduction
The rationale behind this piece of research is to investigate and make a comparison between Islamic and Conventional banks and their performance in the recent global financial crises. This work will not only make a case study of The Gambia but will also enlighten about the performances of some Conventional and Islamic banks in the United Kingdom. Section 1 of this thesis will provide a background information of Islamic and Conventional Banks and how each system operates in the financial industry. It is important to note that banks perform a very significant role in our society. They actually perform the role of an intermediary. That is, they help to move funds from the surplus sector of the economy (depositors) to the people who need money (borrowers) in order to do business. Banking over the years had contributed positively to the wellbeing of people around the globe. It is good to know that financial institutions have not only done well to the society. In fact, they had also contributed tremendously to the recent financial crisis. Ganesh (2008) in an article published in the “The Economic Times” blamed banks for being the primary cause of the crisis. This he said was due to the excessive use of leverage and bad lending principles.1
In history, the earliest banking systems began with Conventional banks.2 However, as the number of Muslims in the world increase, most countries had embraced the Islamic system of banking in order to satisfy the Muslim minority. In evaluating the difference in performance of Islamic and Conventional banks, this work intends to measure performance in terms of Liquidity, Profitability and Financial Leverage. This study is going to focus on the financial
1 http://articles.economictimes.indiatimes.com/2008-10-05/news/28398857_1_lending-standards-property-prices-financial-crisis
2 http://en.wikipedia.org/wiki/History_of_banking
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years of 2008/2009 to 2012. The reason for choosing this period is that much of the global recession was underscored within this period. Great Britain, European Union and the United States of America were predominantly affected by the crisis. This period resulted in a proliferation of new regulatory policies as intervention and an antidote to rescue countries affected by the crisis. It also witnessed closure of some banks around the globe which casted the destiny of most countries’ economies in a precarious situation.
According to the Institute of Islamic Banking and Insurance, Islamic banking is a system of banking whose activities are in line with the principles of sharia (Islamic ruling). Islam does not allow the payment or acceptance of interest charges (Riba) in banking activities such as lending and depositing of money. Furthermore, it prohibits trading in any activity that is considered contrary to the principles of Islam.3 It is however important to note that Islamic banking is not restricted to Muslims only.
1.1. Importance of the Research
This piece of research is very important given the recent global economic and financial upheavals which rendered the lives of many around the globe in a precarious state. This crisis became a catalyst that increased youth unemployment. Banks have been identified as one of the main forces behind the catastrophes. The outcome of this novel research will enlighten and illuminate the impact of the financial crisis on some Islamic and Conventional banks in The Gambia and United Kingdom.
3 http://www.islamic-banking.com/what_is_ibanking.aspx
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1.2. Research Question
Did the only Islamic bank in The Gambia perform better than its Conventional bank peers in the recent global financial crisis?
How well did Islamic banks in the United Kingdom perform during the recent global financial crisis?
1.3. Conceptual Framework
The research framework maps out the structure and order the research is presented. The next section on this paper provides you with Background Information about Islamic and Conventional banking. Section 3 presents the Literature Review, Section 4 provides you with an overview of the banking Sector in The Gambia and United Kingdom. Section 5 explains the Methodology used. Sections 6 and 7 provides an Empirical Analysis and Results and Conclusions respectively.
1.4. Research Limitation
It is important to mention and note the methodological constraints of this thesis work. The thesis was primarily limited by the inability of the researcher to access Annual Financial Reports of the only Islamic Bank in The Gambia (Arab Gambia Islamic Bank (AGIB)). The research relied entirely on data accessed from the Central Bank of The Gambia and this includes Income statements, Balance Sheet Statements and Cash Flow statements. Access to AGIB’s annual reports would have provided the researcher with enough information to the Financial Notes.
The Financial Notes are supplementary information added to the end of the financial statements, which assist to explain specific items in the financial statements (http://en.wikipedia.org). In addition to the above, the sample size of Islamic banks in the Gambia is limited to only one Islamic bank. This is because there exist only one Islamic bank in The Gambia. The analysis of
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the performance of Islamic and conventional banks in The Gambia would have been more interesting if the researcher was able to use equal numbers of Islamic and conventional banks for the study.