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Phd. Programme the Role of Central Bank Regulations in Enhanci Cardiff Metropolitan University Cardiff School of Management – PhD. Programme The Role of Central Bank Regulations in Enhancing Islamic Bank Performance in Egypt Dissertation Submitted in Fulfilment of the Requirements for the Degree of Doctor of Philosophy - 2019 Submitted By: Aliaa Abdallah Tammam Supervised By: Prof. Dr. Eleri Jones Prof. Dr. Claire Haven-Tang Prof. Dr. Sameh Sakr Prof. Dr. Mohamed Moustafa Dedication To my husband Hisham Massoud, my sons Muhammad and Ibrahim, my mom Afaf Ahmad Ali, my dad Abdallah Tammam, my sister Afaf Tammam and my brother Amr Tammam. Their love, patience and support, have made this possible. I love you all and thank you for always being there for me! Acknowledgments My grateful thanks go to my supervisors Professor Eleri Jones, Professor Claire Haven-Tang, Professor Sameh Sakr and Professor Mohamed Mostafa for their valued efforts in helping this thesis come to fruition. Further, I would like to take this opportunity to thank my faculty Dean, Professor Tarek Abdeen and Professor Khaled Gad, Head of the Finance Department for their constant support. Special thanks go out to my colleagues, Ahmad Maher, Ali Allam, Nehal Ayad and Nouran Nashaat for helping me through the whole process. Last, but certainly not least, I would like to express my deepest gratitude for my family. Most of all, I must acknowledge the encouragement and forbearance of my husband, Hisham Massoud, and his support throughout this research project. I would also like to thank my two sons Muhammad and Ibrahim. My parents, Dr Abdallah Tammam and Professor Afaf Ahmad Ali, raised me and taught me with love and encouragement and have supported me in all my pursuits; they believe in me and in all my endeavours. Moreover, my brother, Dr Amr Tammam, and my sister, Afaf Tammam, have always encouraged me with their best wishes. ii Abstract One of the key success elements of economic development is a well-established, banking system. This sector is often considered for mobilising savings as credit or investment tools. In addition, the banking system plays a vital role in increasing investments to serve the financial resources essential for developmental needs (Etab, 2016). However, continual financial crises have resulted in troubles in many conventional banks all over the world. By contrast, the Islamic banks (IBs) were safeguarded against these crises (Johnes et al., 2014). In fact, Islamic banking broadened its requests to more investors other than just traditional Muslims ones. Recently, more than 300 Islamic financial institutions were established in 70 countries across the world (Johnes et al., 2014). This study explored the key problems and challenges in the development of Islamic banking in Egypt, considering the extant rules and regulations set by the Central Bank of Egypt (CBE): the legal reserve policy, bank examination system, credit ceiling, liquidity limit, capital adequacy policy, discount rate, financial policy, ban on dealing in moveable and immoveable assets, and open market operations. Through the development of a regression model, the aspects of the regulations with the most impact on Islamic banking performance were identified, and proposals for amendments were developed as necessary. These proposals were discussed with experts from Islamic banking sectors as well as the CBE. This study will be of great importance for banks’ managers, regulators, depositors, investors and shareholders. It reflects the real condition of the Islamic banking system in Egypt, providing a complete picture of IB’s place in the Egyptian iii banking sector. Further, it provides a full analysis of how the current regulations affect the achievement of Islamic banks in comparison with the achievement of conventional banks in Egypt. Data was gathered by interviewing 30 bank employees, chosen via non- probabilistic convenient sampling techniques, to help in developing the research hypotheses. In addition, secondary data on banking performance using CAMEL was gathered from the Fitch solution database. Hypotheses were answered by analysing the data collected from 347 questionnaires; the data was distributed using regression and correlation analyses to test the relationships and the relative importance of the variables. Finally, the researcher developed a set of proposals to amend the central bank regulations and discussed them with an expert panel. According to the relative importance and the regression models, it was concluded that the performance of IBs was low due to the absence of the following factors: the current legal reserve policy, current bank examination system and credit ceiling. iv Contents List of Tables .................................................................................................................. xi List of Figures ............................................................................................................... xiv List of Abbreviations .................................................................................................... xv Chapter 1: Introduction ................................................................................................. 1 1.1 Background ............................................................................................................ 1 1.2 Research Problem .................................................................................................. 4 1.3 Research Aim ......................................................................................................... 6 1.4 Research Importance ............................................................................................ 6 1.5 Research Objectives .............................................................................................. 7 1.6 Contributions of the Study ................................................................................... 9 1.7 Research Limitations .......................................................................................... 10 1.8 Structure of the Thesis ........................................................................................ 11 Chapter 2: Overview of Islamic Principles and Economy and Islamic Banking .... 15 2.1 What is Islam ....................................................................................................... 15 2.1.1 Shariah and its Sources ........................................................................... 15 2.1.2 Islamic Economy ...................................................................................... 17 2.1.3 Islamic Finance ......................................................................................... 18 2.1.4 Distribution of Resources in Islam ......................................................... 19 2.1.5 Zakah ......................................................................................................... 19 2.1.6 Riba ........................................................................................................... 20 2.1.7 Interest, its Origin and History ............................................................... 22 2.2. The Islamic Banking System ............................................................................. 24 2.2.1 The History of Islamic Banking .............................................................. 24 2.2.2 Islamic Banking and Finance .................................................................. 27 v 2.2.3 The Aims and Objectives of Islamic Banking ....................................... 32 2.2.4 The Benefits of an Islamic Banking and Finance System ..................... 35 2.2.5 Central Bank’s Role and Islamic Banking ............................................ 39 2.2.6 The Operational Framework of Islamic Banking ................................. 42 2.2.7 Islamic Banking in Different Countries ................................................. 47 Chapter 3: Background and Literature ...................................................................... 57 3.1 Conventional Banks ............................................................................................ 57 3.1.1 Payment Services ...................................................................................... 59 3.1.2 Deposits and Lending Services ................................................................ 59 3.1.3 Investment, Pensions, and Insurance Services ...................................... 60 3.1.4 E-banking .................................................................................................. 60 3.2 Islamic Banks ....................................................................................................... 60 3.2.1 Deposit Services ........................................................................................ 62 3.2.2 Financing Services .................................................................................... 63 3.3 The Role of Central Banks ................................................................................. 66 3.4 Comparison between Conventional and Islamic Banks .................................. 77 3.5 Islamic Banks and the Central Bank ................................................................. 79 3.6 Social Norms, Religiosity and Governance ....................................................... 83 3.7 Banks’ Performance Measurement ................................................................... 87 3.8 Conclusion .......................................................................................................... 107 Chapter
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