The University of Dodoma University of Dodoma Institutional Repository http://repository.udom.ac.tz
Business Master Dissertations
2015 Assessing the Islamic bank operations in Tanzania: a study of Amana bank Dar es salaam
Mpalangulu, Madina M.
The University of Dodoma
Mpalangulu, M. M. (2015). Assessing the Islamic bank operations in Tanzania: a study of Amana bank Dar es salaam . Dodoma: The University of Dodoma. http://hdl.handle.net/20.500.12661/1064 Downloaded from UDOM Institutional Repository at The University of Dodoma, an open access institutional repository. ASSESSING THE ISLAMIC BANK OPERATIONS IN
TANZANIA: A STUDY OF AMANA BANK DAR ES SALAAM
By
Madina M Mpalangulu
A Dissertation Submitted in Partial Fulfillment of the Requirements for the Award of the Degree of Masters of Business Administration of the University of Dodoma
The University of Dodoma
October, 2015
CERTIFICATION
The undersigned certifies that has read and hereby recommends for acceptance by the University of Dodoma dissertation entitled: “Assessing the Islamic Bank
Operation in Tanzania: A Case of Amana Bank Dar es Salaam” in partial fulfillment of the requirements for the Degree of Masters of Business
Administration of the University of Dodoma.
…………………………………….
Dr N. Viswanadham
(SUPERVISOR)
Date ………………………………
i DECLARATION AND COPYRIGHT
I, Mpalangulu Madina M. do hereby declare to University of Dodoma that this dissertation is a result of my own original work and that it has not been submitted for any degree award in any university for the award of the Degree of Masters of
Business Administration.
Signature: …………………………..…
No part of this dissertation may be reproduced, stored in retrieval systems or transmitted in any other forms or means. Photocopying, electronic or mechanical recording or otherwise without the prior permission of the author or University of
Dodoma on behalf.
ii ACKNOWLEDGEMENT
The finishing point of this study makes me recognizable with other people with unlike category in life. Those people who helped me in different ways discharge the study. I become conscious that without the help of these people I would not complete this work. In view of that, I express the cordial thanks to the Almighty
God for giving me life and strength.
I recognize the subsequent people and organizations that provided assistance during this study. Without their support this work would not have been possible. First and foremost, I deeply thank Dr. N. Viswanadham for his help, guidance, liable and resourceful scholarly contribution to make this study feasible. He undertook the last of guiding me from the initiation of the study during its execution through to the final write up of the Dissertation. The constructive criticism suggestions and encouragement motivated me to hard work.
With the deepest gratitude I wish to thank every person who has come into my life and inspired, touched and illuminated me though their presence. Thus, I am grateful to my parent (Toshi S. Mtambuzi), who invested the little he had in my life. What can I give in return that equals to what you gave me? Absolutely nothing! with regular love accept my tons of thanks that come from the bottom of my heart. You always kept me moving.
My special heartfelt goes to my children (Nasiima, Abubakari, Rashiiki and Murjah) and to my all sisters for their tolerance and inducing unavoidable income nie -es coursed to them during the periods of study. For generously sharing their wisdom, love and divinity, I pay honor to appreciation to Amana bank staffs in responding during data collection. May the Almighty God bless them.
iii DEDICATION
This study is dedicated to my lovely husband Mr Moshi Bilingo.
iv ABSTRACT
The study was focused in assessing the operation of Islamic bank in Tanzania. The objective of the research is to discover operation of Islamic bank is it brings profit. The study area was chosen because of being convenient to the researcher in acquiring data because the main branch of the bank is allocated there. Nevertheless, on these study is a new field in Tanzania, fewer has been done on Islamic bank. Preferences for the achievement of the company; hence, requiring a study, hence the researcher develop the interest on general objective of the study on operation of the Islamic bank.
Employed was Cross-sectional research design in the methodology in involving a sample size of 60 respondents. As its methodology this investigation used data collection such as questionnaires, observation and reading official documents. Data collected were analyzed descriptively by SPSS software by using the figures and tables.
The findings show that Islamic bank operation create profit because use financial contract which is create profit also its role create profit to society, includes: to clear and settle payments; to aggregate (pool) and disaggregate wealth and allow the flow of funds so that both large-scale and small-scale projects can be financed; to transfer economic resources over time, locations and sectors; to accumulate, process and disseminate information for decision-making purposes; to provide ways for managing uncertainty and controlling risk; and to provide ways for dealing with risk and return issues that arise in financial contracting. These roles can be performed by offering financial transactions, pooling savings and channeling funds. By performing these roles, Islamic banks play a valuable and integral part in the development of the national economy by creating wealth for individuals and the community.
v DEFINITION OF TERMS
Salam: A contract in which bank made advance payment for goods/services to be delivered at future date.
Istisna: A contract of credit sale that allows future payment for manufacturing goods for future delivery.
Muajjal: A financing contract in which bank purchase goods to be sold to customer by showing the purchase price and profit margin.
Qarz/Qarz-e-Hasna: A debt, which is given without any interest or benefit to meet the financing need.
Diminishing Musharika: A partnership deed in which one party (banker) transfers
(partnership) share to the other party (customer) with the passage of time.
Riba: Any excess amount or benefit (than principal amount) given by the debtor for debt or kind
Sharia’h: A set of instructions consists of the Holy Quran, Sunnah, Ijmah and Qiyas for every walk of life.
Mudarib: Partnership deed between investor and bank to provide competency & skills to share profit/ lose
Musharka: A partnership agreement in which all partners contribute capital and work to share profit/loss.
Mudaraba: A partnership agreement in which some partners contribute capital and others contribute their competencies to share profit or loss according to an agreed ratio.
Ijarah: A lawful consideration as rent for hiring an asset or reward for hiring.
vi TABLE OF CONTENTS
CERTIFICATION ...... i DECLARATION AND COPYRIGHT ...... ii ACKNOWLEDGEMENT ...... iii DEDICATION ...... iv ABSTRACT ...... v DEFINITION OF TERMS ...... vi TABLE OF CONTENTS ...... vii LIST OF TABLE...... x LIST OF FIGURES ...... xi LIST OF ABBREVIATIONS AND ACRONYMS ...... xii CHAPTER ONE...... 13 INTRODUCTORY CHAPTER ...... 13 1.0 Introduction ...... 13 1.1 Background of the study ...... 14 1.1.1 Historical Perspective ...... 14 1.1.2 Present scenario...... 17 1.2 Statement of the Problem ...... 18 1.3 Research Objective ...... 20 1.3.1 General Objective ...... 20 1.3.2 Specific Objectives ...... 20 1.4 Research Question...... 21 1.5 Significant of the Study...... 21 1.5.1 To Research...... 21 1.5.2 To Banking Institution ...... 21 1.5.3 To the Customer ...... 21 1.5.4 To other Researchers ...... 21 1.5.5 To the Government ...... 22 1.6 Limitation of the Study ...... 22 1.7 Scope of the Study ...... 23 1.8 Conclusion ...... 23
vii CHAPTER TWO ...... 24 LITERATURE REVIEW ...... 24 2.1 Introduction ...... 24 2.2 Definition of the Key Term ...... 24 2.2.1 Asset Liability Management (ALM)...... 24 2.2.2 Bank ...... 25 2.2.3 Basel II ...... 26 2.2.4 Islamic Banking ...... 26 2.3 Theoretical Frame Work ...... 27 2.3.1 Innovations Theory of Cost and Profit ...... 27 2.3.2 Dynamic Theory of Cost and Profit ...... 27 2.3.3 The Chapra Model ...... 28 2.4 Review of the literature...... 31 2.5 Empirical literature Review ...... 36 2.6 Synthesis and Research Gap ...... 40 2.7 Conceptual framework ...... 42 2.8 Conclusion ...... 42 CHAPTER THREE ...... 43 RESEARCH METHODOLOGY ...... 43 3.1 Introduction ...... 43 3.2 Study Area...... 43 3.3 Research Design and methods ...... 43 3.4 Research Population ...... 44 3.5 Research sample ...... 44 3.6 Sampling Frame ...... 44 3.7 Sampling Methods ...... 45 3.9 Types of Data ...... 45 3.9.1 Primary Data...... 45 3.9.2 Secondary Data ...... 46 3.10 Data Processing, Analysis and Presentation ...... 46 3.10.1 Data Processing...... 46 3.10.2 Data Analysis ...... 46 3.11 Reliability and Validity of Data ...... 47
viii 3.11.1 Validity of Data ...... 47 3.11.2 Reliability of Data ...... 47 3.11 Ethical Considerations ...... 48 3.12 Conclusion ...... 48 CHAPTER FOUR ...... 49 PRESENTATION ANALYSIS AND DISCUSSION ...... 49 4.0 Introduction ...... 49 4.1 Characteristics of the Respondents ...... 50 4.2 Demography of Respondents and Response Rate ...... 50 4.2.1 Demography of Respondents ...... 50 4.2.2 Study and Response Rate ...... 50 CHAPTER FIVE ...... 59 SUMMARY, CONCLUSION AND RECOMMENDATIONS ...... 59 5.0 Introduction ...... 59 5.1 Summary of the Study...... 59 5.2 Findings of the Study ...... 60 5.3 Conclusion ...... 62 5.4 Recommendations ...... 63 5.5 Guiding Principle Implications ...... 64 5.6 Areas for Further Research ...... 64 REFERENCES ...... 65
ix LIST OF TABLE
Table 4.1: Demography of Respondents (N=60) ...... 51 Table 4.2: Operations of Amana Bank and Profit Performance ...... 52 Table 4.3: Cost Benefits Analysis Use by Amana Bank to Enable Good Organization Performance...... 53 Table 4.4: Factor of Shariah Compliant Musharakah in Brings Profit ...... 55 Table 4.5: The Principle Use by Islamic Bank Brings Profit ...... 56 Table 4.6: Shariah Compliant Transaction Enable Bank to Get Profit ...... 58
x LIST OF FIGURES
Figure 1.1: Bank Crisis in the World ...... 16
Figure 1.2: Islamic Banking Global Average Growth Trends ...... 19
Figure 2.1: Islamic Model describes Adaption of law on Islamic banking in
Tanzania ...... 31
Figure 2.2: Conceptual Framework ...... 42
xi LIST OF ABBREVIATIONS AND ACRONYMS
HSBS Standard Chartered Bank
PLS Profit and loss sharing
UK United Kingdom
USA United States of America
ALM Asset Liability Management
NEV Net Economic Value
NIM Net Interest Margin.
ROA Return On Equity
BTP Before Tax Profit
CAR Capital Asset Ratio
OBS Off Balance sheet
OIC Organization Islamic Cooperation
KCBT Kenya Commercial Bank of Tanzania
NBC National Bank of Commerce
GDP Gross Domestic Product
SPSS Statistical Package for Social Science
IFSI Islamic Financial Services Institution
xii CHAPTER ONE
INTRODUCTORY CHAPTER
1.0 Introduction
The chapter provides the study overview, background information regarding the
Islamic bank operations. It describes the background information and its present scenario, statement of the problem, research objectives and questions, the significance, scope, limitations, and end up with conclusion.
Islamic bank is a deposit-taking banking institution whose scope of activities includes all currently known banking activities, excluding borrowing and lending on the basis of interest. Iqbal and Jarhi (2001) on liabilities side, it mobilizes funds on the basis of a mudarabah or wakalah (agent) contract.It can also accept demand deposits which are treated as interest free loans from the client to the bank. On the asset side, it advances fund on a profit-and-loss sharing or a debt-creating basis, in accordance with principles of the shariah. It plays the role of an investment manager for the owners of time deposits, usually called investment deposits. In addition, equity holding as well as commodity and asset trading constitute an integral part of
Islamic banking operations. An Islamic bank shares its net earning with its depositors in a way that depend on the size and date-to-maturity of each deposit.
Depositors must be informed beforehand of the formula used for sharing the net earnings with the bank.
13 1.1 Background of the study
1.1.1 Historical Perspective
In order to assess the operation of Islamic banking it is important to understand the historical origins of the banking system in predominantly Muslim countries and the evolving divergences from conventional banks. The modern conventional banking system in Islamic countries is a product of colonizers using the support of financial institutions for mining, agriculture, and manufacturing. The initial banks were predominantly used for the funds of foreigners and as a means to increase foreign- owned industries that spread through imperial rule. While these institutions were used to finance the expansion of the public sector in the Middle East and North
Africa, huge portions of the population made up of devout Muslims were left out of the banking system altogether due to voluntary self-exclusion caused predominantly by their religious beliefs et (Mohielden Al 2011). A lack of the fulfillment of their banking needs has led to inefficient use of savings and a less powerful money multiplier, contributing to an overall liquidity problem. In recent years, Islamic banks attempted to fulfill this economic need by providing products that are compliant with Shariah law. Such products are constructed around the philosophy that no person should profit from another‟s loss, thereby prohibiting Riba (interest).
Islamic banking emerged as a practical reality and started functioning in 1970s.
Since then it has been growing continuously all over the world. Presently, Islamic banking industry has reached US$1.0 trillion US dollars by the end of 2008.
International Rating Agency, Standard & Poor estimates that Islamic financial industry has potential to grow to US$4.0 trillion over medium term. It is surprising to note that global conventional banks like HSBS, Standard Chartered Bank, 14 Deutsche Bank, Citibank, etc, have also set up separate Windows/Divisions to structure Islamic financial products and are offering Islamic banking services to their
Muslim clients and even to those non-Muslim clients who are interested in profit and loss sharing (PLS) financial instruments. UK, France, China, Singapore and many other countries. The vertical growth of Islamic banking within short span of time has surprised everyone including western financial experts and analysts. A massive research activity has been initiated all over Islamic banking has been expanding all over the world particularly in Muslim countries with fast the world to probe this phenomenon. Nazim Ali (2008:154) disclosed that 970 books have been published on Islamic Finance recently. As many as 215 books were published in
Asia, 190 in Europe, 425 in Middle East and 140 in North America. Out of these,
1187 research papers were published in the European journals, which are nearly half of total published papers. It indicates the growing interest of Europe in Islamic finance. Similarly, 1547 papers were read in different conferences held on Islamic finance in Asia, Europe, Middle East and North America. This small detail shows the growing interest of researchers in Islamic finance.
It is interesting to note that conventional banking has been declining continuously.
(Financial stability report, 2008) Even now it is in serious crisis and suffering huge losses. The western countries are also paying huge fiscal cost of conventional banking crisis.
Four main financial crisis occurred during last two decades in different parts of the world has been given in the Figure 1. The first major crisis was U.S. Savings and
Loan crisis, 1986-95, which involved a fiscal cost of $225 billion to the United
States while five percent of GDP losses.
15 The second major banking crisis was occurred in Japan in 1990-99, spreading over a period of a decade and is termed as “ mother of all crises”, costing Japanese economy about $800 billion, about 18 percent of GDP losses. Third major crisis was ensued in East Asian and Latin American countries in 1998-99 that involved fiscal cost about $400 billion, 10 percent of GDP losses. The fourth biggest financial crisis
(generally termed as Sub-prime mortgage loans crisis) was occurred in the United
States in 2007 and is still continued in 2009. IMF estimated its fiscal cost around
$1.4 trillion and 10 percent GDP losses in 2007, which was revised to $2.2 trillion and 16 percent of GDP losses in 2009. This crisis has hit hard to the United States,
European countries and slightly Asian countries. It is to be taken as the worst financing crisis since Second World War that has jolted the invulnerability and institutional financial strength of advanced economies.
Figure 1.1: Bank Crisis in the World Source: Financial stability report, October, 2008
16 1.1.2 Present scenario
After liberalizing banking and finance sector, Tanzania is among the countries in
Africa experiencing new ways of banking to satisfy the needs of the market. From
Mobile banking to Islamic banking, Tanzanians are witnessing new business ideas in the makers of banking history. With old aged conventional banking dominating world economies, Islamic banking is growing very fast and it has established itself to be the alternative way to do banking business in a just and fair terms with interest free.
In Tanzania, there is a great demand that drives changes in the field, not for the benefit of the few but the whole community spiritually and materially. With an example of the bank like KCBT, which launched first of its kind Amana banking products in Tanzanian market. This launch brought new banking experience though limited services were on offer. With the launch of Amana Bank, This led other bank to operate in Islamic banking not as all but at least as Islamic window in the conversional bank such as NBC operate. Further, the beginning of 21st century proved a success for Islamic banking as a large number of banks started to deal in products/services according to principles of Sharia'h. It is suggested that riba-free and equity based economy is necessary to realize the benefits of Islamic financial system and to ensure the well being of mankind (Chapra, 1985).
Amana bank in Tanzania is the first full shariah compliant bank. It‟s beginning in
October 2009.When a group of prominent Tanzania business personality meet and set in motion the establishment of Islamic bank. The bank was grated provisional license by Bank of Tanzania on February 2011 and then incorporated on 25
17 February 2011 with authorized share Tzs capital 100 and paid up capital of Tzs 21.5 billion.
1.2 Statement of the Problem
The Islamic Financial Service has evolved in the aftermath of the financial crisis of the world to provide alternative means of financial intermediation and a more diversified platform for allocating investible funds. There have been significant developments in each asset class of Islamic finance since the Islamic Finance and
Global Financial Stability Report of April 2010, including a growing number of industry players, particularly in new jurisdictions, the introduction of regulatory reforms, incentives and various government-sponsored initiatives to establish
Islamic financial services in various markets, as well as an IFSI whose assets are estimated to have reached USD1.6 trillion as at end-2012, representing 20.4% growth. Started to concentrate Islamic banks around the world especially where that service not most exists.
Islamic banking in the early 2000 was a niche market in most jurisdictions with only a few institutions offering basic depository and financing instruments. This was coupled with low awareness and demand for Islamic banking services, particularly in Asia Pacific and developed markets. Regulation was another area that was undeveloped in most jurisdictions until the mid-2000s, when various Authorities began introducing and amending legislation to make it supportive of the Islamic banking industry‟s growth. Such amendments served to regulate, accommodate and incentivize Sharī`ah compliant transactions in a number of markets across the globe.
18 A sample of 50 Islamic banks across 11 countries shows that the Islamic banking industry has witnessed significant growth over recent years. The USD value of total assets with these Islamic banks reached USD411.4 billion as at end-2011, which represents 63.9% of the estimated total banking assets in 2011 if Iran is excluded.
Total assets with these Islamic banks have grown at a CAGR of 16.6% between
2007 and 2011.
Figure 2.2: Islamic Banking Global Average Growth Trends
Source: Internet. Islamic banking sample, KFHR (2013)
19 In spite the fact that Islamic bank as great contribution in globe economy, might seem faced more risk and unprofitable business in view of the fact that Islamic banks can not charge a fixed return for their customer‟s operations. Given that
Islamic banks will have more unstable returns on their assets since they have to be the owner of the asset before lease or sale it to the customers. The investigates whether Islamic banking cost fully and that by looking at the profit compatibility and this relationship will be evaluated with respect to the use cost volume profit analysis and cost efficiency.
Therefore the researcher wanted to know operation of Islamic banking generate any profit by using Amana bank as case study. By using cost benefit analysis and cost efficiency.
1.3 Research Objective
1.3.1 General Objective
The main objective of this study was to investigate the bank profit in the perspective of overall operational framework of Islamic banking in Tanzania using cost benefit analysis.
1.3.2 Specific Objectives
i. To assess Amana bank operation performance.
ii. To analyses the bank cost benefit analysis of Amana bank.
iii. To determine the relevance of cost benefit analysis in Islamic bank‟s
decision making.
20 1.4 Research Question
i. How Amana bank performance it‟s operating efficiently?
ii. How cost benefit analysis relevant to Islamic bank‟s decision making? iii. How cost benefit analysis use in decision making?
1.5 Significant of the Study
1.5.1 To Research
The achievement of this study served as research‟s partial fulfillment of the academic requirements for the award of the Master degree of Business administration at University of Dodoma.
1.5.2 To Banking Institution
The finding of this research will help the banking institution to understand if there is any importance of Islamic operation to the customers and hence towards good performance of an organization. Moreover, the study provides the real picture of financial institution in services provision particularly on Islamic banking operations.
1.5.3 To the Customer
The finding of this research will help the customers to create a good relation i.e. they saw as the party of the management and contributors to the success of the organization. On the other hand, it enabled businessmen to increase revenue as result they could afford several cost sharing services like education and health care.
1.5.4 To other Researchers
The study created new theoretical knowledge and areas for future research and literatures that have been addressed to this topic.
21 1.5.5 To the Government
The finding of this research will help the government on creation a nation of participative citizens, Hence a democracy country. Also the information about the impact of finance on economic growth will help to influence government policy makers and advisors to prioritize and attach to reforming financial sector policies.
1.6 Limitation of the Study
It is important to mention a few limitation of this study. The study was subjects to the normal survey study, the responses may influence by the problem of question of questions understanding and interpretation which resulted in data analysis difficulties.
All research designs can be discuss in terms of their relative strengths and limitations. The merits of a particular design are inherently related to the rationale for selecting it as the most appropriate plan for addressing the research problem. The research selected a case study design because of the nature of the research problem.
The case study is basically been fault for its lack of representativeness and therefore it involve problem on the issue of reliability, validity, and generalizability. This is because a case study focuses on a single unit, a single instance. Time and budget were also among the limiting the factors of this study. This is self –sponsor research.
Therefore the cost associated with the whole study will incur by the researcher. Thus the researcher was subject to financial constraints and time for data collection and analysis.
22 1.7 Scope of the Study
The study will be conducted in Posta, Ilala District in Dar es Salaam region which is in Tanzania involve one banking institution, Amana bank main brunch PPF House.
The scope of the study in term of content of the research looked just on operation of
Islamic banking led profit hence provide suggestion for appropriate strategies in the course of carrying out their business activities. Such issue can come up when preparing company budgets, financial plans, when new promotions and other functional decision are taken. It evaluates what-if situation occur in business.
In order to ascertain profit accurately, it is essential to ascertain the relationship between cost and profit on one hand. This will help banking to know most profitable service(s) among various that the bank offers in market. This aids the management to focus more on profitable service compare to others. It also supports the form to know the impact of any variance, due to any reason, on the profits.
1.8 Conclusion
In the above chapter the researcher discussed about the origin of Islamic banking
Statement of problem, research objective, research question and the significant of the study.
23 CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This section reviews the related literature to point out the visions of other scholars relating to the issue understudy. It shows the Islamic banking operations and the research intended to answer the following question connecting projects researcher must be aware of the fulfilled work of other investigators, in particular those reported in literature, regular updating of bibliographies is essential for determining how ones study fit with the literature, similarities between researcher findings and the work of others is indicative of validity. Finally, comparison with the literature will provide information about which findings from the study are new and enable the investigator to address the significance of the study.
2.2 Definition of the Key Term
2.2.1 Asset Liability Management (ALM)
Can be defined as a mechanism to address the risk faced by a bank due to a mismatch between assets and liabilities either due to liquidity or changes in interest rates. Liquidity is an institution‟s ability to meet its liabilities either by borrowing or converting assets. Apart from liquidity, a bank may also have a mismatch due to changes in interest rates as banks typically tend to borrow short term (fixed or floating) and lend long term (fixed or floating). A comprehensive ALM policy framework focuses on bank profitability and long-term viability by targeting the net interest margin (NIM) ratio and Net Economic Value (NEV), subject to balance
24 sheet constraints. Significant among these constraints are maintaining credit quality, meeting liquidity needs and obtaining sufficient capital. An insightful view of ALM is that it simply combines portfolio management techniques (that is, asset, liability and spread management) into a coordinated process. Thus, the central theme of
ALM is the coordinated – and not piecemeal –
Management of a bank‟s entire balance sheet. Although ALM is not a relatively new planning tool, it has evolved from the simple idea of maturity-matching of assets and liabilities across various time horizons into a framework that includes sophisticated concepts such as duration matching, variable rate pricing, and the use of static and dynamic simulation.( Oracle Corporation,2008)
2.2.2 Bank
The name bank derives from the Italian word banco „desk‟used during the
Renaissance era by Florentine bankers, who used to make their transactions above a desk cover by a green tablecloth ( Al-Tamimi,2010) however, traces of banking activity can be found even in ancient time. Some have suggested, the word traced its origins back to the ancient Roman Empire, where money lenders would set up their stalls in the middle of enclosed courtyards called macella on a long bench called a bancu, from which the word bank derived. As moneychanger the merchant at the bancu did not so much invest money as merely convert the foreign current into the only legal tender in Rome that of the Imperial Mint ( Al-Tamimi, 2010).
25 2.2.3 Basel II
An agreement on International banking regulation dealing with how bank handle risk Basel 11 establishes risk management and risk capital requirement in an attempt to ensure banks remain solvent. Basel 11 consist of three categories qualifiable must have sufficiency capital; Regulation can use to deal with non-qualifiable form of risk and also attempts to promote market displine. (Farlex financial dictionary, 2012)
2.2.4 Islamic Banking
Iqbal and Jarhi (2001) define Islamic Bank in the following words:
“An Islamic bank is a deposit-taking banking institution whose scope of activities includes all currently known banking activities, excluding borrowing and lending on the basis of interest. On the liabilities side, it mobilizes funds on the basis of a mudarābah or wakālah (agent) contract. It can also accept demand deposits which are treated as interest-free loans from the clients to the bank .On the assets side; it advances funds on a profit-and–loss sharing or a debt-creating basis, in accordance with the principles of the Shariah. It plays the role of an investment manager for the owners of time deposits, usually called investment deposits. In addition, equity holding as well as commodity and asset trading constitute an integral part of Islamic banking operations. An Islamic bank shares its net earnings with its depositors in a way that depends on the size and date-to-maturity of each deposit. Depositors must be informed beforehand of the formula used for sharing the net earnings with the bank.”
26 2.3 Theoretical Frame Work
2.3.1 Innovations Theory of Cost and Profit
It is the dynamic changes which give rise to profits according to the dynamic theory of profits. American economist Joseph Schumpeter has singled out for special treatment the par; played by innovations. The daring and the dynamic entrepreneurs continue to hit at one innovation or another, keeping their business ahead of others and thus making handsome profits. According to Schumpeter, the principal function of the entrepreneur is to make innovations and profits are a reward for successful innovations. To Schumpeter, the principle function of the entrepreneur is to make innovations and profits are a reward for performing this important function.
Schumpeter has given the term „innovation‟ very wide meaning. Discovery of a new material or a new technique of production resulting in a lowering of the cost of production or improving the quality of the product is an innovation. Any new measure or new policy initiated by the entrepreneur comes under innovation in the sense in which Schumpeter uses the term.
2.3.2 Dynamic Theory of Cost and Profit
This theory is associated with the name of J. B. Clark, who is of the opinion that there can be no profit the static world where size and composition of the population, the .number and variety of human tastes and desires, techniques of production, technical knowledge, commercial organization, etc. remain constant. In a world like this, everything is known and is knowable and can be accurately foreseen. There is no risk, and hence no .profit Costs and selling price are always equal, and there can be no profit beyond wages for the routine work of supervision. But we are not living in a stationary state.
27 Ours is a dynamic world and some changes are constantly taking place. The clever entrepreneur foresees these changes. He is a pioneer. Somehow by invention or otherwise, he lower his cost of production and makes profits. The changing world offers limitless opportunities to the far-sighted, daring and clever entrepreneurs to make profits by turning the facts of the situation in their favour.
It is only because the world is dynamic that it is possible for them to keep the lead and reap the profits. In a static state, profits will disappear, and the entrepreneurs will only earn wages of management.
2.3.3 The Chapra Model
In other words like other institutions in the Islamic economy the Islamic banks have an apparent and equal responsibility to help achieve economic justice, fair distribution of wealth, and upliftment of the plight of the poor. In the Chapra model
Islamic banking is seen as part of the Islamic economic system. Therefore as for
Chapra‟s model of Islamic banking it will uphold the objectives of Islamic economics (Chapra, 2008). He outlines four goals and values for Islamic economics namely:
1) Economic well-being within the framework of the moral norms of Islam.
2) Universal brotherhood and justice
3) Equitable distribution of income
4) Freedom of the individual within context of social welfare.
From each objective the characteristics of the Chapra Model may be derived. In the first objective the emphasis is on the moral norms of Islam. This suggests a deliberate desire to achieve Islamic moral norms in the Islamic banking system.
28 The safest definition of Islamic moral norms would be the objectives of Shariah or
Maqasid Shariah. Therefore it may be concluded that the Chapra model seeks achieving Maqasid Shariah as an objective of the Islamic banking system.
The second objective in the Chapra economic model begins with the emphasis that all men are created equal and therefore there must be justice in all man-to-man relationship. By extension in Chapra‟s model of Islamic banking justice between banks and its customers are of paramount importance. An Islamic bank cannot take the position of the conventional bank with their customers where conventional banks tend to treat their customers with much injustice.
The third objective of equitable distribution of income means the Islamic banking system cannot perpetuate activities which defeats or does not contribute to this objective. There must be wide distribution of wealth and the Islamic bank must not contribute to concentration of wealth in the hands of the rich.
The fourth objective of Chapra Islamic economic system is the freedom of individual within the context of social welfare. Chapra believes in the freedom of the market system but modified as necessary to make it conforms to the ideals of Islam as much as possible. By extension the Islamic banking system according to Chapra must also conform to the ideals of Islam as much as possible.
29 Principles of Islamic banking
Prohibition of Interest (Riba)
Interest cannot be paid or received on transaction in any case where money is exchanged for money is not actually any value according to Islamic if it is not employed in business‟s
Prohibition of uncertainty and speculation. (Gharar and Maysir)
Transaction must avoid uncertainty(Gharar), speculation (Maysir) or anything that could lead to the unjust enrichment or unfair exploitation of one of the parties to a contract(Imeson,2007).In case of speculation the big investors and industrialist turn the economic financial system toward their own and personal benefits.
Unethical business
Transaction cannot be made that involve prohibited product or activities, such as alcohol, illicit drugs and tobacco because Islam wants to develop a ethical and friend environment in the society (Imeson, 2007)
Principle of Asset back transaction
Contracts are sacred, in Islamic bank contract are common uses .The bank buys an asset and sells it to a client. Rather than exchanging money for money, an asset is traded for money so it complies with sharia. Bank would state the cost of an asset as well as the markup so as to make the profit known to the buyer.
30 Figure 2.1: Islamic Model describes Adaption of law on Islamic banking in Tanzania
Prohibition of interest
Prohibition of uncertainty (e.g Profit and loss speculation) principle and risk sharing
Islamic finance
Prohibition on to Principle of Asset support some sector back (eg. Alcohol) transaction
Source: Field data survey from literature review 2015
2.4 Review of the literature.
Bashir (2000) assessed the performance of Islamic banks in eight Middle Eastern countries. He analyzed important bank characteristics that affect the performance of
Islamic banks by controlling economic and financial structure measures. The paper studied fourteen Islamic banks from Bahrain, Egypt, Jordan, Kuwait, Qatar, Sudan,
Turkey, and United Arab Emirates between 1993 and 1998.
31 To examining profitability, the paper used Non Interest Margin (NIM), Profit before tax (PBT), Return on Assets (ROA), and Return on Equity (ROE) as performance indicators. There were also internal and external variables: internal variables included in the regression were bank size, leverage, loans, short term funding, overhead, and ownership; while external variables included macroeconomic environment, regulations, and financial market. In general, results from the study confirm previous findings and show that Islamic banks profitability is positively related to equity and loans. Consequently, if loans and equity are high, Islamic banks should be more profitable. If leverage is high and loan to assets is also large, Islamic banks will be more profitable. The results also indicate that favorable macro- economic conditions help profitability of Islamic banks.
The objective of this study was to measure cost and profit efficiency of Islamic banks in Africa, Europe, Far East and Central Asia and Middle East for the period from 2003 to 2008. For analyses purposes, we obtained data from Bank scope database for 193 sample banks for measuring cost efficiency and 163 sample banks for profit efficiency. The findings showed that the average cost and profit efficiency of the overall Islamic banking increased during the survey period. The average cost and profit efficiency over 2003-2008 are 43.6 percent Banks and Bank Systems,
Volume 5, Issue 4, 2010 82 and 41.1 percent, respectively. This implies that banks in these four regions were relatively better in controlling cost than generating profits. Hence, this result supports the findings by Hassan and Hussein‟s (2003) and
Kamaruddin et al. (2008) that Islamic banks are relatively better in controlling cost than generating profits.
32 This finding, however, contradicts to the study found by Mohamad et al. (2008), who reported that Islamic banks are better in generating profits than utilizing its resources. The inter temporal comparison of the efficiency scores suggest that the trend for both the cost and profit efficiency of Islamic banking is upward, suggesting that the sample of Islamic banks has improved their efficiencies over the study period.
The other findings also show that Islamic banks in Europe are more cost and profit efficient than the other groups of Islamic banks. Overall, banks in the Far East and
Central Asia scored the lowest cost efficiency, while African Islamic banks scored the lowest profit efficiency. Islamic banks in the Far East and Central Asia had mean cost and profit efficiency 29.8 percent and 41.8 percent, respectively. On the other hand, the cost and profit efficiency scores for Islamic banks in the Middle East were
43.5 percent and 45.4 percent, respectively.
Sudin Haron (1996), while discussing external determinants of the profitability of
Islamic Banks, argued that conventional banking theory postulates that the bigger the market, the more profit the banks earn, this theory is not necessarily true for
Islamic banks. Islamic banks perform well due to efficient use of capital in short- term financing. Similarly, Islamic banks in a competitive market are better managed than those in the monopolistic markets. This finding is also in line with general assumption. Those businesses which operate in a competitive environment must be alert to the changes and produce innovative strategies and policies, if they wish to remain in the market. In contrast, conventional banks perform better in monopolistic environment as competitive environment involve them in moral hazard and adverse selection, causing high rate of default and less profitability.
33 Hasan and Dridi (2010) show that although Islamic banks experienced more profitability than conventional banks from 2005-2007, as the crisis moved from the financial economy to the real economy, Islamic banks‟ profitability decreased.
Islamic banks experienced higher returns on assets and equity before 2008 but became less profitable than conventional banks post-2008. Despite this finding,
Hasan and Dridi assert that their data show that Islamic banks were not drastically less profitable post-2008.
Bashir and Hassan (2004) studied the determinants of Islamic baking profitability between 1994 and 2001 for 21 countries. Their findings show that Islamic banks have a better capital asset ratio as compared to commercial banks which means that
Islamic banks are well capitalized. Also, their paper used internal and external banks characteristics to determine profitability as well as economic measures, financial structure variables, and country variables. They used, Net-non Interest Margin
(NIM), which is non interest income to the bank such as, bank fees, service charges and foreign exchange to identify profitability. Other profitability indicators adopted were Before Tax Profit divided by total assets (BTP/TA), Return on Assets (ROA), and Return on Equity (ROE). They studied 43 Islamic banks.
Results obtained by Bashir and Hassan (2004), were similar to the Bashir (2000) results, which found a positive relationship between capital and profitability but a negative relationship between loans and profitability. Bashir and Hassan also found total assets to have a negative relationship with profitability which amazingly means that smaller banks are more profitable. In addition, during an economic boom, banks profitability seems to improve because there are fewer non-performing loans.
Inflation, on the other hand, does not have any effect on Islamic bank profitability.
34 The results also indicate that overhead expenses for Islamic banks have a positive relation with profitability which means if expenses increase; profitability also increases.
Munawar Iqbal (2001 and 2004) compares Islamic and conventional baking in the
Nineties and included 12 banks into his study sample. He studied the growth of
Islamic banking industry during 1990-98 to measure annual growth rates for some key variables of Islamic banks like total equity, total deposits, total investment, total assets and total revenue. Then he used ratio analysis like capital assets ratio, liquidity ratio, deployment ratio, cost/income ratio, profitability ratio, return on asset and return on equity ratio and concluded that both return on assets (ROA) and return on equity (ROE) for the Islamic banks are substantially higher than the conventional banks and the two ratios are respectively 2.3 and 22.6 percent for the Islamic banks as against 1.35 and 15 percent for conventional banks. He concluded that the profit ratio of Islamic banks compare favorably with international standards, it should be noted that conventional banks‟ depositors are guaranteed their principal amounts and hence bear less risk than Islamic banks‟ depositors. Therefore, the depositors of
Islamic banks would genuinely expect a higher rate of return to compensate for extra risk.
Alkassim (2005) in his study of GCC countries banking found that higher capital ratios support Islamic banks profitability. Total Loans for both types of banking have a positive relationship with profitability indicating that lending improves profitability. Deposits have a positive relation with profitability for Conventional and a negative relation for Islamic banking. This indicates that deposits impact
35 Islamic banks profitability negatively whereas it contributes to Conventional banks profitability.
Cook (2006) Islamic bank phenomenally profitable because although its underlying funding mechanism is the same as conventional banking, its default experience is better and its charge higher and less transparent.
(Mohielden et al., 2011) a lack of the fulfillment of their banking needs has led to inefficient use of savings and a less powerful money multiplier, contributing to an overall liquidity problem.
Hasan and Dridi , 2010) argue that this characteristic of Islamic banking should increase stability, thereby stimulating growth. Shariah-compliant products align entrepreneurs‟ payment obligations with revenue accrual, leading to a reduction of instability in financial markets. Islamic law prohibits the exchange of money for money or money for debt, which frequently degenerates into games of chance, creating instability through speculation.
2.5 Empirical literature Review
(Cihak and Hesse, 2008) they measure the impact of Islamic banks on financial stability and also compare the performance of Islamic banks with the conventional banks. Using z-scores as a measure of stability, they found that (i) small Islamic banks tend to be financially stronger than small commercial banks; (ii) large commercial banks tend to be financially stronger than large Islamic banks; and (iii) small Islamic banks tend to be financially stronger than large Islamic banks.
In their cross-country empirical study on “Islamic banks and financial stability” analyzed 20 banking systems operating in Bahrain, Bangladesh, Brunei, Egypt, 36 Gambia, Indonesia, Iran, Jordan, Kuwait, Lebanon, Malaysia, Mauritania, Pakistan,
Qatar, Saudi Arabia, Sudan, Tunisia, United Arab Emirates, West Bank and Gaza, and Yemen and covers 520 mb Observations for 77 Islamic banks (and 3,248 observations for 397 conventional commercial banks) over the period 1993 to 2004.
The contrast between the high stability in small Islamic banks and the relatively low stability in large Islamic banks is particularly interesting. It suggests that Islamic banks while relatively more stable when operating on a small scale, are less stable when operating on a large scale. A plausible explanation for the above findings is that it is significantly more complex for Islamic banks to adjust their credit risk monitoring system as they become bigger. Another possibility is that small banks concentrate on low-risk investments and fee income, while large banks do more profit-and-loss (PLS) business.
The above studies prove that Islamic banking is a reality and a strong alternate financial system having solution to the existing financial problems of the world.
Bourke (1989) covered ninety banks in Australia, Europe, and North America: a total of twelve territories between 1972 and 1981. The paper split the determinants of bank profitability in terms of internal and external factors: internal factors such as staff expenses, capital ratio, liquidity ratio, and loans to deposit ratio; external factors such as regulation, size of economies of scale, competition, concentration, and growth in market, interest rate, government ownership, and market power.
Bourke also discusses regulation and show how it can be identified in different countries by constructing a matrix and by stating the differences in entry barriers, interest rate restrictions, and credit ceilings. He also discusses industry structure, risk avoidance; value added measures, and economies of scale. His results show that increase in government ownership leads to lower profitability in banking. 37 In addition, results also reveal that concentration, interest rates, and money supply are positively related to profitability. The results show that capital and reserves of total assets as well as cash and bank deposits of total assets are both positively related to profitability. Bourke adds that well capitalized banks enjoy cheaper access to sources of funds as they are less risky than less capitalized banks (Bourke, 1989).
Molyneux and Thornton (1992) studied the determinants of European banks profitability. The paper examined eighteen counties in Europe between 1986 and
1989. The studied sample included 671 banks in 1986, 1,063 in 1987, 1,371 in 1988, and 1,108 in 1989. This paper replicated Bourke‟s (1989) work by using internal and external determinants of bank profitability. However, Molyneux and Thornton
(1992) results contradict Bourke‟s findings showing that government ownership expresses a positive coefficient with return on capital (profitability). The other results were similar to Bourke‟s, showing that concentration, interest rate, and money supply were positively related to bank profitability.
Spathis, Kosmidou, and Doumpos (2002) research work on the profitability factors in the Greek banking system is an interesting study which measures the effectiveness of small and large banks in Greece with the use of ROA, ROE, and
Net Interest Margin (MARG) ratios as profitability measures. There were a total of
23 banks - seven large and sixteen small - between 1990 and 1999 using panel data.
The results indicate that large Greek banks have a higher ROA and have more access to resources than small banks. Surprisingly, small banks had large ROE and
MARG as well as high financial leverage and high capital adequacy.
Molyneux and Thornton (1992) their study investigates the determinants of profitability in six European countries like Denmark, France, Germany, Italy, Spain, 38 and United Kingdom and the study covered 665 banks between 1992 and 1998. The study used cross-sectional and dynamic panel data. The variables used in the regression analysis were ROE, the logarithmic of total assets, Off Balance Sheet
(OBS) dividends, Capital to Asset Ratio (CAR). The results from both models were similar: evidence reveals that there is a positive relationship between size (total assets) and profitability.
Bagehot (1873), argue that banks that excel at identifying creditworthy firms and pooling risk accelerate economic growth. The risk sharing model of Islamic banking in which risk cannot be transferred through financial markets may be more effective than the borrower-risk model dominating conventional banking. Since Islamic banks bear more of the burden of risk, theoretically I argue they should exercise more deliberation and prudence in their decisions to lend to firms; this effect could potentially lead to a more economically optimal distribution of liquidity. However, there is a lack of empirical evidence to support this claim. Although Islamic banks may not solve the problem of imperfect information between lenders and borrowers, their lending system incentivizes financing more successful projects.
Stiglitz and Weiss (1981) assert that conventional banks must ration credit as a result of the imperfect information in the lender-borrower relationship. Banks may attempt to transmit the potential risk of misinformation to borrowers through a higher interest rate, but doing so results in an adverse selection effect; only borrowers pursuing riskier projects will take on higher interest because they have a low probability of actually paying it back (Stiglitz and Weiss 1981). Islamic banking rids borrowers of most financial risk, transferring risk to the lending institution.
While this does not necessarily result in a better mechanism for information accrual,
39 I argue this system theoretically incentivizes banks to exercise more prudence in their lending decisions. Since Islamic banking links financial intermediaries‟ returns directly to the actual revenue of the borrower.
Siddiqi (1999) argues that funds are allocated towards projects that are more innovative and expected to produce better results. Siddiqi asserts that the risk- sharing aspect of Islamic finance incentivizes banks and private lenders to be more prudent with their funds and, consequently, allocate liquidity more optimally than conventional banks. Since lenders would have a personal stake in the success of the project, any risk they undertook would reflect a true belief in the success of the borrowers‟ endeavors, unlike conventional lending in which risk can be bought and sold for profit primarily through credit default swaps. Siddiqi‟s argument is questionable, however, since Islamic banks may also exercise more caution in their investments, stimulating less innovation than conventional banks due to the increased burden of risk. Furthermore, entrepreneurs have less incentive to work hard to achieve success since they are bearing such a limited financial risk. It is unclear which of these hypotheses dominates empirically
2.6 Synthesis and Research Gap
Banking sector is growing across the globe during the decade of 1990s. The 21st century came with blending of opportunities and threats for the banking sector due to inception of Islamic banking practices in different E. African countries like
Kenya, Tanzania, Uganda and even in other parts of the globe. The existence of
Islamic and conventional banks created competition among banks to meet operation efficiency in production cost and profit maximization. This competition leads to concentration on banking mergers increase efficiency according to the Riegle-neal 40 interstates Banking and Banking Efficiency Act of 1994 permits a bank in one state to acquire a bank in another state. One of the reasons bank may merger is to improve efficiency. Efficiency can be measured by the cost of producing a given amount of a given product.
An Islamic banking practice in Tanzania in 2000s was registered as Islamic window in some bank and Islamic bank in other. Islamic banks are new entrants in the
Tanzania banking industry and also require a comparative study to assess the efficiency of their operations. Islamic banks have to face multiple challenges due to strong reaction from conventional banks because they were deep rooted and popular among the public to meet their requirement. Everyone tries to introduce innovative products and services by beautiful blending of traditional facilities and modern technology to cope with each other for greater number of customers that leads to more profitability. the ups and downs in the growth of banking sector require researcher to study operation performance by The acute shortage of literature regarding Islamic banking system inspired the researcher to conduct a comparative study in Tanzania.
However, there is abundance of literature regarding in the banking sector but there is scarcity of studies in Islamic banking in Tanzania with. Islamic banking practices were newly introduced in Tanzania that requires a comparative study to contribute towards literature.
41 2.7. Conceptual framework
Figure 2.2: Conceptual Framework
General Investment fund Specific Investment Fund
Accept Deposit
Islamic bank
Financing Product
Long term Medium Term Short term Musharaka Mudaribah Ijarah Murabah, Salam, Diminished Musharaka Istisnaa
Source : Developed by the Researcher‟s literature review (2015)
2.8 Conclusion
The chapter has covered important areas on literature review both theoretical and empirical. Various views and ideas from other researchers have provided a clear picture on Islamic banking in the world. The following chapter will discuss the methodology by which study will be conducted.
42 CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
This chapter describe how the study has been conducted, it cover the research design and method, area of study, data collection methods, data processing, analysis and presentation, reliability and validity of data.
3.2 Study Area
The study conducted in Dar es Salaam Region where Amana bank is located in.
Amana main branch at postal area in PPF House.
3.3 Research Design and methods
A research design is the framework for a study that specified how each activity should be conducted to accomplish the research objectives, which includes specifying the information require, designing the instruments, selecting the sample, collecting and analyzing the data (Robson, 2002).
Research design also is a plan used to get out the expected results of the study; it is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure,
Research design was needed because it facilitates the smooth sailing of the various research operations (Kothari, 2004)
A cross-sectional research design was applied in this study. The cross-sectional research design allows data to be collected at single point in one time and used in descriptive study and for determination of relationship of variable (Bailey, 1998;
Babbie, 1990).
43 Descriptive research approach was also used to gain more information about the nature of a particular area of study. This approach provide picture of a situation so as to identify the problems (Burn and Grove 1999)
Researcher used the case study design in collecting data. This design has been adopted for its flexibility in data collection methods and in depth study.
3.4 Research Population
Population refers to the number of items about which the information is desired
(Kothari, 1990). In this study, the size of study was identified by a researcher, considering people who could provide information related to operation of Islamic banking. For purpose of this study, sample of respondent includes workers on
Amana bank, managers and customers.
3.5 Research sample
Kothari (2005) defined the sample as the number of items to be selected from the universe/population. The researcher sample should neither be excessively large nor too small; it should be optimum as it will fulfill the requirements of efficiency, representative, reliability and flexibility. In this research a sample of 60 people was selected, purposive sampling was used because the universe to be studies was small with a known characteristic which has to be studied intensively.
3.6 Sampling Frame
Sampling frame of the study on Islamic banking operation has included managers, customer and all workers working in Islamic bank.
44 3.7 Sampling Methods
This study used purposive sampling to get key information. Random sampling was used and each member was given an equal chance of giving views on Islamic banking in Tanzania
3.8 Sample Size
In order to justify the findings, the researcher chooses great and sufficient sample, the sample that chosen from the company was 60 respondents. base in departments starting with company Managing Director, senior Human Resource Manager, Area managers, team leaders and representatives the semi structured interview will base on departmental and operational leverage depending on the sample. Moreover the questionnaires paper was distributed.
3.9 Types of Data
3.9.1 Primary Data.
Primary data are those data which are collected afresh and the first time and thus happen to be original in character (Kothari2004) questionnaire and interview.
Primary data collected methods involve data collected by the researcher from different respondents in the course of undertaking the study (Wayne, 2008). It involves data which are observed or collected directly from firsthand experience.
Questionnaire comprised factor identifies from extent literature in survey. The data for the survey constitute the primary data for the research.
45 3.9.2 Secondary Data
Secondary data is one of the most acknowledged sources of information.
It can be steadfast source that helps to answer prejudiced of your research (Saunder et al., 2009). The secondary data help people to understanding literature gaps, it also helps to establish research objectives and so the methodology .The questions were set considering objectives and several of the questions prepared to meet the research objectives.
3.10 Data Processing, Analysis and Presentation
3.10.1 Data Processing.
Data collected have been classified, categorized and summarized into meaningful groups transcribed into worksheet and tabulated. Collected data also edited, coded so as to be able to enter into the computer software SPSS.
3.10.2 Data Analysis
Data analysis and presentation is process of inspecting, cleaning, transforming, and modeling data with the goal of discovering useful information, suggesting conclusions, and supporting decision making. Pallant, (2007) stated that, in a research process the data analysis method has its own part. The letter, assimilate evidence in order to obtain answer to the research questions, Kothari (2002). The researcher analyzed item-to-item putting into account the importance of each item under the study. Data analysis constitutes data from publications.
To pave a way for smooth analysis, collected raw data were processed. The key activities in data analysis are editing, coding, classification and tabulation of collected raw data (Adam, 2008). 46 Data entry which aims at converting gathered data to a minimum for viewing and tabulation is also a part of data processing (Bhattacharya, 2003).
3.11 Reliability and Validity of Data
3.11.1 Validity of Data
Welman and Kruger (2001), describe validity as a mechanism that ensures that the process implemented to collect data has collected the intended data successfully.
Validity refers to extent to which an empirical measure adequately reflects the real meaning of the subject under investigation (Babbie, 1995).To ensure the data acquired is valid in this study; the following steps will be taken. An extensive literature review, interview and self- administered questionnaire surveys will be conducted (Blancher and Durrheim, 1999, Gunn, 1994, Finn et al, 2000). Interview guidelines will be generated in conjunctions with the fieldworker. This ensured that the interviews will focus on the topic under investigation and the purpose of the study will be clearly explained. The procedure of the interview will be explained to the respondents. Lastly, respondents will be assured of anonymity and confidentiality especially their names to appear in the text. This will encourage honesty during the interview.
3.11.2 Reliability of Data
Babbie (1995) describes reliability as a condition in which the same results were achieved whenever the same technique is repeated to do the same study. This will be achieved by the following means: The anonymity and confidentiality of the respondents to be ensured so that to provide information for use strictly for the purpose of the study. Environment friend with the respondents created during the preliminary fieldwork study. 47 3.11 Ethical Considerations
During the study, the researcher sticks on to human rights national policies and paid attention to rules and regulations. That is, the data were collected after clearance to carry out the research study was obtained from Amana bank.
Other consideration was about Informed Consent of Respondents and
Confidentiality. In the study area, friendship with the respondents order to inquire about their consent. The respondents were assured in advance that the information they provided would be kept confidential and private would be used only for the research purpose. In effecting human rights, the respondents were free to pull out at any time during data collection and during interview session.
3.12 Conclusion
This part has presented practical procedure of the study. Start with research design and method, followed by data collection methods, data processing, analysis and presentation, reliability and validity of the data wind up with ethical issues. Chapter four will show how those collected data will be analyzed, discussed and presented as finding.
48 CHAPTER FOUR
PRESENTATION ANALYSIS AND DISCUSSION
4.0 Introduction
This chapter concern with the analysis of data and discussion of the research findings. In this chapter the data which were collected from the research questionnaires, interviews and observations as well as from the objectives of the research which were set forth in chapter one have been presented and analyzed. The researcher has presented the facts which were discovered during the study. The findings which were situate forth have depended on the data collected which are edited and coded for the purpose of completeness and accuracy and have been classified into meaningful relationships to indicate what it means in the context of the research report. The research basically carried out the research in the limits of the research investigation questions; therefore, within this chapter the analysis of data and the research findings are interpreted with respect to research questions of the study.
This is the most essential part of this research since it is the Centre of the study and it provides answers to the examined question. This party gives general idea of the general observation based on what was pragmatic by the researcher in the field and on the responses. Beyond the scope of this chapter, the researcher has presented the statistical gathering and the quantitative. The results which are being presented in this chapter should be viewed in consideration of the scope and limitations of the study pointed out in the early chapters.
49 In this chapter response rate has been dealt with first, followed by characteristics and findings from Man Frequency distribution was used to organize data, to give meaning to the response rates and facilitate insight. in relevant tables the frequency distribution of responses has been arranged by occurrence from the highest to the lowest obtained from the responses. Furthermore, tables, graphs and charts were drawn using Statistical Package for Social Science (SPSS) and excel.
4.1 Characteristics of the Respondents
The interviewed respondents in this study were Managers, Workers and customer of the intended study area in Dar es salaam Ilala Municipality, particularly in the studied Area. As well the consumers of the targeted area were involved in the study both male and female by filling questionnaires where by the characteristics distribution of respondents included sex, age, and level of education as here under described.
4.2 Demography of Respondents and Response Rate
4.2.1 Demography of Respondents
The demography of the respondents included; gender (sex), age, level of education, occupation. The results show the following as given in Table 4.1below:
4.2.2 Study and Response Rate
The sample studied were sixty in total which contained worker, customer of Amana and questionnaires distributed, and all respondents were collected, this represents rate of 100% as summarized in the table below.
50 Table 4.1: Demography of Respondents (N=60) Characteristics Frequency Percentage (%) Sex Male 41 68.3 Female 19 31.7 Age group Less than 20 2 3.3 20 - 29 19 31.7 30 – 39 22 36.7 40 – 49 14 23.3 50 – More 3 5.0 Education Level Secondary 16 26.7 Bachelor 18 30.0 Above Bachelor 22 36.7 Others (Diploma) 4 6.7 Occupation Director 2 3.3 Admin. / Executive Officer 7 11.7 Other Officer 51 85.0 Source: Field Survey Data, 2015
Table 4.1. Showed that male workers, customers are large in number than female. In case of Islamic bank 68% are male customers and 31% of the sample is represented by female customer. It is consistent with the literature as men and women are differentiated due to role and perception in the society (Woldie and Adersua, 2004).
Social, cultural and religious factors also influence the banking activities. Men are responsible for financial activities outside the home while female performs domestic duties inside the home (Obbe, 1980). The distribution of customers, workers
51 according to age reflects that young and mature people (30--39) are more interested to interact and know about Islamic bank.
It is found that the majority of primary bank customers are male between 20 to 55 years old in Nigeria (Ojo, 1994). While most of the customers of Islamic banks fall in the age group of 25-35 years (Khan, Hassan and Shahid, 2008). Study of Islamic bank also shows that most of customer and workers are the people with high level of education degree and above.
Table 4.2: Operations of Amana Bank and Profit Performance Operations Percentage % Yes No Murabah 82 18 Istisnaa 78 22 Salam 90 10 Diminished Musharaka 84 16 Musharaka 93 07 Mudaribah 87 13 Average 85.6 14.4 Source: Field Data Survey from literature review, 2015
The result in table 4.2 showed. The main objective of the study was to investigate the bank profit in the overall operation framework. For this purpose, the researcher asked the respondents to identify different operation of the Amana Islamic bank. The results in Table 4.2 showed that the majority of respondents (85.6%) were able to examine the operation of Islamic bank according to their understanding by explain their financial contract/products; while the minority of respondents (14.4%) being unable as indicated above.
52 Specifically, the results in Table 4.2 showed that (78%) of respondents stated that,
Istinaa transaction acquire an asset manufactured on. this agreement involve exchange of an offer and acceptance which complete the contract. Moreover the results showed in Table 4.2 that (93%), Islamic bank operating through Musharaka, which refers to a joint enterprise in which parties share the profit and loss of the enterprise. It plays a vital role in financing business operations based on Islamic principles, which prohibit making a profit on interest from loans. In general, the results in this part imply that Islamic financial contract it is great‟s parts of its operation which bring a great profit.
Table 4.3: Cost Benefits Analysis Use By Amana Bank To Enable Good Organization Performance. Islamic Bank Principle Use By Decision Makers Percentage % Yes No Encourage risk sharing, asset and service backing. 78 22 Prohibition of interest 82 18 Have Contractually uncertainty 90 10 Profit and loss sharing 84 16 Ethical banking 93 07 Mode of financing 87 13 Average 85.6 14.4 Source: Field Survey Data, 2015
The results in Table 4.3 showed that the majority of respondents (85.6%) were able to examine the cost benefit analysis used by decision makers help to create good organization performance, while the minority of respondents (14.4%) being unable as indicated above. Specifically, the results in Table 4.3 showed that (78%) of respondents stated that, Encourage risk sharing, asset and service backing. based on
Islamic concept of „no return without risk‟ Islamic bank takes a direct equity
53 position, or buy particular asset and charge premium through trade or leasing it uses risk mitigates but not without first taking ownership risk as supported by Ethical
Institute of Islamic Finance 2012- 2015.
Moreover, decision maker applied the principal of interest free to improve organization performance the principal of interest free motivate customer safe keeping in Islamic bank use wadia and murabah. (84%) of the respondents in order to attract consumers‟ attention and encourage them to examine the Islamic bank performance. Profit and loss sharing customer share profit with bank as well as loss if occurs. Furthermore, the results in Table 4.3 showed that (87%) of the respondents identified the other Principal used by decision makers in Amana bank is ethical bank, there is no buying, selling, trading anything that is impermissible according to shariah fore stance support alcohol, tobacco and other harmful product.
In general, the results in this part imply that cost benefit analysis in Islamic bank‟s decision making important contribution to improve organization through practice
Islamic principal.
54 Table 4.4: Factor of Shariah Compliant Musharakah in Brings Profit
Factors Percentage %
Yes No
Profit sharing mechanism and profit ratios must be 88 12 clearly determined by musharakah inception
One part cannot guarantee any part of the profit or 76 24 capital of another partner
Profit may not be guaranteed or fixed in absolute 70 30 term for any musharakah partner
Profit may not be set as a percentage of capital 60 40
Each partner whether minority or majority 72 28 shareholder must be allocated a profit share
Silent partner‟s profit ratio may not exceed his 95 05 investment ratio
Musharaka may only announce expected return for 80 20 business actual return are declared only after their known
During Musharakah a partner may surrender all or 72 28 part of his profit share to another provided doing so is not agreed at the time Musharakah execution
Average 76.4 23.6 Source: Field Survey Data, 2015
The results in Table 4.4 show that the majority of respondents (76.4%) were able to identify how this operation bring profit .Among of the good way use by this bank to bring profit is this one ,to both side of bank as well as customers, they are investors allowed to share everything in business with the bank in (participation); while the minority of respondents (23.6%) being unable as indicated in Table 4.4.
55 Specifically, the results in Table 4.4 show that (70%) of the respondents were able to explained profit may not be guaranteed or fixed in absolute term for any musharakah partner in factor bank or customer may get profit when it is gotten if the profit and not if there is no profit. It may be due to lack of Supportive financial environment.
Increasing contribution of Diminishing Musharikah shows the banks' vigilance to diversify their portfolio by attracting a maximum number of customers (SBP, 2007).
On the other hand, (88%) respondents show the other factor is Profit sharing mechanism and profit ratios must be determined by Musharakah inception. Both inter in Musharakah agree in all term of profit this is very important unlike interest based partner financing, where the bank is only interested in the repairing of debt, in a running Musharakah the bank as actual equity ownership of the client‟s business.
Moreover (76%) of the respondents in Table 4.4 show that One part cannot guarantee any part of the profit or capital of another partner.
In general, the results imply that, the Musharakah as partnership in business create investing capital this participation in business make parts to share loss proportional to capital they invest.
Islamic bank has competitive advantage because of this where by create a pure capital since parties pooling together expertise or goodwill.
Table 4.5: The Principle Use by Islamic Bank Brings Profit Frequency Percent Valid Cumulative Percent Percent Agree 1 1.7 1.7 1.7 Strongly agree 59 98.3 98.3 100.0 Total 60 100.0 100.0 Source: Field Survey Data, 2015 56 The results in Table 4.5 show that the majority of respondents (98.3%) were strongly agree that principle of Islamic bank bring profit; while very few of them
(1.7%) where not strongly agree They just agree. Table 4.5 indicated that Islamic bank principle bring profit, such as of Principle of Asset back transaction The bank buys an asset and sells it to a client. Rather than exchanging money for money, an asset is traded for money so it complies with sharia. Bank would state the cost of an asset as well as the markup so as to make the profit known to the buyer. Moreover there other principle of Prohibition on to support some sector. This principle not allows the bank to give support, trade for any how like give loan to the organization which its operation is against Islam like alcohol industries.
Furthermore, Interest free principle where by principle avoid interest, the modes of financing by Islamic banks acting as intermediaries would lead to fairness by serving the interests of the community as a whole and is expected to promote value creation to depositors and shareholders and to the economy as a whole. As according to support from (Chapra, 1985) during the decade of 1990s, Islamic banking practices were initiated all over the world especially in the Muslim dominated parts of the globe. Further, the beginning of 21st century proved a success for Islamic banking as a large number of banks started to deal in products/services according to principles of Sharia'h.
It is suggested that riba-free and equity based economy is necessary to realize the benefits of Islamic financial system and to ensure the well being of mankind. In general principal use by Islamic bank bring profit to the, that the reasons the Amana as among of Islamic bank perform well.
57 Table 4.6: Shariah Compliant Transaction Enable Bank to Get Profit Frequency Percent Valid Cumulati Percent ve Percent 56 93.3 93.3 93.3 Strongly agree 4 6.7 6.7 100.0 Total 60 100.0 100.0 Source: Field Survey Data, 2015
Table 4.6 The results in Table 4.6 show that the majority of respondents (93.3%) were strongly agree that shariah compliant transaction enable bank to get profit.
Islamic bank follows shariah compliant transaction; this is to say transaction with interest free. The basic aim of the Islamic banking is to perform interest-free activities based on principles of Sharia‟h and carry out only Halaal (permissible) transactions. The most important feature of Islamic banking is the sharing of risk among the investors; Islamic banking focuses on fairness and freedom as a centrally controlled and individually managed system according to the instructions of Islam.
As support by Friedman (1969) suggested that a nominal zero interest rate is necessary condition for optimal allocation of resource. It was found that zero interest rate is required and sufficient for allocate efficiency by investigation within general equilibrium models (Wilson and Charles, 1979; Cole and Kocherlakota, 1998).
Literature also supported that interest-free (profit and loss sharing) system is viable and superior to an interest-based system (Chapra, 1985).
Islamic banks deal in equity based (profit/loss) contracts that are more suitable for the economy as compared to interest-oriented conventional banks.
58 CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.0 Introduction
This chapter presents the debate of the findings of the study as investigated and presented in the prior chapter. The chapter sets in five sections. The conversation predominantly speaks about the results acquired in the study to those of related studies under the literature review part. The whole discussion is centered on the major research questions inspected.
5.1 Summary of the Study
This study launched the background and problem of the study in Chapter One, reviewed literature on the Assessment of Islamic bank operation: A Case Study of
Amana bank. Chapter Two, delineated and discussed the research methodology in
Chapter Three and presented and discussed the research findings in Chapter Four.
And Chapter Five centers on conclusions and recommendations founded on the literature reviewed in Chapter Two and data presented and discussed in Chapter. The chapter gives a comprehensive rundown of all research findings that were collected during fieldwork survey in the city of Dar es salaam. The chapter gives also the conclusions of all the objectives that are established during the development of research proposal. The conclusion was then followed. The recommendations provided can only be productive if taken into account by the stakeholders who deal with this issue for the benefit of Tanzania development and its community and the society at large.
59 The chapter winded up with proposing out different suggested areas for researchers to conduct other studies if they may be interested in such field of investigation.
5.2 Findings of the Study
An investigation of Assessing of Islamic bank operation was conducted in Dar es
Salaam, Amana bank. In the findings from the study regarding the operation of
Islamic banking in Amana create profit as a business organization. Business organization is primarily originated for the sake of profit by performing lawful activities. Banks are also one of the business organizations that provide a set of products and services to generate profits. Inception of Islamic banking practices in
Tanzania created multiple threats and opportunities to meet customers' expectations by the provision of quality services. It initiated a healthy competition for Islamic banks to compete with their peers and conventional banks for greater profits. It was observed that the banking industry experienced stiff competition with banks and with other financial institutions to attract potential customers (Hull, 2002).
Additionally, Islamic bank works as a trading concern and financial intermediary to perform interest free activities purely according to principles of Sharia‟h. It is a welfare organization that promotes business and trade activities by pooling the financial resources for the sake of profit and loss for mutual benefit. It is found that
Islamic bank performs activities in the right direction towards human development.
It plays a positive role towards economic development having main focus on human development while performing its functions (Al-Harran, 1993). It is documented that banks have witnessed more profits on Murabaha facilities as compared to conventional loans due to profit and loss base of Islamic products (Ebraim, 1999).
60 The research find the operation of Islamic bank bring profit to the bank through its
Asset and Liability operation. In side of Liability bank mobilize deposit. This deposit divided in two main contract Wadia contract(safe keeping) in this contract bank benefit from customer saving amount because the contract permit bank to utilize the fund, no profit given to customer. Also Mudharabah financial contract
(investing) saving with the intention of investing so the bank do some investment and share the profit with customer, under this contract called Mudharah. In this contract the customer should have minimum amount to participate into profit and loss sharing.
As well, the findings demonstrates that financial contract in Asset side are Murabah is a sale which the asset and the profit earned from it are disclosed to the client or buyer. Amana banks offer the Murabah to fulfill asset purchase requirement and not as liquidity financial facility.
Islamic banks are trade oriented financial institutions that provide interest free deposits and investment opportunities for the people. It accepts deposits from general public under general investment fund and specific investment fund that is clearly mentioned in the agreement between the bank and the customer while opening their bank accounts. Islamic bank actively performs several operations to provide a variety of products according to customers' requirements. It deals with different types of customers i.e. depositors, borrowers and service users. It provides credit facilities, financing products; funds transfer facilities and other services according to customers' needs.
Generally most of respondent were the men of which they respond over 68% while male were 31% and most of the majority are at the age of 30-39.and are the literacy
61 one though the level of education were masters and PhD while secondary education were little respondent.
5.3 Conclusion
The study finding that Amana Islamic banks provide a variety of financing products according to principles of Sharia‟h to cope with the challenges of the recent age.
These products may be categorized as short-term, medium-term and long-term according to their specific characteristics. Islamic banks provide Short-term products like Murabaha; Istisna; Salam and Muajjal etc. to meet running finance requirements of different business units. Ijarah and Ijarah- Wa-Iqtina are a medium term financing options offered to the customers. Long-term financing options consist of Musharika,
Mudaribah and Diminishing Musharika. It inspires the people to deal on the basis of profit and loss to enhance the spirit of cooperation. It is observed that Murabaha and
Ijarah financing are very popular among people. But Mudarbah is least preferred option.
The financing Presented findings of this study provide enough evidence to establish the conclusion that in spite of their well intentioned of improvement banking service by provide Islamic banking system still there are some challenges of there are other group of customer are not willing to use Islamic banking, number of employees also its problem, in some extent organization depend fund from customer whereby it is not reliable. It is concluded that managers should improve the quality of services to retain their customers as satisfied customers for long-term benefits.
Similarly, they should make arrangements to enhance awareness among customers and employees of banks for improvement of their products/services to enhance
62 performance. Cost benefit analysis helps Amana decision makers utilize well their resource whereby bring profit .Islamic banks develop marketable products according to Islamic instructions to compete with conventional banks. The study has developed an understanding about the operation of Islamic bank in Tanzania. Cost benefit assessment thus involved as a tool to inform the decision making process as Mc
Kean observed “Cost –benefit analysis clearly play an important role in the determination of budgets and in the selection of particular project.
5.4 Recommendations
Since the defined general objective of this study was to analyze “the operation of
Islamic bank in Tanzania. The performance of the bank is efficiency do to the financial contracts use by the bank this indication shows by financial statement of the bank. Amana as among of Islamic bank perform well as the various bank financial statement shows. Rashid et al., (2003) measured firm's financial performance using the financial indicators such as return on assets, return on investments and current ratios. Financial ratios reflect the financial performance of the organization by an examination of financial statements as indicated by profitability, liquidity, leverage and asset utilization and growth ratios. The bank should continue with that performance by improve some of contract as well as increase other contract where Amana not yet establish such as Islamic insurance.
Amana decision maker tried a lot to make sure that operation of the bank to bring profit to bank and increase performance of the bank by use cost benefit analysis.
Amana bank has decision maker‟s board, structured in two side Islamic shariah unit and SSB. Where issue of the organization and all the decision of the bank is
63 decided in this boards for the benefit of the bank. In spite of the bank has well
decision board which compiles both educations Islamic and secular,
Also should give chance other stake holder to improve the organization through their
contribution. Due to stiff completion in bank sector innovation and new ideals
needed every time. (Kuo and Wu, 2007) Islamic banks require performance
evaluation to compete with conventional banks. Bank performance should be
evaluated due to stiffer competition and customers' awareness of service quality.
Performance of an organization could be assessed by resource-based view as
explored by a number of researchers. It could be linked with market orientation,
organizational learning, human resource productivity, quality improvement or any
other component. Generally Amana bank should give out enough education about its
operation to the society and encourage the society to participate in their bank. This
will help society to understand this bank for all against interest not only Muslim.
Not only has that but also to know that this bank operates in profit as conversion
banked whereby it‟s reliable.
5.5 Guiding Principle Implications
Policymakers have to see a need for the adoption of Islamic banking principle to
create equal profit to both side of customer and bank. Since Islamic bank is
profitable and faithfully banks.
5.6 Areas for Further Research
The study explained about Islamic bank operations; it is advised that further studies
could be done on the following issues:
i. Mode of insurance in Islamic bank. ii. Consumer‟s satisfaction and organization behavior a case of Islamic bank in
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