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The Internal and External Contingent Factors That Affect the Determination of Profitability in Islamic Banks in Comparison to Conventional Banks in Egypt

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The Internal and External Contingent Factors That Affect the Determination of Profitability in Islamic Banks in Comparison to Conventional Banks in Egypt The Internal and External Contingent Factors that Affect the Determination of Profitability in Islamic Banks in Comparison to Conventional Banks in Egypt By Menan Mohamed Etab A THESIS SUBMITTED TO THE FACULTY OF BUSINESS AND LAW, DE MONTFORT UNIVERSITY IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY (PhD) March, 2016 i Abstract Islamic banking system is one of the fastest growing segments of the international financial industry. This system has been receiving a growing attention nowadays especially after the global financial crisis which gave Islamic banks an opportunity to prove their resilience and contribution to financial and economic stability. The beginning of the Islamic banking in its contemporary mode was in the sixties of the past century by the first modern Islamic banking experiment which was undertaken in Egypt in 1963 by Ahmad Al-Najjar. Islamic financial institutions are established to operate commercial banking activities within an Islamic teaching perspective which depends on the elimination of any prohibited element in Islamic Shariah jurisprudence such as interest, gambling, speculation, dealing in pork or alcohol. The very distinct nature of Islamic banking led to a growing interest in determining the success factors of such type of banks especially that in most of the cases they operate with conventional banks Vis a Vis within the same market and sometimes under the same regulatory framework. The aim of this research is to make a comparative study between the performance of Islamic banks and conventional banks in the Egyptian financial market. The study is an attempt to determine the internal and external contingent factors that affect the profitability of Islamic banks in Egypt in comparison to conventional banks while taking into consideration the fact that both types of banks operate under the same rules and regulations. The goal is to discover whether the different nature of operations between the two types of banks is likely to affect their determinants of performance. The main motivation for undertaking this research is to fill the gap in literature and provide some information that might benefit both academics and practitioners in this field. A thorough revision of the literature suggested contingency perspective as the most suitable and appropriate theoretical framework for this type of research (Thomas’ (1991); Schweikart's (1985); Otley, 1980). Data were gathered in this research through the collection of annual financial reports for the two Islamic banks working in Egypt ii and a sample of eleven conventional banks registered in the stock market. The study covered the period from 2002 to 2010. The findings indicate that in general, the performance of conventional banks in Egypt outweighed that of their Islamic counterparts. Moreover, it can be concluded from the results of the study that there are differences between the profitability determinants of Islamic banks and conventional banks. And eventually, it can be inferred that the nature of operations has an effect on the determinants of profitability in Islamic banks and conventional banks. iii Declaration of Rights The copyright of this thesis belongs to the author under the terms of the United kingdom Copyright Acts as qualified by De Montfort University, Business and Law School, Leicester, UK. I declare that this thesis is based on my own original work except for quotations and citations which I have duly acknowledged. Due acknowledgment must always be made of any material contained in, or derived from, the thesis. iv Acknowledgments I would like to thank the almighty GOD, the most Beneficent and the most Merciful, who has empowered and enabled me to complete this thesis successfully. I am indebted to my supervisor Professor David Crowther, who gave me complete support and valuable feedback. The constructive criticism has meant a lot to my work. I want to express my deep thanks for him for his guidance, patience and time throughout all the stages of my PhD. My love, thanks and appreciation go to my family for their constant support and continuous assistance. I dedicate this work to my mom, dad and my beloved sister May. They were always standing behind my back, exerting all necessary efforts for me to move on and never stop. I would never be able to pay back your debts. To my husband Sameh, you are one in a million, you are my backbone, no words can be said to express my love to you and gratitude for your help. To my two beloved sons, Fares and Ahmad, I love you very much and I am sorry for being busy from you. You are the driving force throughout the long way. Many thanks go to Professor Mohamad Mostafa, the head of the department, for your help, support and patience. I appreciate everything you did with me. You are not like any boss, keep it. Last but not least, my thanks go to my friends (Ingy and Abeer) who put faith in me and trusted my ability to complete the road. Ingy, I cannot find enough words to show my appreciation for your love, trust and support. I love you my dear friend. v Table of Contents Abstract ……………………………………………………………………………………………………………….………………ii Declaration of Rights…………………………………………………………………………………………..………………..iv Acknowledgments………………………………………………………………………………………………………………..v List of Tables ………………………………………………………….……………………………………………………………xii List of Graphs ………………………………………………………………………………………………………………………xv List of Figures ……………………………………………………………………………………………………………………..xvi List of Abbreviations ……………………………………………………………………………………………………………xvii Chapter One ................................................................................................................ 1 Introduction ................................................................................................................ 1 1.1 Research Background ........................................................................................... 1 1.2 Research Problem ........................................................................................... 3 1.3 Research Aim ........................................................................................... 4 1.4 Importance of the Research .................................................................................. 5 1.5 Contribution of the Study ........................................................................................... 6 1.6 Originality of the Study ........................................................................................... 7 1.7 Research Outline ........................................................................................... 8 Chapter Two .............................................................................................................. 11 Background to the Study ............................................................................................. 11 2.1 Introduction…………………… ......................................................................................... 11 2.2 The religious Framework of the Islamic Economic System ....................................... 11 2.2.1 What Islam Stands for .................................................................................. 11 2.2.2 The Meaning of Shariah and its Sources ......................................................... 12 2.2.3 Characteristics and Features of Islamic Economy ............................................ 13 2.2.4 Principles of Islamic Finance ......................................................................... 14 2.2.5 Concept of Ownership in Islam ..................................................................... 15 2.2.6 Islamic Objective and Strategy for Distribution in Islam …………. ....................... 15 2.2.7 The principle of Zakah .................................................................................. 16 2.2.8 The meaning of Riba and the prohibition of Riba in Quran ............................... 16 2.2.9 Definition of interest, its Origin and History .................................................... 18 2.3 The Islamic Banking System ................................................................................. 21 vi 2.3.1 The History of Islamic Banking ...................................................................... 21 2.3.2 The Principles of Islamic Banking and Finance ................................................. 24 2.3.3 The Aims and Objectives of Islamic Banking ................................................... 28 2.3.4 The Benefits of an Islamic Banking and Finance System ................................... 30 2.3.5 The Monetary Policies and the Central Bank in an Islamic Context .................... 33 2.3.6 The Operational Framework of Islamic Banking .............................................. 36 2.3.6.1 Shariah Principles of Operations………………………………………………………….…………36 2.3.6.2 The Investment and Financing of an Islamic Bank………………………………….………..37 2.3.6.2.1 Sources of Funds……………………………………….….………………………………….….…40 2.3.6.2.2 Uses of Funds……………………………………..…….……..…….……….….…………..……...41 2.3.6.3 Profit and Loss Sharing Schemes……………..………………………………….………..…..…..…43 2.3.6.3.1 Mudarabah Contracts….………………….………………………….……………..…………43 2.3.6.3.2 Musharakah Contracts….………………….……………………….…………..…..…………44 2.3.6.3.3 Musaqat and Muzarah Contracts…………….…………..…….…………….…..………45 2.3.6.4 Non Profit and Loss Sharing Schemes………………………………………..………….……….…47 2.3.6.4.1 Murabahah Contracts…..………………….…………………………..……….………………48 2.3.6.4.2 Ijarah Contracts…..….………..……………….………………………..…………………………49 2.3.6.4.3 Bai' Muajjal Contracts………...………………….………………..……………………………48
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