THE CASE FOR REGULATORY ACCOMMODATION OF ISLAMIC BANKING AND FINANCE: BANKING THE UNBANKED A Thesis Submitted to the Faculty of The School of Continuing Studies And of The Graduate School of Arts and Sciences In partial fulfillment of the requirements for the degree of Doctor of Liberal Studies By Nida S. Davis, MBA Georgetown University Washington, D.C. April 1, 2018 Copyright © 2018 by Nida S. Davis All Rights Reserved ii THE CASE FOR REGULATORY ACCOMMODATION OF ISLAMIC BANKING AND FINANCE: BANKING THE UNBANKED Nida S. Davis, MBA DLS Chair: Ariel Glucklich, Ph.D. ABSTRACT Islamic Banking and Finance (IBF) is based on the ethical principles prescribed in the Quran and the teachings of Prophet Muhammad. After the fall of the Ottoman Empire and with the advent of Western colonialism, Islamic finance was replaced by the conventional banking system. IBF re-emerged in the early 1970s as one of the fastest growing financial sectors to meet the financial needs of the Islamic world. Despite the rapid growth of Islamic banking and finance, its expansion remains insignificantly small at only 2% of global banking assets.1 The majority of Muslims are unbanked because, among other reasons, conventional banking is not compatible with their Islamic principles. I examine eleven Islamic countries that have tailored their regulatory frameworks to accommodate IBF in order to assess whether such tailoring has led to increases in the financial inclusion 1 Lorraine Ocampos, "Can Islamic Banking Increase Financial Inclusion in the Muslim World?" International Monetary Fund, August 15, 2015. http://www.imf.org/external/np/blog/nafida/081015.pdf (accessed August 6, 2016). iii of Muslims in these countries. I selected a mixed methods research design due to the complexity of my research topic, the social impact of religion in Muslims’ daily financial practices, and lack of extensive empirical IBF financial inclusion research studies in this area. The research analysis results, in general, support my theory’s assertions and confirm that regulatory accommodation of Islamic banking and finance leads to an increase in Muslims’ financial inclusion. iv ACKNOWLEDGMENT This thesis fulfills my commitment, to a certain extent, to a promise that I made many years ago to my mother, who instilled in me the values of equality, justice, and inclusion. You encouraged me to break through the social barriers, shatter the glass walls, and be the voice of those who have been excluded. To you, equality, justice, and inclusion were not mere lofty or theoretical words. As a child, I grew up watching you fight for these values in all aspects of your life. You are my role model, my inspiration, and my rock. I am forever thankful for being your daughter. Many individuals from different parts of my life have made this achievement possible, starting with my father, brothers, and sisters. Your support has been paramount. I am forever indebted for your encouragement and telling me that I can do this! My wonderful husband and my incredibly supportive children, thank you for all the patience, sacrifices, and understanding you have given me through the years as I struggled to balance having a full-time job, working on my PhD, and being a mom. There were many moments during which I doubted my resolve and was about to give it all up, but you would not let me. You believed in me and were willing to sacrifice with me every step of the way. For that, I am forever thankful for your support. The Doctor of Liberal Studies (DLS) program at Georgetown University is an amazing program. It allowed me to structure a flexible and interdisciplinary program in a field of study no other school is offering in the United States today. This speaks volumes to the strength and maturity of the DLS program. Professor Ariel Glucklich, you are such v a dynamic intellectual; your DLS leadership kept me going through very difficult times. You helped me renew my resolve, energy, and focus such that I was able to keep going and finish this work with your excellent guidance and leadership. Professor Shakir Ulah, your expert knowledge in Islamic banking is invaluable. I am very fortunate to have had your support and guidance. You bring forward a wealth of knowledge and expertise in Islamic Banking and Finance that are greatly needed in the United States. Your expert guidance, attention to details, and thoughtful feedback was invaluable to my progress. Dr. Hulusi Inanoglu, I am honored to have worked with you. Without your support, this process would have been much more challenging and would have taken me more time to structure. I am forever thankful for your kindness, intelligence, and thoughtful leadership. Binesh Hass, you are a kindred spirit. Your help with reviewing my work was invaluable. Adaku Uchendu, you are an amazing assistant. I am very grateful for your support. vi ABBREVIATIONS AND GLOSSARY AAOIFI Accounting and Auditing Organization for Islamic Financial Institutions CB Conventional bank GCC Gulf Cooperation Council IB Islamic bank IBF Islamic Banking and Finance IDB Islamic Development Bank IFI Islamic financial institutions IFSB Islamic Financial Services Board IMF International Monetary Fund MENA Middle East and North Africa OIC Organization of Islamic Cooperation PLS Profit and loss sharing SPV Special-purpose vehicle SSB Shari’ah Supervisory Board vii Contents ABSTRACT …………………………………………………………….…………..…... II ACKNOWLEDGMENT.....................................................................................................V LIST OF TABLES ............................................................................................................ IX LIST OF FIGURES ......................................................................................................... XII INTRODUCTION .............................................................................................................. 1 CHAPTER 1 ....................................................................................................................... 9 CHAPTER 2 ..................................................................................................................... 54 CHAPTER 3 ..................................................................................................................... 67 CHAPTER 4 ..................................................................................................................... 86 CHAPTER 5 ................................................................................................................... 117 CONCLUSION ............................................................................................................... 267 BIBLIOGRAPHY ........................................................................................................... 272 APPENDIX A: LIST OF BANKS.................................................................................. 290 APPENDIX B: FINACIAL INCLUSION SURVEY QUESTIONS.............................. 292 APPENDIX C: SAMPLE INTERVIEWS ...................................................................... 300 viii LIST OF TABLES Table 1: Characteristics of Four Worldviews Used in Case Study Research ............................... 89 Table 2: Regulatory Accommodation Approaches in Islamic Banking ..................................... 103 Table 3: Reported Ranking of Challenges Facing Islamic Banking ........................................... 150 Table 4: Reported Ranking of Drivers for Adopting Islamic Banking....................................... 151 Table 5: Reported Ranking for Expanding Islamic Banking Market Share ............................... 152 Table 6: Regulatory Accommodation Approaches in Islamic Banking ..................................... 162 Table 7: Median Z-score of Islamic Banking by Country by Year ............................................ 164 Table 8: Median Z-score by Country, Policy Approach, and Supervisory Mode ...................... 165 Table 9: Median Net Interest Margin in Islamic Banking .......................................................... 168 Table 10: List of the World Bank’s Findex Global Financial Inclusion Indicators.................... 171 Table 11: The IMF World Economic Outlook Financial Inclusion Indicators........................... 171 Table 12: The World Bank’s Findex Financial Inclusion Indicators (2011, 2014) .................... 171 Table 13: World Economic Outlook Financial Inclusion Indicators (2011, 2014) .................... 172 Table 14: Correlation of Islamic Banking with Financial Inclusion Indicators.......................... 173 Table 15: Correlation of Islamic Banking Market Share with Financial Inclusion Indicators ... 174 Table 16: The Five Dimensions of Muslim Religiosity.............................................................. 178 Table 17: Jordan’s Financial Inclusion Indicators ...................................................................... 179 Table 18: Jordan’s Islamic Banking Total Assets....................................................................... 180 Table 19: Jordan’s Islamic Banking Median Z-scores ............................................................... 182 Table 20: Jordan’s Islamic Banking Net Interest Margins ......................................................... 182 Table 21: Group1 — Religiosity of Participants Using Islamic Banking .................................. 183 Table 22: Group 2 — Religiosity of Participants Using Conventional Banking........................ 183 Table 23: Group 3 — Religiosity of