Comparison Of Islamic And Conventional Banking: A Study Of Dubai Islamic Bank And United Arab Bank In UAE (essay).

Prepare a report comparing the two banks and summarising the key findings.

There are various similarities and differences between the Islamic bank and conventional banks. These similarities and differences range from the products and services offered by the banks to the kind of policies the banks operate. Islamic banks are the banks that operate under the Islamic Sharia law. Islamic banks are guided by the Islamic religion on lending and all its activities comply with the Sharia law ( Balala, 2015). The modes of Islamic banking include Mudarabah, Wadiah, Musharaka,and Murabaha. The conventional mode of banking uses the modern principles of banking and finance and is poorly guided by the need to maximize profit and meet the customer needs. Conventional banks are not guided by any religious beliefs or practices. The conventional banks charge interest on loans while the Islamic banks do not charge interest. The analyysis the study carried out on Dubai Islamic Bank and United Arab Bank. The survey was carried out among the customers of both banks to establish the customers knowledge and awareness on Islamic banking. Through literature review is also conducted with the aim of establishing the products offered by the two banks, the types of customers and the financial performance of the banks in recent years.

United Arab Bank (UAB) was incorporated in January 1975asa joint venture between various UAE investors and SocieteGenerale, a French company. The bank operates 14 branches across the UAE. The bank is known to offer tailor-made financial services in both corporate and retail banking. The bank has established itself as a leading innovator across the seven emirates. In 2007, UAB entered into an alliance with The Commercial Bank (Q.S.C) and hence helping both banks to grow across the region (Davids, 2013).

Dubai Islamic Bank was established in Dubai in the year 1975. Dubai Islamic Bank is one of the premier Islamic banking institutions in the world. The bank introduced Islamic banking concepts and it has continued to champion for morality, equality, and transparency. The bank is founded on the principles of equality and is guided by Sharia Law. Currently, Islamic banking is one of the world's fastest growing sectors of finance and it is valued at more than US$1 trillion. DIB has remained customer centered since its establishment and it has continued offering customers innovative products that help to fulfill the needs of the customers.

Products and customers of Dubai Islamic Bank

Islamic banking is based on the idea that all forms of interest are riba. Riba in Islamic simply means addition, interest or excess. Islamic banking has emerged in the late 18 this century and it has evolved over the years and adopted in many countries even where Muslims are the minority. Its origin can be traced to the Ottoman Empire. The arrival of interest-free Islamic banks was facilitated by activist Anwar Qureshi and Muhammad Hamidullah in the late 1940s. They had the view that commercial banks were a necessary evil and thus they proposed a banking system where shared profit on investment would replace interest. Various studies on Islamic banking have been carried especially since the 1970s. There are also various conferences that have been held to deliberate on Islamic issues affecting Islamic banking and how it can be improved. Some of these conferences include the conference of the Finance Ministers of the Islamic Countries held in 1970, the Egyptian study in 1972, the First International Conference on Islamic Economics held in Mecca in 1976 (Golin, 2010).

Several economic concepts of conventional banking were applied in the early Islamic banking. Some of these include; bills of exchange, partnership, limited partnership and capital accumulation/ things such as promissory notes, cheques and trusts were also common in Islamic banking before the 1920s. Islamic banks accept deposits from customers with the promise of great gains and religious guarantee. In the year 1990, an accounting organization for Islamic financial Institutions referred to as Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was established in Algeria. In the 1990s, there were more than 100 Islamic banks worldwide and about one-third of these were run by the government (International, 2011). By the year 2008, Islamic banking was growing at the rate of 10-15% per year and the growth has continued over the years. At the height of the global financial crisis of 2008, the Islamic banks were not initially affected. According to the State of Global Islamic Economy report, by the year 2015, more than $2.004 trillion worth of assets was being managed by banks operating using Sharia laws (  Nafis& Rizvi, 2017).

The purpose of this study is to establish the importance of Islamic banking. Islamic banking has been a very divisive subject over the years. There are some people who believe it has no value on the current economic world while others believe that has had a great impact on the economy, especially in Islamic countries.

Products and customers of United Arab Bank in UAE

The research also aims at identifying the products offered by Islamic banks. This will help in understanding the additional value it offers customers and the differences it has with other conventional banks.

The study also aims at establishing the type of customers the Islamic bank's target. Different banks have different customer segments that they target in their marketing initiatives ( Irfan, 2016).

In addition to this, the study aims at understanding the customer's perception of Islamic banking and their understanding of Islamic banking

The study focuses on Islamic banking in the United Arab Emirates. The products offered by the Islamic banks are analyzed as well as the products offered by the conventional banks. The study establishes the differences between these two banks analyze the perceptions of customers towards Islamic banking (Nenova, Niang& Ahmad, 2009). The study does not venture into the competition between these products. The study also does not analyze the performance of Islamic banks compared to the industry in general.

The data used in this study is collected from both primary and secondary sources. The secondary sources of data used in this study include; books, journals, thesis and dissertations, newspaper and magazines. Internet sources of data are also widely used in this study. The secondary sources are used to provide past literature needed to understand Islamic banking. The sources are also used to provide the history of the two banks used as the case study for these report.Primary sources of data are also used to collect data used in the study. Primary sources of data are also used to collect data for this study. The data is collected using structured questionnaires issued to customers. Interviews are also carried out with the bank managers to help in answering questions that cannot be answered through secondary sources. The interview with the bank manager helps to provide insights into the operations and policies of the bank as well as the products offered by the organizations.

Both qualitative and quantitative methods are used in this study. The qualitative method is mainly used because the data collected in the study is mainly descriptive and hence qualitative methods of data analysis are used. Data analysis for the study is done using tables, graphs, and charts.

According to data collected from the study, more than 89% of the respondents indicated that they are familiar with Islamic banking. The question was asked on whether they have heard about Islamic banks and whether or not they know the difference between the Islamic banks and the conventional banks. This is an indication that most of the customers know the differences between how the two organizations operate. More than 40% of the respondents indicated that they knew the products offered by the Islamic banks. The analysis of the financial performance of the two banks shows that Dubai Islamic bank offers personal accounts, business account, and group account. The personal current account is offered to all customers above the age of 18 years. The current account is for common deposits and withdrawals. Customers can be able to deposits and withdraw money at all times either over the counter or through the ATM. The savings account for customers are open to customers for the purpose of saving money for a period exceeding six months. Customers save money for a fixed period of time after which they get interested in the amount saved.Some of the products that the Dubai Islamic bank offers include; Islamic Banking accounts, Islamic profit Distribution, Islamic deposits, Salary advance facility and Wakala collection and Acc Finance, sukuk, mudarabah,murabahah,andmusharuk (Kettell, 2009). The bank enables customers of the Islamic religion to access products that adhere to Sharia law.  The products offered by other conventional banks such as the United Arab Bank include; loans, personal banking, group banking, money transfer services, mortgages, bonds, SME banking,andE-banking services. The United Arab bank also offers Islamic banking in order to ensure that it serves customers in all the customer segments. The retail banking services offered by the United Arab Bank include; new arrival services, Sadara privileged banking, and bank overdraft (Lone, 2016). The banks` e-banking services enable customers to deposit money online and using the phone. The services also enable customers to withdraw cash from their accounts and check their bank balances. The corporate banking items offered by the United Arab bank include correspondent banking, e-statement services, institutional banking as well as institutional banking.

Financial performance analysis of the two banks

From the analysis of the data, it is seen that for conventional banks like the United Arab Bank, money is a commodity besides being a medium of exchange and store of value (Ansari, 2013). This means that money can be sold ar a higher price and it can be rented out at an interest.For Islamic banking, money is not considered a commodity despite the fact that it is used as a medium of exchange. It, therefore, means that it cannot be sold at a higher commodity than its face.

For conventional banks, interest is charged even in cases where the organization suffers loss (Abdul, 2010). It means that the banks operate purely on the profit and loss sharing. For Islamic banks, they operate on the basis of sharing of profits. When the bank makes losses the loss is shared based on the mode of mudarabah or Musharakah model.

Conventional banks offer mortgage loan which is repaid after a particular period of time at a given interest. In Islamic mortgage finance, the bank shares the bank shares with the customer in purchasing the desired property (Masood, 2015). The customer and the bank co-own the property and they share in profits accrued from the property. At some point in future, the customer may decide to buy the share owned by the bank and therefore own the property hundred percent.

The Islamic bank should increase its product portfolio. This will help to increase consumer choice and hence increasing consumer satisfaction.

The bank should also target a wider customer segment. There are many non- muslims in the UAE and hence it is important that the bank designs its strategy to reach out to these customers and therefore increase customer base (Pacter, 2017).

The banks should become more innovative and offer customers digital products which will make banking easier and improve efficiency.

Conclusion

The study aims at establishing the relationship between Islamic banking and conventional banking. For the purpose of the study, the Dubai Islamic Bank and the United Arab Bank are used as the case study for this research. The study begins with an analysis of the history of both banks. Both the DIB and the UAB were formed in the 1970s and have grown over the years to cover a wider market segment and serve more customers. The study establishes the knowledge that customers have on Islamic banking and the perception that they have towards Islamic banking. Both primary and secondary sources of data are used. The secondary sources used in the report include books, journals as well as internet sources. Primary data is collected through questionnaires Some of the products offered by the Dubai Islamic bank include; Islamic mortgage finance, mudarabah, Musharakah, e-banking services as well as credit card services. The business model of the bank is based on Islamic Sharia law and the bank does not charge interest on loans lent out to customers. The report also compares and contrasts the Islamic banks with the conventional banks. The similarities and the differences are well discussed in the report.

References

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