ICIB 4 th International Conference on Islamic Business 2016 Quaid-e-Azam Auditorium, IIUI Faisal Masjid Campus, Islamabad, Pakistan 20-22 February, 2016 Organized By: riphah international university riphah centre of islamic business Collaborators: Islamic Economics, Finance, Entrepreneurial Development & Public Policy for the Ummah s Socio-economic Wellbeing Under the above theme, the speakers / paper presenters will discuss the vision of Islamic economics, business and finance, public policy for entrepreneurial development and to enhance social inclusion and good governance, meaning how to develop Islamic countries economies giving fair opportunity to all segments of the society and provide them not only suitable jobs / employment but also dignity and respect in the society and falah in this world and the Hereafter. As it is possible only through application of the principles of the Shariah, in letter and spirit, in all socio-economic disciplines and business and finance affairs, Shariah compliance of all institutions, products and activities would also be covered in the Theme of the ICIB-2016 event. Ministry of Planning Development & Reform Conference Secretariat: Riphah Centre of Islamic Business (RCIB) Riphah International University, 274-Peshawar Road, Rawalpindi. Mr. Ikram Ullah Khan (Ikramullah.khan@riphah.edu.pk; +92 (333) 5949 907) Mr. Ehtesham Rashid (ehtesham.rashid@riphah.edu.pk; +92 (345) 2569 620)
Murabaha: The Perspective of Islamic Bankers By Muhammad Aqib Ali Country Head & Director, International Islamic Finance & Insurance Institute (IIFII) & Talat Hussain Assistant Professor, University of Management & Technology (UMT)
Introduction Islamic economic & financial paradigm is founded on the principle of collective welfare as opposed to interestbased conventional economic setup which entails individual welfare and ignores cooperative welfare. This is amazingly a fact that Islamic sacred texts offered guidance on complex economic/financial matters from the times when paper money did not even exist. Islamic principles also provide guidance on the architecture of a system that is economically just & fair and is based on the schema of socio-economic welfare.
Background of the Study The use of Murabaha as an Islamic finance mode is prevalent in Pakistan and other Islamic banking industries around the world. The utilization of murabaha finance is not questionable but it is actually the over utilization of this financing method that arises reservations. By evaluating the perceptions of Islamic bankers and assessing their opinions regarding murabaha, the negative viewpoints can be obliterated to promote better understanding of the concept and to enhance applicability of this vital Islamic financing mechanism.
Islamic Finance Modes The Islamic modes of finance are broadly grouped into two main classes. In First class are the equity or participatory based modes like mudaraba, musharakah. The second group includes trade based or sale based mechanisms like salam, istisna and murabaha. Although the trade-based modes like murabahah, istasna and ijarah etc are not loans in real terms, yet these create debts on the basis of deferred sales.
What is Murabaha? Murabaha is a particular kind of sale in which the seller discloses his cost to the buyer and adds a certain profit to it to determine the selling price. As an asset is being traded in this transaction, hence Murabaha must at all times be considered a trade transaction and not a loan. An ordinary sale in Arabic is called Musawamah - a bargaining exchange without disclosing or referring to what the cost is. On the other hand when the cost is known to the client it is called Murabahah.
Significance of Murabaha Murabaha the most used Islamic financing tool by the Islamic banks and financial institutes around the word is a vital Islamic finance concept. However, the over reliance on murabaha has created doubts about the degree of Shariah compliance. The study focuses on the views of Islamic bankers to evaluate whether these doubts are well based or not and what are the possible options which can be considered in order to dispel these negative opinions about Murabaha.
Review of Related Literature Murabahah actually is a special kind of sale in which cost and profit, are expressly stated, it has nothing to do with financing in its original sense. (Muhammad, Yusof & Hezlina 2011) Using Murabaha for financing, Islamic banks purchase certain goods (required by clients) and sell at cost plus profit basis. Murabaha cost includes all expenses incurred in the acquisition of goods such as invoice price, transportation, marine/in transit insurance, sales tax and other Govt. levies etc. Payment of Murabaha price may at Spot; or in Installments; or in lump sum (bullet) after a certain time period.
Review of Related Literature (Cont.) Tarik (2004) mentioned in his work regarding murabaha domination in Islamic finance and opined that murabaha syndrome has affected Islamic banks product assortment. According to Ibrahim (2006), Shariah scholars approach must be relatively accommodating and supple to deal with the current economic and financial trends to ensure that neither Shariah principles are compromised nor there is scarcity of financial products/offerings based on contemporary demands. Murabahah financing contains several risks to be countered by Islamic banks, including price risk, default risk, commodity risk and market risk. (Iqbal and Mirakhor 2007)
Review of Related Literature (Cont.) According to the Islamic Banking Bulletin of SBP murabaha leads the financing share mix of Islamic banks is 36%. For instance, share of murabahah in financing mix of IBIs/IFIs in Malaysia and Bahrain is more than 54% (Abdus Samad, Norman, Gardner and Cook 2005), and in Sudan it is over 43%. Alsayyed (2010) noted that negative murabaha perceptions are based not on the Islamic mode itself but rather on its over utilization by Islamic banks globally.
Research Methodology Research Questions Research Design The Sample
Research Questions Research Question No.1: Whether the generally held views and opinions of Islamic bankers regarding murabaha financing are adverse or favorable. Research Question No.2: To identify the important factors that contribute to the favorable opinion of murabaha by looking at the perceived variables like murabaha Shariah compliance, murabaha operations transparency, murabaha business support value, knowledge and awareness of murabaha. Research Question No.3: In order to expunge the negative perceptions about murabaha, what measures should be taken keeping in view, the crucial role murabaha financing plays in global Islamic banking industry.
Research Design The study is designed in such a way to effectively evaluate perceptions towards Murabaha to assess the perspectives of Islamic bankers. The research design comprises a structured questionnaire mostly administered personally and at few instances through mail. Apart from getting the questionnaires filled directly by the target audience i.e. the Islamic bankers, several informal and casual interview sessions also took place.
Sample of Study The survey encompasses all the full-fledged Islamic banks that include Meezan Bank, Dubai Islamic Bank, Al-Barakah Bank, Bank Islami Pakistan and Burj Bank in the order of maximum branches in the country. The sample size comprises 100 Islamic bankers belonging to these five full-fledged Islamic banks. This was ensured that all questionnaires are complete, valid and suitable to be considered for their inclusion in the data collection process in the course of the research study.
Analysis & Results In the initial part of analysis, the demographic information of the respondents is discussed. In the later part, the second section of questionnaire is analyzed which relates to Murabaha perspective of Islamic bankers, through various statistical measures including the measures of variation and inferential statistics like regression analysis.
Demographic Analysis Includes personal attributes like their age, gender and religion. 82% of respondents were male, 18% of them were female. 61% of the respondents have age less than 36 years which shows respondents are in mid or start of their careers, fact is also verified when we analyze rank of bankers in the study. The analysis shows that 60% of the respondents were middle level employees while 25% of the respondents were having rank of managerial or upper level and the rest were junior level Islamic bankers. With respect to educational profile, 22% have professional qualification while only a small percentage of 2% of participants hold a PhD degree, 42% hold Bachelors degree.
Regression Analysis In order to assess the perception of Murabaha based products and services, from the viewpoint of Islamic banks employees; the second section of the questionnaire was developed. There were 14 items in the second section of the questionnaire to fetch data about the Murabaha financing mode. The distribution of these 14 items and their respective variables is given in following table 1.1.
The Variables
Descriptive Statistics for Variables
The Model In order to generalize the above results of descriptive statistics multiple ordinary least square regression is performed by taking one dependent variable and four independent variables. The general model of regression analysis is as follows: PM i = b 0 + b 1 SC i + b 2 OT i + b 3 BS i + b 4 KA i + u i Where PM = Perception about Murabaha SC = Shariah compliance OT = Operations and transparency BS = Business Support & Value KA = Knowledge and Awareness
ANOVA In order to proceed to the regression estimates first we have to check whether going through the process of estimation is worthwhile as compared to checking means only or not? From table 1.3, it can be evidenced that at 5% level of significance, model is highly significant so model estimation is more appropriate than mean.
Model Summary As far as explanatory power of models is concerned, R square is increased as compared to initial regression with problems of multicollinearity. But after removal of multicollinearity problem in table 1.8, model 3 has more explanatory power as compared to model 1 and Model 2. It means model 3 has good fit.
Final Model Variables
Concluding Results So on the basis of table 1.9, our final regression model with three independent variables is asfollows: PM i = b 0 + b 1 SC i + b 2 OT i + b 3 KA i PM = -1.62 + 0.53SC i +0.49OT i + 0.56KA i From the above regression equation, we can interpret that Shariah compliance has positive impact on the perception of bank employees. It means if extent of Shariah compliance will increase then perceptions about Murabaha will improve. Similarly if transparency in operations of Islamic banks and knowledge levels about Murabaha improve, this will also improve the impression of Murabaha perceptions.
Conclusion From the analysis results, this can be concluded that Murabaha opinions and viewpoints of Islamic bankers are generally very favorable, this is answer of our first Research Question. The answer to research question two is found through the inferential statistical, in which three key variables emerged with their positive impact on Murabaha, the Murabaha Shariah compliance, transparency & operations, and knowledge & awareness level regarding Murabaha. The answer to last research question on how to dispel negative views regarding murabaha financing is by improving and modifying the operations in Murabaha and enhancing the knowledge & awareness levels of stakeholders to have a positive bearing on the views and perceptions regarding Murabaha.
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