EVOLUTION, PERFORMANCE AND ROLE OF ISLAMIC BANKING IN PALESTINE AHMAD ASAD MAHMOUD IBRAHIM THESIS SUBMITTED IN FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY FACULTY OF ECONOMICS AND ADMINISTARTION UNIVERSITY OF MALAYA KUALA LUMPUR January 2010
ABSTRACT The study seeks to examine the historical evolution of Islamic banks in Palestine, analyse their performance in the various economic sectors, and to empirically evaluate their economic role in Palestine. The study ascertains that the Palestinian economy was rather driven by Israeli stiff regulations and incessant closures, which had inexorably disrupted the banking operations in both Gaza and the West Bank. However, the establishment of the Palestinian Monetary Authority (PMA) after the signing of the Paris Economic Agreement in 1994 with Israel rejuvenated the Palestinian banking system which also led to the rise of Islamic banks in Palestine. The findings of the study show that the evolution of Palestinian Islamic banks (PIBs) came at an amazing pace burgeoning to four full-fledge banks in addition to one Islamic branch of the Cairo-Amman Bank in just three years time. From the sectoral performance standpoint, the study found that the second Al-Aqsa Intifadah had adverse impact on the amount of investment directed to transportation, financial services, and stocks. By contrast, the industrial, commercial, and services sectors witnessed a dramatic growth primed by higher investment funds from Islamic banks. Comparison analysis of PIBs performance with their Islamic counterparts in the neighbouring countries, found that the performance of Islamic banks in the neighbouring countries was apparently better in the industry and services sectors. Performance analysis of PIBs and their conventional counterparts in Palestine concluded that both conventional and Islamic banks performed poorly in channeling investment into the agriculture, tourism, financial services, and stocks sectors. Alternatively, both types of banks had pumped a good stream of their investment portfolio into the commercial sector. As for the remaining five sectors, Islamic banks had outperformed their conventional counterparts in the sectors of transportation, construction, and services; whereas conventional banks outperformed their Islamic counterparts in channeling higher investment into the industry and miscellaneous economic sectors. The study also examined the operational efficiency of Islamic banks in Palestine using selected key performance and financial ratios. The results showed that the Islamic banks in Palestine were financially more stable with relatively lower solvency risk compared with their conventional counterparts. However, the conventional banks appeared to have higher capital utilization and profitability than the Islamic banks. The study also assessed the performance of the Palestinian Islamic banks from two different perspectives; namely the customers (mainly businessmen) and the banks managers. A questionnaire survey was conducted on individual businessmen and small and medium entrepreneurs, and semi-structured interviews were carried out with the Islamic banks managers. It is found that majority of businessmen still rely heavily on other sources of capital such as family and friends; and they were also barely satisfied with the current role of the Islamic banks in the economic development. The interview outcomes revealed that PIBs lack skilled personnel to conduct quality market researches in order to find out profitable prospects of medium and long term projects. The findings also revealed that most deposits of PIBs branches in the rural areas were used to finance investment projects in urban areas. The study winds up with several recommendations, which are to the effect that PIBs can play a greater role in the social development of the society through investment of Zakat funds, sponsoring postgraduate students, developing property endowment, and financing small and medium entrepreneurs. Moreover, PIBs should constantly up skill their employees and design customised training programmes in the fields of Islamic banking, marketing, communication, and many other fields of management such as human resource management. The fact that the laws and regulations governing Islamic banking systems in Palestine are actually derived from the commercial banking systems and laws; therefore, the study recommends adapting laws inherent in the Islamic financial system. ii
ABSTRAK Kajian ini meninjau sejarah evolusi bank-bank Islam di Palestin, mengkaji pencapaian mereka di dalam pelbagai sektor ekonomi dan mengkaji peranan ekonomi mereka secara saintifik di Palestin. Kajian ini juga mendapati ekonomi Palestin adalah didorong oleh undang-undang keras Israel dan penutupan yang berterusan, yang mana telah mengganggu perjalanan operasi- perbankan di Gaza dan Tebing Barat. Walaubagaimanapun, penubuhan Penguasa Kewangan Palestin (PMA) selepas menandatangani Perjanjian Ekonomi Paris pada tahun 1994 dengan Israel telah menghidupkan semula sistem perbankan Palestin dan menggalakkan pertumbuhan bank-bank Islam di Palestin. Hasil kajian menunjukkan bahawa evolusi bank-bank Islam Palestin (PIB) telah berkembang dengan cepat pada tahap yang mengagumkan kepada empat bank utama di samping satu cawangan Islam Bank Cairo-Amman dalam masa 3 tahun sahaja. Dari sudut prestasi mengikut sektor, kajian ini mendapati bahawa Intifadah Al-Aqsa yang kedua telah memberi kesan yang negatif terhadap jumlah pelaburan untuk pengangkutan, khidmat kewangan dan pembekalan stok. Secara perbandingannya, sektor industri, perdagangan dan perkhidmatan menyaksikan pertumbuhan dramatis yang didorong oleh penawaran dana pelaburan yang lebih tinggi daripada bank-bank Islam. Analisis perbandingan prestasi PIB dengan bank-bank Islam di negara-negara jiran mendapati bahawa prestasi bank-bank Islam di negara-negara jiran adalah ketara lebih baik dalam sektor industri dan perkhidmatan. Manakala analisis prestasi PIB dan bank-bank konvensional di Palestin menyimpulkan bahawa kedua-dua bank konvensional dan bank Islam, adalah lemah di dalam menyalurkan dana ke- sektor pertanian, perlancongan, khidmat kewangan dan saham. Sebaliknya, kedua dua jenis perbankan ini telah menyalurkan suatu aliran potfolio saham yang baik ke dalam sektor perdagangan. Untuk baki lima sektor yang selebihnya, prestasi bank-bank Islam telah lebih jauh mendahului bank-bank konvensional di dalam sektor pengangkutan, pembinaan, dan perkhidmatan; manakala bank konvensional pula mendahului bank Islam di dalam menyalurkan pelaburan yang lebih tinggi ke dalam sektor industri dan sektor pelbagai. Kajian ini juga telah mengkaji kecekapan operasi bank-bank Islam di Palestin dengan menggunakan penunjuk utama prestasi yang terpilih dan nisbah kewangan. Keputusan kajian menunjukkan bahawa prestasi kewangan bank Islam di Palestin adalah lebih stabil dengan risiko muflis yang lebih rendah berbanding dengan bank konvensional. Walaubagaimanapun, bank konvensional kelihatannya mempunyai tahap penggunaan modal dan keuntungan yang lebih tinggi berbanding bank Islam. Kajian ini juga menilai pencapaian bank-bank Islam Palestin dari dua sudut pandangan yang berbeza; iaitu perspektif pelanggan (terutamanya ahli perniagaan) dan pengurus-pengurus bank. Satu tinjauan soal selidik telah dijalankan terhadap ahli perniagaan, pengusaha kecil dan sederhana, manakala temuduga separuh-struktur telah dijalankan ke atas pengurus-pengurus bank Islam.di Palestin. Kajian ini mendapati kebanyakan ahli perniagaan masih bergantung kuat terhadap sumber-sumber modal lain seperti keluarga dan rakan-rakan; dan mereka juga hampir tidak berpuas hati terhadap peranan semasa bank-bank Islam di dalam pertumbuhan ekonomi. Hasil temuduga mendedahkan bahawa PIB kekurangan kakitangan mahir untuk menjalankan kajian pasaran yang berkualiti untuk mencari peluang keuntungan ke atas rancangan projek jangka masa pertengahan dan jangka masa panjang. Keputusan kajian juga mendedahkan bahawa kebanyakan deposit cawangan PIB di luar bandar telah digunakan untuk membiayai pelaburan rancangan projek-projek di bandar. Kajian ini disimpulkan dengan beberapa cadangan, iaitu PIB boleh memainkan peranan yang lebih besar di dalam pembangunan masyarakat melalui pelaburan dana Zakat, membiayai pelajar-pelajar lepasan ijazah, membangunkan waqaf, dan membiayai pengusaha kecil dan sederhana. Seterusnya, PIB hendaklah secara berterusan iii
meningkatkan kemahiran kakitangannya dan merancang program latihan yang bersesuaian di dalam bidang perbankan Islam, pasaran, komunikasi dan bidang-bidang pengurusan yang lain seperti pengurusan sumber manusia. Fakta menunjukkan bahawa undang-undang dan peraturan yang mentadbir sistem perbankan Islam di Palestin adalah sebenarnya diambil dari sistem dan undang-undang perbankan konvensional. Oleh itu kajian ini mencadangkan penyesuaian dan pemakaian undang-undang yang ada di dalam sistem kewangan Islam. iv
ACKNOWLEDGEMENTS Allamdulillah, all praise belongs to Allah, the Lord of the Universe whose Mercy, Guidance and Blessings have enabled me to complete this study successfully. I would like to express my deepest appreciation and respect towards my supervisor Associate Professor Dr. Radiah Adul Kader. It was through her great efforts, motivation and persistent encouragement that I was able to complete this study. May Allah reward her for her sincere endeavour and contribution to Islamic Banking. Special acknowledgement and appreciation to the University of Malaya for giving me the opportunity to pursue my Ph.D. study and to all lecturers of the Faculty of Economy in the University for their great efforts and sincerity in teaching. My sincere gratitude goes to Prof. Rodney Wilson, Prof. Iraj Toutounchian, and Prof. Joni Tamkin Bin Borhan, who have given me their constructive feedback and support as examiners during my viva. I would also like to express my deepest appreciation to all managers of the Islamic Banks in Palestine and the Palestinian Monetary Authority for their cooperation and help in conducting the research successfully. I am also grateful for the help and encouragement of many who have directly both directly and indirectly contributed to this work especially my wife, my brothers, Dr. Rasem Kayed, Dr. Radwan Jamal, Mada Mustapha, Harith Zud, and Kamal Badarsawee. Lastly I would like to mention the sincere support of Susakawa foundation who has significantly contributed to my research willingly. v
TABLE OF CONTENTS Title Abstract (English Version) Abstrak (Malay Version) Acknowledgements Table of Contents List of Tables List of Figures List of Graphs List of Abbreviations Page ii iii V Vi xx xxvi xxviii xxx CHAPTER 1: INTRODUCTION 1 1.1 Statement of the Problem 3 1.2 Research Questions and Research Objectives 4 1.3 Significance of the Study 5 1.4 Scope of the Study 6 1.5 Theoretical Framework 7 1.6 Methodological Approach 7 1.7 Thesis Structure 8 CHAPTER 2: THEORETICAL FRAMEWORK 12 2.0 Introduction 2.1 Impact of PLS banking on Savings and 12 14 Investment vi
2.2 Islamic Model of Financial Intermediary and Its 22 Role In Economic Development. 2.3 Impact of PLS Banking on 23 Financial System Stability 2.4 Conventional view on PLS 26 2.5 Corporate Social Responsibility and Islamic 28 Banking 2.5.1 Background 28 2.5.2 Islamic Views on CSR 31 CHAPTER 3: AN OVERVIEW OF PALESTINE S 36 ECONOMY (1948-1999) 3.0 Historical and Geographical Background 36 3.1 Occupation of Palestine and its Impact on the 38 Socio-Economic Structure (1948-1987) 3.1.1. Israeli occupation and collapse of 38 Palestinian economy (1948 1967) 3.1.1.1 Investment 39 3.1.1.2 Balance of Trade 39 3.1.1.3 Balance of Payment 40 3.1.2 Economic Development in West 41 Bank (1967-1987) 3.1.2.1 GDP Structure 41 3.1.2.2. Agriculture and Industry 42 3.1.2.3 Investment 43 vii
3.1.2.4 Trade Balance Deficit 45 3.2 Palestinian Intifadah (1984-1992) 49 3.2.1 Pre- Intifadah (1984-1987) 49 3.2.2 Populous Intifadah (1987-1992) 50 3.2.2.1 The Economic Damages 51 Caused by the Intifadah 3.2.3 Palestinian Economy in the End of 52 Transitory Phase (1992-1996) 3.3 Post Compromise Pacts (1996-1999) 53 3.3.1 Unemployment and Inflation Rates 54 (1996 1999) 3.3.2 Gross National Product (GNP) and 54 Gross Domestic Product (GDP) (1996-1999) 3.3.3 Economic Sectors: (1996 1999) 55 3.4 The Second Al-Aqsa Intifadah (2000 2004) 56 3.4.1 Unemployment and Inflation Rates 57 (2000 2004) 3.4.2 Gross National Product (GNP) and 58 Gross Domestic Product (GDP) 3.4.3 Economic Sectors 59 3.5 Chapter Summary 60 CHAPTER 4: THE FINANCIAL SYSTEM IN PALESTINE 61 4.0 Introduction 61 viii
4.1 Palestinian Monetary Authority 61 4.1.1 Banking Control by the Palestinian 62 Monetary Authority 4.1.2 Assets and Liabilities of Palestinian 63 Monetary Authority 4.2 Palestinian Banking System 64 4.2.1 Palestinian Banking System before 64 the Establishment of the National Authority 4.2.2 Palestinian Banking System after the 66 Establishment of the National Authority 4.2.3 Deposits and Credit Facilities Offered 68 by the Banks Operating in Palestine 4.2.3.1 Deposits 68 4.2.3.2 Credit Facilities 72 4.2.4 The Development of the Palestinian 76 Banking System During the Second Intifadah 4.2.4.1 Deposits 77 4.2.4.2 Credit Facilities 79 4.3 Non Bank Financial Institutions 81 4.3.1 Arabian Institution of Lending and 81 Development (ALID) 4.3.2 Economic Development Institution 81 ix
(EDI) 4.3.3 Technical Development Institution 81 (TDI) 4.4 Money Changers 81 4.5 The Palestinian Securities Exchange 82 4.6 Chapter Summary 86 CHAPTER 5: HISTORICAL EVOLUTION FOR THE 88 EMERGENCE OF ISLAMIC BANKS 5.0 Introduction 88 5.1 The Early Development of Banking Institutions 88 5.2 Banks in the Middle Age 88 5.3 Historical Review of Islamic Banks 89 5.4 Review of Islamic Banking Development 91 5.5 Summary of Islamic Banks Performance in 1995 103 5.6 Characteristics of Islamic Banks 106 5.6.1 Means of Production, Investment & 107 Trade 5.6.1.1 The Prohibition of 107 Non-Production Activities 5.6.1.2 Functions of Investor, 108 not Merely Financier 5.6.1.3 Providing the Trade Tools 108 x
5.6.2 Ideological Driven Entities: Ruled by 100 Shari ah 4.6.2.1 Divine Sources Standard 109 4.6.2.2 Scholarly & Knowledge 110 Based Standards 5.6.3 An Institution of Social & Spiritual 110 Responsibility 5.6.4 Creates Stability & Absorbs 110 Financial Shocks 5.6.4.1 Asymmetric Information 111 5.6.4.2 Not Based on Speculation 111 5.6.4.3 Stronger Corporate 112 Governance & Risk Management 5.6.5 Easy Recovery from Financial 113 Crisis By Shareholder s Wealth 5.6.6 Modes of Less Inflation and 113 Vulnerability 5.7 Chapter Summary 115 CHAPTER 6: THE EVOLUTION OF ISLAMIC 117 BANKS IN PALESTINE 6.0 Introduction 117 6.1 The Establishment of Islamic Banks in Palestine: 117 xi
An Overview 6.2 Jurisprudential Base for the Palestinian Islamic 121 Banks 6.2.1 Palestinian Treasury Fund (PTF) 121 6.2.2 Arab Islamic Bank (AIB) 129 6.2.3 Palestinian Islamic Bank (PIB) 129 6.2.4 Al-Aqsa Islamic Bank 135 6.2.5 The Cairo-Amman Bank 136 6.3 Conventional Legal Basis 138 6.4 The Objectives of the Palestinian Islamic Banks 143 6.5 Chapter Summary 145 CHAPTER 7: THE SOCIO-ECONOMIC ROLE OF 147 ISLAMIC BANKS IN PALESTINE: PERFORMANCE ANALYSIS 7.0 Introduction 147 7.1The Role of Banking Sector in the Reconstruction and Development in Palestine 7.2 Analysis of the Sectoral Financing Performance 148 151 of Islamic Banks in Palestine 7.2.1 Introduction 151 7.2.2 Method of Analysis 152 7.3 Data Analysis 154 7.4 Effects of the Palestinian Uprising (Intifadah) on 159 xii
the Performance of the Palestinian Islamic Banks 7. 5 Comparison of the Performance of Islamic Banks in Palestine with their Counterparts in 168 Egypt and Jordan 7.6 A Comparison of the Performance of the Islamic Banks in Palestine with their Conventional 173 Counterparts in Palestine 7.7 Measuring the Economic Performance of Islamic 178 Banks in Palestine through Financial Ratios 7.7.1 Introduction 178 7.7.2 Method of Analysis 7.7.3 The Use of Financial Ratios in the Measurement of Islamic 179 181 Banks Performance 7.7.4 The Financial Ratios Used in the 182 Evaluation of the Performance of the Islamic Banks 7.7.5 Analysis of the Financial Ratios 7.7.5.1 Shareholders Equity Ratio 7.7.5.2 Capital Utilization 187 187 189 Ratio/Deployment Ratio 7.7.5.3. Profitability Ratio 191 7.7.5.4. Deposit Ratio 192 7.7.5.5. External Investment Ratio 193 xiii
7.7.5.6. Internal Investment Ratio 7.7.5.7. Statutory Reserve Ratios 195 197 7.8 The Social Role of Islamic Banks in Palestine 200 7.8.1. Effectiveness of the Social Role of 202 Islamic Banks 7.8.1.1 Islamic Banks and the Social 204 Effects of Zakat 7.8.1.2 Islamic Banks and the Social 207 Effects of Interest-Free Loans 7.8.1.2.1 Establish and 208 Manage Interest-Free Loans (IFL) 7.8.1.2.2 Mechanism of 208 Managing Interest Free Loans 7.8.1.3 The Contribution of the 209 Islamic Banks to Local Investments and Microfinance 7.8.1.4 The Islamic Banks and the 210 Social Effects of Education & Training 7.8.1.5 Islamic Banks and the Social 211 Effects of Reducing Unemployment xiv
7.8.1.6 Islamic Banks and the 212 Development of Waqf 7.8.1.7 Takaful Exchange Unit 213 7.9 The Obstacles that Affect the Economic Role of 215 the Islamic Banks 7.9.1 The Unsuitability of the Monetary 216 Policy for the Islamic Banks 7.9.2 The Unsuitability of Available 218 Financial Resources 7.9.3 Lack of Suitable Clients 225 7.9.4 The Lack of Political Stability and Its 230 Effects on Islamic Banks 7.10 Suggestions to Deal with the Obstacles that 231 Encumber the Capability of the Islamic Banks to Realize their Economic Role 7.10.1 Suggested Solutions for the Obstacle 231 of Unsuitable Monetary Policies 7.10.2 Suggested Solutions for the Obstacle 233 of Unsuitable Financial Resources 7.10.3 Suggested Solutions for the Obstacle 233 of Unsuitable Clients 7.11 Chapter Summary 235 CHAPTER 8: THE ROLE OF ISLAMIC BANKING IN THE 236 DEVELOPMENT OF THE PALESTINIAN ECONOMY: BUSINESSMEN AND MANAGERS PERSPECTIVE xv
8.0 Introduction 236 8.1 Methodology 237 8.1.1 Research Design 8.1.2 Primary Data Collection 237 238 8.1.2.1 Survey 238 8.1.2.2 Interviews 8.1.2.3 Limitations of the Study 246 248 8.3 Analysis and Discussion 248 8.3.1 Background of Business/ 250 Respondents 8.3.2 Attitude towards Islamic Banks 253 8.3.3 Businessmen s Awareness of PIBs 256 Products and Services 8.3.4 Sectors Benefiting from Islamic 259 Banks as Perceived by Businessmen 8.3.5 Customer Satisfaction and the 263 Banking Sector 8.3.6 The Descriptive and Factor Analysis 266 of the Businessmen s Selection Criteria for Islamic Banks 8.3.6.1 Descriptive Analysis 267 8.3.6.2 Factor Analysis 271 8.3.7 Problems Faced by Businessmen 277 Dealing with Islamic Banks 8.3.7.1 Lack of Human Resources 279 xvi
8.3.8 Demand for Deposit 282 8.3.9 The Type of Accounts Used by the 283 Customers of Islamic Banks 8.3.10 Account Preference 285 8.3.11 The Profit Of The Investment 286 Account 8.3.12 The Risk of the Investment Account 288 8.3.13 Demand and Financing 289 8.4 Managers Interviews 291 8.4.1 The Management attitude towards 291 Raising Deposits and Maintaining the Market Share 8.4.2 The Management Attitude and Their 294 Deputies towards the Role of Islamic Banks in Economic Development 8.4.2.1 The Management Attitude 294 and Their Deputies towards financing of small and medium scale enterprises 8.4.2.2 The Management Attitude 294 and Their Deputies towards collateral security 8.4.2.3 The Management Attitude 295 and Their Deputies towards customers personal character or behaviour xvii
8.4.2.4 The Management Attitude 295 and Their Deputies towards poor demand 8.4.2.5 The Management Attitude 297 and Their Deputies towards limited number of investors and their low demand 8.4.2.6 The Management Attitude 297 and Their Deputies towards human resource 8.4.2.7 The Management Attitude 298 and Their Deputies towards investment in rural areas 7.5 Chapter Summary 299 CHAPTER9: RESULTS AND RECOMMENDATIONS 301 9.0 Introduction 301 9.1 The Findings of the Study 301 9.1.1 The Dramatic Rise of Islamic Banks in 301 Palestine 9.1.2 PIBs Performance Benchmarking 302 Analysis - Sectorial Perspective 9.1.3 Assessment of PIBs Financial 304 Performance Key Financial Ratios xviii
9.1.4 Customers & Management s 304 perception on PIBs 9.2 Recommendations 310 REFERENCES 317 APPENDECIES 327 xix
LIST OF TABLES Table Title Page 3.1 Contribution of the Leading Economic Sectors to GDP 39 3.2 West Bank Trade by Destination and by Nature of Product: 1966 40 (in Thousands of Jordanian Dinars and Percentage) 3.3 Balance of Payments of the West Bank: 1966 (in Millions of 40 Jordanian Dinars) 3.4 Proportional Distribution of GDP According to the Principal 41 Economic Sectors (Percentage) 3.5 Distribution of Cultivated Land According to the Type of 42 Agricultural Use in Selected Years 1964-1983/4 3.6 Output by Main Manufacturing Branches for Selected Years 43 ( 1969-1984) (Percentage at Current Prices) 3.7 Gross Domestic Capital Formation by Sector and Type of Assets 45 for Selected Years (1968-1984) (Percentage) 3.8 West Bank Trade by Partner Country in 1969 and 1984 46 (Percentage) 3.9 Foreign Trade Balance of the West Bank by Partner Country for 46 Selected Years (1968-1984) (in Millions of US$) 3.10 Exports and Imports of Agricultural and Industrial products by 47 Partner Country 1984 (Percentage) 3.11 Exports and Imports of the West Bank According to the Nature of 48 the Product and by Partner Country 1984 (Percentage) 3.12 West Bank Balance of Payments in 1970, 1984 (Estimates in 48 Millions of US $) 3.13 Unemployment and Inflation Rates (1996 1999) 54 xx
3.14 Gross Domestic Capital Formation by Sector for Selected Years 55 (1996-1999) (Percentage) 3.15 Unemployment and Inflation Rates (2000 2004) 57 3.16 Gross Domestic Capital Formation by Sector and Type of Assets 58 for Selected Years (2000-2004) (Percentage) 4.1 Assets and Liabilities of Palestinian Monetary Authority (1995-64 1998) ( US$ Million) 4.2 Palestine Banking System 67 4.3 Distribution of Deposits among Authorized Banks. (US $ Million) 72 4.4 Credit Facilities Structure 74 4.5 Distribution of the Credit Facilities over the Economic Sectors 76 (US$ Million) 4.6 Contribution Shares of the Economic Sectors to GDP and their 76 Respective Amount of the Lending Bank Facilities 4.7 Types of Deposit According to Public and Private Sector 77 4.8 Distribution of Deposits According to the Types of Deposits (US 78 $ Million) 4.9 Distribution of the Credit Types. (US$ Million) 80 4.10 Contribution Shares of the Economic Sectors to GDP and their 80 Respective Amount of the Lending Bank Facilities 1996-2004 4.11 Stock Exchange Data for Selective Middle Eastern Countries 1999 85 5.1 Islamic banking: Summary of financial highlights, 1995 104 5.2 Islamic Banks: Financing by Sectors/Regions- (1995) Percent 104 5.3 Islamic Banks Financing by Modes/ Regions percent 105 6.1 The Islamic Banks in Palestine and their Branches 118 6.2 Geographical Distribution of Deposits and Credit Facilities as at 120 xxi
31/12/2004 7.1 The Sectoral Financing Performance of Islamic Banks in Palestine 153 (1997-2004) Percentage 7.2 The Sectoral Financing Performance of the Islamic Banks in 153 Palestine (1997-2004) - US.D Millions 7.3 Losses suffered by the Palestinian Economic Sectors (2001-2004) 160 7.4 The Sectoral Performance of Islamic Banks in Palestine in the 161 Period (1997-2000) - US $ millions (before al-aqsa Intifadah) 7.5 The Sectoral performance of Islamic Banks in Palestine in the 161 Period (1997 2000) - in percentage (before al-aqsa Intifadah) 7.6 The Sectoral Performance of Islamic Banks in Palestine in the 162 period (2001 2004) - in US $ millions (after the al-aqsa Intifadah) 7.7 The Sectoral Performance of Islamic Banks in Palestine in the 163 Period (2001 2004) in Percentage (after al-aqsa Intifadah) 7.8 Sectoral Performance Comparison of Islamic Banks before and 166 after al-aqsa Intifadah US $ millions 7.9 Sectoral Performance Comparison of Islamic Banks before and 166 after al-aqsa Intifadah in Percentage 7.10 The Average Performance of al-faisal Egyptian Islamic Bank in a 169 Period of Five Years (1994 1999) 7.11 The Average Performance of the Jordanian Islamic Bank in a 169 Period of Five Years 7.12 Performance Comparison between Average Percentage of Islamic 174 Banks and Conventional Banks 7.13 Distribution of Credit Facilities by Economic Activities for the 177 xxii
Conventional Banks in Palestine in US $ Million 7.14 Distribution of Credit Facilities by Economic Activities for the 177 Conventional Banks in Palestine by Percentage % 7.15 Shareholders Fund Ratio (The mean ratio for 1996-2004) 187 7.16 Deployment Ratio (the Mean Ratio for 1996-2004) 189 7.17 Fund Utilization of the Palestinian Islamic Banks (the Mean for 190 1996-2004) 7.18 Profitability Ratios (the mean ratio for 1996-2004) 192 7.19 Deposit Ratios (the Mean Ratio for 1996-2004) 193 7.20 External and Internal Investment Ratios (the mean ratio for 1996-194 2004) 7.21 Statutory Reserve Ratios (the Mean Ratio for 1996-2004) 198 7.22 The Contributions of Zakat for the Islamic Banks Estimated in 214 1000 US $ from 1996-2000 7.23 The Contributions of Good Loan for the Islamic Banks Estimated 214 in 1000 US $ from 1996-2000 7.24 The Contributions of Donations and Scholarships for the Islamic 214 Banks Estimated in 1000 US $ from 1996-2000 7.25 The Contributions of Staff Training and Prosperity for the Islamic 214 Banks Estimated in 1000 US $ from 1996-2000 7.26 The Contributions of Waqf for the Islamic Banks Estimated in 215 1000 US $ from 1996-2000 7.27 Total Number of Staff in the Islamic Banks 215 7.28 The Growth of Assets of Palestinian Islamic Banks in Millions 220 7.29 The Growth Percentage of Assets of Palestinian Banks 221 8.1 Sub-Population Data Distribution 239 xxiii
8.2 Strata Sample Size 240 8.3 Numbers Workers Indicated by Businessmen 251 8.4 Legal Form Distribution of Legal Firms as Indicated by 251 Businessmen 8.5 Type of Capital Distribution of Businessmen According to Types 251 of Capital 8.6 Distribution of Businessmen According to the Sources of Capital 252 8.7 Distribution of Businessmen According to the Importance of 252 Sources of Capital 8.8 Businessmen s Attitude towards the Islamic Banks 254 8.9 Businessmen s Response if Islamic Banks were closed down 256 8.10 Businessmen s Attitude towards Bank Interest 257 8.11 Businessmen s Perception on the Meaning of Mudharabah and 257 Musharakah 8.12 Businessmen s Perception on the opening of new Islamic banks or 258 branches and the increase of the working hours of the banks 8.13 Mostly Benefiting Sectors from Islamic Banks as Perceived by 259 Businessmen 8.14 Availability of Services Offered by Islamic Banks as Perceived by 264 Businessmen 8.15 Frequency Distribution and Percentages of Businessmen s 267 Perceptions of the Importance of Location and Recommendations in Islamic Banks 8.16 Frequency Distribution and Percentages of Businessmen s 268 Perceptions of the Importance of Recommendation in Choosing to Deal with Islamic Banks xxiv
8.17 Frequency Distribution And Percentages Of Businessmen s 269 Perceptions Of The Importance Of The Rate Of Profitability And Credit Facilities In Islamic Banks 8.18 Frequency Distribution and Percentages of Businessmen s 270 Perceptions of the Importance of Services and Good Management in Islamic Banks 8.19 Frequency Distribution and Percentages of Businessmen 270 Perceptions of Importance of Interest Avoidance in Islamic Banks 8.20 Factor Analysis of Perceptions of Importance of Islamic Banks 272 8.21 Estimates of Scale Reliability 273 8.22 Businessmen s Indication of Problems with Islamic Banks 278 8.23 Businessmen s Approach of Conventional Banks for Deposit 282 before 8.24 Purpose of Islamic Bank as Perceived by Businessmen 284 8.25 Businessmen s Distribution According Types of Account 285 8.26 The preference of Accounts as Perceived by Businessmen 287 8.27 Profit Rate in Islamic Banks as Perceived by Businessmen 288 8.28 Businessmen s Response when Islamic Banks lower their Profit 290 Rate xxv
LIST OF FIGURES Figure Title page 1.1 The Framework of the Study 11 2.1 Classical Theory of Interest Rate Determination 17 2.2 Irrelevance of the Rate of Interest in the Classical Model 18 2.3 Rate of Profit in Industry and Conventional Real Interest Rates in 18 the G7 Countries 2.4 Rate of Profit in Industry and Conventional Real Interest Rates in 19 the US 2.5 Rate of Profit in Industry and Conventional Real Interest Rates in 19 Japan 2.6 Rate of Profit in Industry and Conventional Real Interest Rates in 19 Germany 2.7 Rate of Profit in Industry and Conventional Real Interest Rates in 20 France 2.8 Rate of Profit in Industry and Conventional Real Interest Rates in 20 Italy 2.9 Rate of Profit in Industry and Conventional Real Interest Rates in 20 the UK 2.10 Rate of Profit in Industry and Conventional Real Interest Rates in 21 Canada 4.1 The Jerusalem Index(1998) 84 4.2 Trading Volume at the Palestine Securities Exchange 84 4.3 Annual Turnover Ratio at the PSE, 1998-2002 (%) (Source: PSE 88 Data) 5.1 1995 Regional Distribution Of Financial Highlight In Percentage 104 xxvi
5.2 1995 Distribution By Sector In Percentage 105 5.3 1995 Distribution By Modes Of Financing 106 xxvii
LIST OF GRAPHS Graph Title page 7.1 The Sectoral Financing Performance of the Islamic Banks in 154 Palestine (1997-2004) Millions 7.2 The Sectoral Financing Performance of the Islamic Banks in 154 Palestine (1997-2004) percentage 7.3 Losses Suffered by the Palestinian Economic Sectors (2001-2004) 160 7.4 The Sectoral Performance of Islamic Banks in Palestine (1997-162 2004) US $ millions 7.5 The Sectoral Performance of Islamic Banks in Palestine 162 (1997-2004) - in Percentage 7.6 The Sectoral Performance of Islamic Banks in Palestine 163 (2001-2004) in US $ Millions 7.7 The Sectoral Performance of Islamic Banks in Palestine 163 (2001-2004) - in Percentage 7.8 Sectoral Performance Comparison of Islamic Banks before and 167 after al-aqsa Intifadah in US $ Millions. 7.9 Sectoral Performance Comparison of Islamic Banks before and 167 after al-aqsa Intifadah in Percentage. 7.10 Comparison Between Percentage of Islamic Banks and 174 Commercial Banks 7.11 Distribution Credit Facilities by Economic Activities for the 178 Commercial Banks in Palestine (US $ million) 7.12 Distribution Credit Facilities by Economic Activities for the 178 Commercial Banks in Palestine (percentage) 7.13 The Growth of Assets of Palestinian Islamic Banks 220 xxviii
7.14 The Growth of Assets of Palestinian Islamic Banks (Millions) 221 7.15 The Growth Percentage of Assets of Palestinian Islamic Banks 221 (percentage) 7.16 The Growth Rate Percentage of Assets of Palestinian Islamic 222 Banks xxix
LIST OF ABBREVIATIONS AD AAOFI AIB AILD BC CII CRR EDI GCC GNP HIB IDB IFC JD KMO KTF PCA PIB PLC PLO GDP PLS PLS PMA Anno Domini (indicate dates after birth of the Christ) Accounting and Auditing Organization For Islamic Banks Arab Islamic Bank Arabian Institution of Lending and Development Before Christ Council of Islamic Ideology Cash Reserve Ratio Economic Development Institution Gulf Cooperation Council Gross National Product Handbook of Islamic Banking Islamic Development Bank International Finance Corporation Jordan Dinar Kaiser-Meyer - Oklin Kuwait Treasury Fund Palestinian Currency Authority Palestinian Islamic Bank Palestinian Legislative Council Palestinian Liberation Organization Gross Demos tic Product Profit and Loss Sharing Profit-Loss Sharing Palestinian Monetary Authority xxx
PNA PSE PTF PTFC SLRR SMI SPV SRR TDI UNRWA WBGS Palestinian National Authority Palestinian Securities Exchange Palestinian Treasury Fund Palestinian Treasury Fund Company Statutory Liquidity Requirement Ratios Small and Medium Enterprise Special Purpose Vehicle Supplementary Reserve Ratio Technical Development Institution United Nation Relief and Works Agency West Bank and Gaza Strip xxxi