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Bank

An organization, usually a corporation, chartered by a state or federal government, which

does most or all of the following: receives demand deposits and time deposits, honors,
instruments drawn on them, and pays interest on them; discounts notes, makes loans, and
invests in securities; collects checks, drafts, and notes; certifies depositor's checks; and
issues drafts and cashier's checks.
Islamic banking

Islamic banking refers to a system of banking or banking activity that is consistent with
the principles of Islamic law (Sharee'ah) and its practical application through the
development of Islamic economics. Sharia prohibits the payment or acceptance of interest
fees for the lending and accepting of money respectively, (Riba, usury) for specific terms,
as well as investing in businesses that provide goods or services considered contrary to its
principles (Haraam, forbidden). While these principles were used as the basis for a
flourishing economy in earlier times, it is only in the late 20th century that a number of
Islamic banks were formed to apply these principles to private or semi-private
commercial institutions within the Muslim community.

History of Islamic banking

Classical Islamic banking

During the Islamic Golden Age, early forms of proto-capitalism and free markets were
present in the Caliphate, where an early market economy and an early form of
mercantilism were developed between the 8th-12th centuries, which some refer to as
"Islamic capitalism". A vigorous monetary economy was created on the basis of the
expanding levels of circulation of a stable, high-value currency (the dinar) and the
integration of monetary areas that were previously independent.

A number of innovative concepts and techniques were applied in early Islamic banking,
including bills of exchange, the first forms of partnership (mufawada) such as limited
partnerships (mudaraba), and the earliest forms of capital (al-mal), capital accumulation

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(nama al-mal), cheques, promissory notes, trusts (see Waqf), startup companies,
transactional accounts, loaning, ledgers and assignments. Organizational enterprises
similar to corporations independent from the state also existed in the medieval Islamic
world, while the agency institution was also introduced during that time. Many of these
early capitalist concepts were adopted and further advanced in medieval Europe from the
13th century onwards.

Riba

The word "Riba" means excess, increase or addition, which correctly interpreted
according to Shariah terminology, implies any excess compensation without due
consideration (consideration does not include time value of money). The definition of
riba in classical Islamic jurisprudence was "surplus value without counterpart", or "to
ensure equivalency in real value", and that "numerical value was immaterial." During this
period, gold and silver currencies were the benchmark metals that defined the value of all
other materials being traded. Applying interest to the benchmark itself (ex natura sua)
made no logical sense as its value remained constant relative to all other materials: these
metals could be added to but not created (from nothing).

Applying interest was acceptable under some circumstances. Currencies that were based
on guarantees by a government to honor the stated value (i.e. fiat currency) or based on
other materials such as paper or base metals were allowed to have interest applied to
them. When base metal currencies were first introduced in the Islamic world, no jurist
ever thought that "paying a debt in a higher number of units of this fiat money was riba"
as they were concerned with the real value of money (determined by weight only) rather
than the numerical value. For example, it was acceptable for a loan of 1000 gold dinars to
be paid back as 1050 dinars of equal aggregate weight (i.e., the value in terms of weight
had to be same because all makes of coins did not carry exactly similar weight).

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Modern Islamic banking

Interest-free banking seems to be of very recent origin. The earliest references to the
reorganisation of banking on the basis of profit sharing rather than interest are found in
Anwar Qureshi (1946), Naiem Siddiqi (1948) and Mahmud Ahmad (1952) in the late
forties, followed by a more elaborate exposition by Mawdudi in 1950 (1961).2
Muhammad Hamidullah’s 1944, 1955, 1957 and 1962 writings too should be included in
this category. They have all recognised the need for commercial banks and the evil of
interest in that enterprise, and have proposed a banking system based on the concept of
Mudarabha - profit and loss sharing.

In the next two decades interest-free banking attracted more attention, partly because of
the political interest it created in Pakistan and partly because of the emergence of young
Muslim economists. Works specifically devoted to this subject began to appear in this
period. The first such work is that of Muhammad Uzair (1955). Another set of works
emerged in the late sixties and early seventies. Abdullah al-Araby (1967), Nejatullah
Siddiqi (1961, 1969), al-Najjar (1971) and Baqir al-Sadr (1961, 1974) were the main
contributors.3

Early seventies saw the institutional involvement. Conference of the Finance Ministers of
the Islamic Countries held in Karachi in 1970, the Egyptian study in 1972, First
International Conference on Islamic Economics in Mecca in 1976, International
Economic Conference in London in 1977 were the result of such involvement. The
involvement of institutions and governments led to the application of theory to practice
and resulted in the establishment of the first interest-free banks. The Islamic
Development Bank, an inter-governmental bank established in 1975, was born of this
process.

The first modern experiment with Islamic banking was undertaken in Egypt under cover
without projecting an Islamic image—for fear of being seen as a manifestation of Islamic
fundamentalism that was anathema to the political regime. The pioneering effort, led by

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Ahmad Elnaggar, took the form of a savings bank based on profit-sharing in the Egyptian
town of Mit Ghamr in 1963. This experiment lasted until 1967 (Ready 1981), by which
time there were nine such banks in the country.

History of Western Banks

The first banks were probably the religious temples of the ancient world, and were
probably established in the third millennium B.C. Banks probably predated the invention
of money. Deposits initially consisted of grain and later other goods including cattle,
agricultural implements, and eventually precious metals such as gold, in the form of easy-
to-carry compressed plates. Temples and palaces were the safest places to store gold as
they were constantly attended and well built. As sacred places, temples presented an extra
deterrent to would be thieves. There are extant records of loans from the 18th century BC
in Babylon that were made by temple priests/monks to merchants.

Capitalism

Around the time of Adam Smith (1776) there was a massive growth in the banking
industry. Within the new system of ownership and investment, the state's role as an
economic factor changed substantially.

Global banking

In the 1970s, a number of smaller crashes tied to the policies put in place following the
depression, resulted in deregulation and privatization of government-owned enterprises in
the 1980s, indicating that governments of industrial countries around the world found
private-sector solutions to problems of economic growth and development preferable to
state-operated, semi-socialist programs. This spurred a trend that was already prevalent in
the business sector, large companies becoming global and dealing with customers,
suppliers, manufacturing, and information centres all over the world.

History of financial crisis

The financial crisis of 2007–present, or the Great Recession as it is now starting to be

called by some, is a crisis triggered by an insolvent United States banking system. It has

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resulted in the collapse of large financial institutions, the bailout of banks by national
governments and downturns in stock markets around the world. In many areas, the
housing market has also suffered, resulting in numerous evictions, foreclosures and
prolonged vacancies. It is considered by many economists to be the worst financial crisis
since the Great Depression of the 1930s. It contributed to the failure of key businesses,
declines in consumer wealth estimated in the trillions of U.S. dollars, substantial financial
commitments incurred by governments, and a significant decline in economic activity.
Many causes have been proposed, with varying weight assigned by experts. Both market-
based and regulatory solutions have been implemented or are under consideration, while
significant risks remain for the world economy over the 2010–2011 periods. The collapse
of a global housing bubble, which peaked in the U.S. in 2006, caused the values of
securities tied to real estate pricing to plummet thereafter, damaging financial institutions
globally. Questions regarding bank solvency, declines in credit availability, and damaged
investor confidence had an impact on global stock markets, where securities suffered
large losses during late 2008 and early 2009. Economies worldwide slowed during this
period as credit tightened and international trade declined. Critics argued that credit
rating agencies and investors failed to accurately price the risk involved with mortgage-
related financial products, and that governments did not adjust their regulatory practices
to address 21st century financial markets. Governments and central banks responded with
unprecedented fiscal stimulus, monetary policy expansion, and institutional bailouts.

Background and causes

The immediate cause or trigger of the crisis was the bursting of the United States housing
bubble which peaked in approximately 2005–2006. High default rates on "subprime" and
adjustable rate mortgages (ARM) began to increase quickly thereafter. An increase in
loan packaging, marketing and incentives such as easy initial terms and a long-term trend
of rising housing prices had encouraged borrowers to assume difficult mortgages in the
belief they would be able to quickly refinance at more favorable terms. However, once
interest rates began to rise and housing prices started to drop moderately in 2006–2007 in
many parts of the U.S., refinancing became more difficult. Defaults and foreclosure

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activity increased dramatically as easy initial terms expired, home prices failed to go up
as anticipated, and ARM interest rates reset higher.

Boom and collapse of the shadow banking system

In a June 2008 speech, President and CEO of the NY Federal Reserve Bank Timothy
Geithner — who in 2009 became Secretary of the United States Treasury — placed
significant blame for the freezing of credit markets on a "run" on the entities in the
"parallel" banking system, also called the shadow banking system. These entities became
critical to the credit markets underpinning the financial system, but were not subject to
the same regulatory controls. Further, these entities were vulnerable because they
borrowed short-term in liquid markets to purchase long-term, illiquid and risky assets.
This meant that disruptions in credit markets would make them subject to rapid
deleveraging, selling their long-term assets at depressed prices. He described the
significance of these entities:

Financial markets impacts

Impacts on financial institutions

2007 bank run on Northern Rock, a UK bank

The International Monetary Fund estimated that large U.S. and European banks lost more
than $1 trillion on toxic assets and from bad loans from January 2007 to September 2009.
These losses are expected to top $2.8 trillion from 2007-10. U.S. banks losses were
forecast to hit $1 trillion and European bank losses will reach $1.6 trillion. The IMF
estimated that U.S. banks were about 60 percent through their losses, but British and
eurozone banks only 40 percent. One of the first victims was Northern Rock, a medium-
sized British bank. The highly leveraged nature of its business led the bank to request
security from the Bank of England. This in turn led to investor panic and a bank run in
mid-September 2007. Calls by Liberal Democrat Shadow Chancellor Vince Cable to
nationalise the institution were initially ignored; in February 2008, however, the British
government (having failed to find a private sector buyer) relented, and the bank was

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taken into public hands. Northern Rock's problems proved to be an early indication of the
troubles that would soon befall other banks and financial institutions.

Initially the companies affected were those directly involved in home construction and
mortgage lending such as Northern Rock and Countrywide Financial, as they could no
longer obtain financing through the credit markets. Over 100 mortgage lenders went
bankrupt during 2007 and 2008. Concerns that investment bank Bear Stearns would
collapse in March 2008 resulted in its fire-sale to JP Morgan Chase. The crisis hit its peak
in September and October 2008. Several major institutions either failed, were acquired
under duress, or were subject to government takeover. These included Lehman Brothers,
Merrill Lynch, Fannie Mae, Freddie Mac, Washington Mutual, Wachovia, and AIG.

Effects on the global economy

Global effects

A number of commentators have suggested that if the liquidity crisis continues, there
could be an extended recession or worse. The continuing development of the crisis has
prompted in some quarters fears of a global economic collapse although there are now
many cautiously optimistic forecasters in addition to some prominent sources who remain
negative. The financial crisis is likely to yield the biggest banking shakeout since the
savings-and-loan meltdown. Investment bank UBS stated on October 6 that 2008 would
see a clear global recession, with recovery unlikely for at least two years. Three days later
UBS economists announced that the "beginning of the end" of the crisis had begun, with
the world starting to make the necessary actions to fix the crisis: capital injection by
governments; injection made systemically; interest rate cuts to help borrowers. The
United Kingdom had started systemic injection, and the world's central banks were now
cutting interest rates. UBS emphasized the United States needed to implement systemic
injection. UBS further emphasized that this fixes only the financial crisis, but that in
economic terms "the worst is still to come". UBS quantified their expected recession
durations on October 16: the Eurozone's would last two quarters, the United States' would
last three quarters, and the United Kingdom's would last four quarters. The economic

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crisis in Iceland involved all three of the country's major banks. Relative to the size of its
economy, Iceland’s banking collapse is the largest suffered by any country in economic
history. At the end of October UBS revised its outlook downwards: the forthcoming
recession would be the worst since the Reagan recession of 1981 and 1982 with negative
2009 growth for the U.S., Eurozone, UK; very limited recovery in 2010; but not as bad as
the Great Depression. The Brookings Institution reported in June 2009 that U.S.
consumption accounted for more than a third of the growth in global consumption
between 2000 and 2007. "The US economy has been spending too much and borrowing
too much for years and the rest of the world depended on the U.S. consumer as a source
of global demand." With a recession in the U.S. and the increased savings rate of U.S.
consumers, declines in growth elsewhere have been dramatic. For the first quarter of
2009, the annualized rate of decline in GDP was 14.4% in Germany, 15.2% in Japan,
7.4% in the UK, 18% in Latvia, 9.8% in the Euro area and 21.5% for Mexico.

Some developing countries that had seen strong economic growth saw significant
slowdowns. For example, growth forecasts in Cambodia show a fall from more than 10%
in 2007 to close to zero in 2009, and Kenya may achieve only 3-4% growth in 2009,
down from 7% in 2007. According to the research by the Overseas Development
Institute, reductions in growth can be attributed to falls in trade, commodity prices,
investment and remittances sent from migrant workers (which reached a record $251
billion in 2007, but have fallen in many countries since). By March 2009, the Arab world
had lost $3 trillion due to the crisis. In April 2009, unemployment in the Arab world is
said to be a 'time bomb'. In May 2009, the United Nations reported a drop in foreign
investment in Middle-Eastern economies due to a slower rise in demand for oil. In June
2009, the World Bank predicted a tough year for Arab states. In September 2009, Arab
banks reported losses of nearly $4 billion since the onset of the global financial crisis.

PROBLEM DUE TO INTREST BANKING

Global financial stability has been shaken and America is facing a growing economic
crisis that could make the 1930s look like “good times.” The U.S. banking system is on

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the verge of disaster, as banks have recorded over $100 billion in losses, with hundreds of
billions more forecasted.

Simply put, America’s banks are staring into a financial abyss.

What started with subprime mortgage losses in 2007 is now growing into a full-blown
financial crisis. Consider just one example. As of January 2008, Stockton, Calif. (pop.
280,000), had 4,200 homes in default or foreclosure, with bad loans totaling a staggering
$1.4 billion. According to CBS News, Stockton has gone from being one of the hottest
real estate markets to the foreclosure capital of America. Prices of homes in the city have
dropped as much as 70%.

In many of the nation’s cities, towns and smaller communities, Stockton-like scenarios
are playing out. Banks are busy auctioning off houses at “fire sale” prices.

And the news keeps growing worse. Once proud banking titans Merrill Lynch and
Citigroup had to look to investments from Asian and Middle Eastern governments
(through “Sovereign-Wealth Funds”) to shore up their balance sheets. They were rescued
by life-saving injections of $6.6 billion and $14.5 billion, respectively. European banks
have also been affected, as Swiss, German, French and British banks have suffered
billions of dollars in losses.

The losses are not confined to banks alone. One of the world’s largest insurance
companies, American International Group, recently reported losses from the mortgage
crisis of up to $5 billion—up from a previous estimate of $2 billion. This may be a sign
of coming reassessments by others as the crisis intensifies.

At a meeting of the G7 finance leaders, German Finance Minister Peer Steinbrueck stated
that the G7 feared losses from the subprime mortgages could reach as high as $400
billion (nearly as large as the entire economy of Holland, ranked 16th worldwide).
Highlighting the gravity of the economic situation, U.S. Treasury Secretary Hank Paulson
described it as “challenging and uncertain.”

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A deadly combination of the credit crunch, the collapsing housing market, increasing
energy prices, and the threat of rising inflation are rapidly weakening America’s
economy.

The crisis threatens to engulf banks and other financial institutions, affecting pension
funds, mutual funds and insurance companies. The situation is so grave that President
George W. Bush and the Federal Reserve (the Fed) have implemented unprecedented
emergency measures, including stimulus plans, tax rebates and interest rate freezes, in an
effort to prevent total collapse. The stability of the global economy is at stake.

Solution of Financail Crisis through Islamic Finance System:

Islamic Finance has emerged in recent decades as one of the most important trends in the
financial world. There has always been a demand among Muslims for financial products
and services that conform to the Shariah (Islamic law). With the development of viable
Islamic alternatives to conventional finance, Muslims are beginning to find Shariah
compliant solutions to their financial needs.

The Islamic banking system may just be the answer to the zero-sum game of capitalism.

Published by John Wiley & Sons (Asia) Pte Ltd, Islamic Money & Banking: Integrating
Money in Capital Theory (ISBN: 978-0-470-82319-4) seeks to prove that Islamic
economics, in general, and Islamic banking, in particular – with their premises of
cooperation among individuals, and ultimate goal of justice – are the answers to restoring
positive synergy to the ailing capitalist system. The concept is lauded an effective
solution to check greed and remove the conflict between equity and efficiency.

Islamic Money & Banking presents many new and original ideas that hail the Islamic
Banking system as the path to full employment, stable prices, equitable wealth and
income distribution, and sustained growth, and finally counter-cyclical apparatus built in
the system. It also investigates the nature and functions of money in an interest-less
banking system and then for the first time, integrates money in capital theory.

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This authoritative study is a maverick amongst the existing literature in Islamic Finance
and a must-read for anyone who is interested in this field or in search of an ideal
economic system.

Research Question

Is Islamic banking the solution of financial crisis ?.

Aims & Objectives :

 Our aim is to solve the financial crisis through is Islamic banking system.
 Implement the Islamic system & financial system to get rid off all the crisis that
exist in an economy.
 Through the implementation of banking system support the common person
financially.
 Remove the crisis which exist due to intrest banking.
 Show the intrest banks that islamic banking safe them from financial crisis &
Islamic banking remove their financial problems.

Importance of study of Islamic banking

Islamic Banking, puts profits at hands reach to even small investors who are, generally,
not enabled to trade or do not have the time to do so. Those having significant levels of
capital could reap increases in the value of such sums through investing in the Islamic
Banks which act as Managing Companies. However, these profits would only be reaped
and blessed if the Islamic Banks bind to all the Sharia'h's prescriptions and proscriptions
that are related to Finance and to related ethical considerations.

The first Qur'anic episode regarding collective finance is found in Surah Yusuf. It
discusses the prophet Yusuf (Alayhis Salaam) who economically plans a strategy for the
future consumption of Egypt's crop that was to be harvested in the seven years that were
to follow at that period. The Qur'aan therefore highlighted the concept of long-term

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planning, and as such, had actually advocated an Economical Principle, i.e. presently
saving for future consumption.

The savings however, contextually differ from our situation. This episode concerned
grain that was to be stored after harvesting. Being a commodity, it was not subject, in a
monetary sense, to all the economic factors that affect savings in the form of fiduciary
monetary currencies and token money of the past decades. The latter are affected by
political & economic factors like devaluation, inflation and the forces of supply and
demand.

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LITERATURE REVIEW
Brand management is an area of increasing importance to marketers today, particularly as
organizations attempts to communicate the ever complex and intangible messages as part

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of brand management strategies (Davis, 2000; Good child & Callow, 2001). One of the
many interesting questions facing today’s brand managers concerns how to develop a
better understanding of the appropriate relationship between constructs such as
relationship marketing and brand loyalty, particularly in relation to the myriad of known
antecedents to brand loyalty in the marketing literature (Taylor et al., 2004). In this study
we assess the relative importance of many of the known antecedents to brand loyalty,
including overall customer satisfaction.
By having a strong brand, companies not only could facilitate the differentiation of their
offer from the competitors. With branding, financial companies are able to create
customer confidence and loyalty in their performance, exert greater control over
promotion and distribution of the brand, as well as commanding a premium price over the
competitors; all while impacting the valuation of the business (Holverson & Revaz, 2006;
Pass et al., 1995).
The added value that a brand name gives to a product is now commonly referred to as
“brand equity” (Aaker, 1991). Brand name adds value to each of these interested parties
which include the investors, manufacturers, and the retailers. Brand equity and brand
loyalty provides a strong platform for introducing new products and insulates the brand
against competitive attacks. From the perspective of the trade, brand loyalty contributes
to the overall image of the retail outlet. It builds store traffic, ensures consistent volume,
and reduces risk in allocating shelf space (Cobb-Walgren et al., 1995). However, if the
brand has no meaning to the consumer, automatically there wouldn’t be of any value to
the investors, the manufacturer, and the retailer unless there is value to consumer
(Farquhar, 1989; Crimmins, 1992).
Over the past 15 years, a major shift has occurred in the ways that industrial companies
deal with their customers and suppliers (Christopher et al., 1991; Ellram, 1995). This
change has come about as companies have recognized that sustainable competitive
advantage in the global economy increasingly
requires companies to become trusted participants in various networks or sets of strategic
alliances (Morgan & Hunt, 1994). Relationship marketing which is powered by the
employees of an organization has emerged over the years as an exciting area of marketing
that focuses on building long-term relationships among employees who is a proxy to their

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employer and customers that frequent to their business premises. As Gronroos (1993)
observed: establishing a relationship, for example between an employee and a customer,
can be divided into two parts: to attract the customer and to build the relationship with
that customer so that the economic goals of the organization are achieved through that
relationship.

THE RESEARCH MODEL

The Objectives of This Study

a. To determine whether Relationship marketing between Bank Islam staff and their
customers will have any influence on Brand loyalty.
b. To determine whether Relationship marketing within Bank Islam will have any
influence on customer’s overall satisfaction.
c. To determine whether customer Overall satisfaction with Bank Islam employee will
have any influence on Brand loyalty.
d. To determine whether customer Overall satisfaction on Bank Islam employee mediates
the relationship between Relationship marketing and Brand loyalty.

Hypotheses
Hypothesis 1: There is positive relationship between relationship marketing and brand
loyalty.
1a: There is positive relationship between trust and brand loyalty.
1b: There is positive relationship between commitment and brand loyalty.

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1c: There is positive relationship between communication and brand loyalty.
Hypothesis 2: There is a positive relationship between relationship marketing and overall
satisfaction.
H2a: There is a positive relationship between trust and overall satisfaction.
H2b: There is a positive relationship between commitment and overall satisfaction.
H2c: There is a positive relationship between communication and overall satisfaction.
Hypothesis 3: there is a positive relationship between overall satisfaction appeal and
brand loyalty.
Hypothesis 4: Overall satisfaction mediates the relationship between relationship
marketing and brand loyalty.
Research Questions

From the previous discussion, we infer specific research questions for this study, they
are:

a) Does customers trust towards the Bank Islam employee during their interaction
influences Bank Islam Brand Loyalty?
b) Does Bank Islam employee’s commitment towards their customers during
employee/customers interaction influence Bank Islam Brand Loyalty?
c) Does Bank Islam employee’s communications skills delivered during
employee/customers interaction influences Bank Islam Brand Loyalty?
d) Does customer’s overall satisfaction towards Bank Islam employee influences Bank
Islam Brand loyalty?
e) Does customer’s overall satisfaction mediates the relationship between Bank Islam
relationship marketing and Bank Islam Brand loyalty?

METHODOLOGY
The area of study for this research is limited to three Bank Islam business premises
located in Pulau Pinang, Kedah, and Perlis. All the three states are located in the Northern
States of Peninsular Malaysia.

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A structured questionnaire will be distributed by four research assistance at the
entrance/exit of the Bank Islam business premises that was selected for this study.
Questionnaire will be collected right after respondents completed the survey. Thus a non-
response as well as early and late response analysis is not required for this study.
The unit of analysis for this study is individual customers who patronize the Bank Islam
business premises.
Description of Methodology
To have a representative finding, the sampling technique used must be objective. This is
an important effort adopted by most researchers in order to furnish a finding pertinent to
the general. To choose the sample for this study, probability random sampling was used.
A probability sample is necessary if the sample is to be representative of the population
(Reeves, 1992). Therefore, a two-stage sampling technique is employed in this study.
The unit of analysis for this study is individual customers who patronize the Bank Islam
business premises. Studying primary consumer groups permits a more valid and reliable
clarification to the model research in this study. A total number of 500 samples will be
collected from 3 different locations (Bank Islam business premises) in the state of Pulau
Pinang, Kedah, and Perlis. In determining the sample size for this study, sample size
selected was based on 3 considerations. One of the considerations is the criteria set
according to Roscoe’s rule of thumb (Sekaran, 2003) i.e. a sample that is larger than 30
and less than 500 are appropriate for most research, and the size must be several times
larger (10 times or more) for multiple regression analysis to be conducted. For this study,
a survey method is employed. Surveys are a better source of primary data collection in
marketing and social sciences in contrast to observation and experiments (Baker, 2001).
According to Robson (2002), surveys are use in accord with a cross-sectional design, that
is, the collection of information from any given sample of the population only once. The
data are collected using a set of questionnaires or structured interviews with the objective
of generalizing from a sample to a population to determine attitudes and opinions and to
help understand and predict be1havior (Baker, 2001; Mokhlis, 2006). Questionnaires will
be distributed personally to customers who exit Bank Islam business premises and have
had an interaction with any Bank Islam employees.
Population and Sample Size

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Since the mailing list of Bank Islam customers/clients is not made available, a 2-stage
systematic sampling technique will be employed.
Sampling Design
A two-stage sampling technique is employed in this study. During the 1st stage = A
random sampling technique is used to select the Bank Islam business premises. List of
Bank Islam business premises will be retrieved from Bank Islam listing. 2nd stage =
systematic sampling. A skip interval of 2 will be utilized in the selection of Bank Islam
clients as our respondent (Arithmetic progression will be utilized).
Sample
A sample of 480 will be collected (16 items (independent variable) X 10 = 160 samples X
3 locations = 480 samples). To accommodate for non-responses, an additional of 20
samples will be collected. Therefore a total of 500 samples will be collected altogether
for this study. Sample selected was based on 3 considerations:-
a) The first consideration, Sample size selected was based on the criteria set according to
Roscoe’s Rule of Thumb (cited in Sekaran, 2003).
30< sample < 500. The size must be several times larger (10 times or more) for multiple
regression analysis to be conducted.
Therefore, 16 items (questionnaire) X 10 = 160 samples x 3 independent hoteliers – 480
samples.
b) Second considerations, Cohen & Cohen (1977); Sawyer & Ball (1981), believes that
very large sample sizes usually allow even small effects to be statistically significant. It is
especially important with highly powered research designs to measure and report effect
sizes in addition to statistical significance.
Sawyer and Ball (1981) estimated that a proportion of 13% of the explained variance to
effect size values, as a medium effect size for regression analysis. According to Sawyer
and Ball (1981), the medium effect of 13% is sufficient for testing an existing model.
f² = R² = 0.13 = 0.1494
1- R² 1 – 0.13
ŋ* = L+K+1
f²
= 13.62 + 3 + 1

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0.1494
= 117 samples.
Therefore, 117 samples x 3 locations = 351 samples (to be collected) Thus, 500 samples
will be collected to accommodate for non-responses.
c) The third considerations, Issue’s on response rate were covered. Response rate in
Malaysia is between 15% - 30% base on the previous research/study/theses. Therefore,
the samples that will be collected are 500 samples, (The sample size was increased to
23%, to accommodate the non-response rate).
Questionnaire Design
Questionnaire consists of 3 Sections. Section A =Relationship marketing (Caceres &
Paparoidamis, 2007). Section B = Overall customer satisfaction ( Bloemer & Ruyter,
1998). Section C = Brand loyalty
An interval scale data (use for independent variable, mediating variable, and dependent
variable) and a nominal scale data (demographic data) will be collected from the
questionnaire distributed to the hotel guest. A Liker Scale of 1 to 5 will be used to frame
answers in the questionnaire.
Translation Procedure
A back-to-back translation procedure will be utilized. The original instrument in English
was literally translated into Bahasa Malaysia and back to English by a bi-lingual lecturer
from Universiti Teknologi MARA Kampus Kedah. The instrument will be pre-tested for
reliability and language accuracy.
CONCLUSION
To ensure success, it is recommended that Bank Islam follows the suggested model above
to ensure that they significantly improved their overall brand management particularly
building up Brand loyalty among their customers, without losing a large part of their
uniqueness, independence and management control. The essence of Bank Islam
management is to be able to relate relationship marketing through their employee,
customer overall satisfaction, and Brand loyalty as part of their property management. To
do so it requires the management of Bank Islam to spend time, effort and commitment, as
well as to put in some financial resources, blended with management experience and
knowledge of market plus courage to take risks. This venture is achievable and can be

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used as a strategy to speed up corporate growth and success of Bank Islam. The value of
this study lies in the fact that it places the role of brand management firmly in Bank
Islam. The employees of Bank Islam play a key role in enhancing good relationship with
Bank Islam customers and exert considerable influence on the structure and culture of a
company.

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METHODOLOGY
The area of study for this research is limited to three Bank Islam business premises
located in Pulau Pinang, Kedah, and Perlis. All the three states are located in the Northern
States of Peninsular Malaysia.

22
A structured questionnaire will be distributed by four research assistance at the
entrance/exit of the Bank Islam business premises that was selected for this study.
Questionnaire will be collected right after respondents completed the survey. Thus a non-
response as well as early and late response analysis is not required for this study.
The unit of analysis for this study is individual customers who patronize the Bank Islam
business premises.
Description of Methodology
To have a representative finding, the sampling technique used must be objective. This is
an important effort adopted by most researchers in order to furnish a finding pertinent to
the general. To choose the sample for this study, probability random sampling was used.
A probability sample is necessary if the sample is to be representative of the population
(Reeves, 1992). Therefore, a two-stage sampling technique is employed in this study.
The unit of analysis for this study is individual customers who patronize the Bank Islam
business premises. Studying primary consumer groups permits a more valid and reliable
clarification to the model research in this study. A total number of 500 samples will be
collected from 3 different locations (Bank Islam business premises) in the state of Pulau
Pinang, Kedah, and Perlis. In determining the sample size for this study, sample size
selected was based on 3 considerations. One of the considerations is the criteria set
according to Roscoe’s rule of thumb (Sekaran, 2003) i.e. a sample that is larger than 30
and less than 500 are appropriate for most research, and the size must be several times
larger (10 times or more) for multiple regression analysis to be conducted. For this study,
a survey method is employed. Surveys are a better source of primary data collection in
marketing and social sciences in contrast to observation and experiments (Baker, 2001).
According to Robson (2002), surveys are use in accord with a cross-sectional design, that
is, the collection of information from any given sample of the population only once. The
data are collected using a set of questionnaires or structured interviews with the objective
of generalizing from a sample to a population to determine attitudes and opinions and to
help understand and predict be1havior (Baker, 2001; Mokhlis, 2006). Questionnaires will
be distributed personally to customers who exit Bank Islam business premises and have
had an interaction with any Bank Islam employees.

23
Since the mailing list of Bank Islam customers/clients is not made available, a 2-stage
systematic sampling technique will be employed.

RESEARCH DESIGN

Islamic banking refers to a system of banking or banking activity that is consistent with
the principles of Islamic law (Sharia) and its practical application through the
development of Islamic economics. Sharia prohibits the payment or acceptance of interest
fees for the lending and accepting of money respectively, (Riba, usury) for specific terms,
as well as investing in businesses that provide goods or services considered contrary to its
principles (Haraam, forbidden). While these principles were used as the basis for a
flourishing economy in earlier times, it is only in the late 20th century that a number of
Islamic banks were formed to apply these principles to private or semi-private
commercial institutions within the Muslim community.

Principles of islamic banking

Islamic banking has the same purpose as conventional banking except that it operates in
accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on
transactions). The basic principle of Islamic banking is the sharing of profit and loss and
the prohibition of riba (usury). Common terms used in Islamic banking include profit
sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus
(Murabahah), and leasing (Ijarah).

In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the
item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit,
while allowing the buyer to pay the bank in installments. However, the bank's profit
cannot be made explicit and therefore there are no additional penalties for late payment.
In order to protect itself against default, the bank asks for strict collateral. The goods or
land is registered to the name of the buyer from the start of the transaction. This
arrangement is called Murabaha. Another approach is EIjara wa EIqtina, which is
similar to real estate leasing. Islamic banks handle loans for vehicles in a similar way

24
(selling the vehicle at a higher-than-market price to the debtor and then retaining
ownership of the vehicle until the loan is paid).

An innovative approach applied by some banks for home loans, called Musharaka al-
Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower form
a partnership entity, both providing capital at an agreed percentage to purchase the
property. The partnership entity then rents out the property to the borrower and charges
rent. The bank and the borrower will then share the proceeds from this rent based on the
current equity share of the partnership. At the same time, the borrower in the partnership
entity also buys the bank's share of the property at agreed installments until the full equity
is transferred to the borrower and the partnership is ended. If default occurs, both the
bank and the borrower receive a proportion of the proceeds from the sale of the property
based on each party's current equity. This method allows for floating rates according to
the current market rate such as the BLR (base lending rate), especially in a dual-banking
system like in Malaysia.

There are several other approaches used in business transactions. Islamic banks lend their
money to companies by issuing floating rate interest loans. The floating rate of interest is
pegged to the company's individual rate of return. Thus the bank's profit on the loan is
equal to a certain percentage of the company's profits. Once the principal amount of the
loan is repaid, the profit-sharing arrangement is concluded. This practice is called
Musharaka. Further, Mudaraba is venture capital funding of an entrepreneur who
provides labor while financing is provided by the bank so that both profit and risk are
shared. Such participatory arrangements between capital and labor reflect the Islamic
view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced
distribution of income and not allowing lender to monopolize the economy.

Islamic banking is restricted to Islamically acceptable transactions, which exclude those

involving alcohol, pork, gambling, etc. The aim of this is to engage in only ethical
investing, and moral purchasing.

25
In theory, Islamic banking is an example of full-reserve banking, with banks achieving a
100% reserve ratio. However, in practice, this is not the case, and no examples of 100 per
cent reserve banking are observed. Islamic banks have grown recently in the Muslim
world but are a very small share of the global banking system. Micro-lending institutions
founded by Muslims, notably Grameen Bank, use conventional lending practices and are
popular in some Muslim nations, especially Bangladesh, but some do not consider them
true Islamic banking. However, Muhammad Yunus, the founder of Grameen Bank and
microfinance banking, and other supporters of microfinance, argue that the lack of
collateral and lack of excessive interest in micro-lending is consistent with the Islamic
prohibition of usury (riba).

REASON

We choose qualitative method . Because this method is effective and reliable then
the quantitative because we can express our ideas in the form of qualities while we can’t
discuss the quantity of some thing in words.

TECHNIQUE FOR COLLECTING DATA

We collect these data from different sources e.g books, internet, islamic magzines &
different persons. We collect data from website www.trueislamicbanking.com & book
islamic banking system from where we found a lot of principles & history of islamic
banking. We found different articles on islamic banking in weekly magzines.

26
27
Interest-free banking as an idea

Interest-free banking seems to be of very recent origin. The earliest references to the
reorganisation of banking on the basis of profit sharing rather than interest are found in
Anwar Qureshi (1946), Naiem Siddiqi (1948) and Mahmud Ahmad (1952) in the late
forties, followed by a more elaborate exposition by Mawdudi in 1950 (1961).2
Muhammad Hamidullah’s 1944, 1955, 1957 and 1962 writings too should be included in
this category. They have all recognised the need for commercial banks and the evil of
interest in that enterprise, and have proposed a banking system based on the concept of
Mudarabha - profit and loss sharing.

In the next two decades interest-free banking attracted more attention, partly because of
the political interest it created in Pakistan and partly because of the emergence of young
Muslim economists. Works specifically devoted to this subject began to appear in this
period. The first such work is that of Muhammad Uzair (1955). Another set of works
emerged in the late sixties and early seventies. Abdullah al-Araby (1967), Nejatullah
Siddiqi (1961, 1969), al-Najjar (1971) and Baqir al-Sadr (1961, 1974) were the main
contributors.

The coming into being of interest-free banks

The first private interest-free bank, the Dubai Islamic Bank, was also set up in 1975 by a
group of Muslim businessmen from several countries. Two more private banks were founded
in 1977 under the name of Faisal Islamic Bank in Egypt and the Sudan. In the same year the
Kuwaiti government set up the Kuwait Finance House.

However, small scale limited scope interest-free banks have been tried before. One in
Malaysia in the mid-forties4 and another in Pakistan in the late-fifties.5 Neither survived. In
1962 the Malaysian government set up the “Pilgrim’s Management Fund” to help prospective
pilgrims to save and profit.6 The savings bank established in 1963 at Mit-Ghamr in Egypt
was very popular and prospered initially and then closed down for various reasons.7 However
this experiment led to the creation of the Nasser Social Bank in 1972. Though the bank is still
active, its objectives are more social than commercial.8, 9

28
In the ten years since the establishment of the first private commercial bank in Dubai, more
than 50 interest-free banks have come into being. Though nearly all of them are in Muslim
countries, there are some in Western Europe as well: in Denmark, Luxembourg , Switzerland
and the UK. Many banks were established in 1983 (11) and 1984 (13). The numbers have
declined considerably in the following years.10

In most countries the establishment of interest-free banking had been by private initiative and
were confined to that bank. In Iran and Pakistan, however, it was by government initiative
and covered all banks in the country. The governments in both these countries took steps in
1981 to introduce interest-free banking. In Pakistan, effective 1 January 1981 all domestic
commercial banks were permitted to accept deposits on the basis of profit-and-loss sharing
(PLS). New steps were introduced on 1 January 1985 to formally transform the banking
system over the next six months to one based on no interest. From 1 July 1985 no banks
could accept any interest bearing deposits, and all existing deposits became subject to PLS
rules. Yet some operations were still allowed to continue on the old basis. In Iran, certain
administrative steps were taken in February 1981 to eliminate interest from banking
operations. Interest on all assets was replaced by a 4 percent maximum service charge and by
a 4 to 8 percent ‘profit’ rate depending on the type of economic activity. Interest on deposits
was also converted into a ‘guaranteed minimum profit.’ In August 1983 the Usury-free
Banking Law was introduced and a fourteen-month change over period began in January
1984. The whole system was converted to an interest-free one in March 1985.11

Current practices

Generally speaking, all interest-free banks agree on the basic principles. However, individual
banks differ in their application. These differences are due to several reasons including the
laws of the country, objectives of the different banks, individual bank’s circumstances and
experiences, the need to interact with other interest-based banks, etc. In the following
paragraphs, we will describe the salient features common to all banks.

29
Deposit accounts
All the Islamic banks have three kinds of deposit accounts: current, savings and Current
accounts

Savings accounts

Savings deposit accounts operate in different ways. In some banks, the depositors allow the
banks to use their money but they obtain a guarantee of getting the full amount back from the
bank. Banks adopt several methods of inducing their clients to deposit with them, but no
profit is promised. In others, savings accounts are treated as investment accounts but with
less stringent conditions as to withdrawals and minimum balance. Capital is not guaranteed
but the banks take care to invest money from such accounts in relatively risk-free short-term
projects. As such lower profit rates are expected and that too only on a portion of the average
minimum balance on the ground that a high level of reserves needs to be kept at all times to
meet withdrawal demands.

Investment account

Investment deposits are accepted for a fixed or unlimited period of time and the investors
agree in advance to share the profit (or loss) in a given proportion with the bank. Capital is
not guaranteed.

Modes of financing

Banks adopt several modes of acquiring assets or financing projects. But they can be broadly
categorised into three areas: investment, trade and lending.

Investment financing

This is done in three main ways: a) Musharaka where a bank may join another entity to
set up a joint venture, both parties participating in the various aspects of the project in
varying degrees. Profit and loss are shared in a pre-arranged fashion. This is not very
different from the joint venture concept. The venture is an independent legal entity and
the bank may withdraw gradually after an initial period. b) Mudarabha where the bank

30
contributes the finance and the client provides the expertise, management and labour.
Profits are shared by both the partners in a pre-arranged proportion, but when a loss
occurs the total loss is borne by the bank. c) Financing on the basis of an estimated rate
of return. Under this scheme, the bank estimates the expected rate of return on the
specific project it is asked to finance and provides financing on the understanding that at
least that rate is payable to the bank. (Perhaps this rate is negotiable.) If the project ends
up in a profit more than the estimated rate the excess goes to the client. If the profit is less
than the estimate the bank will accept the lower rate. In case a loss is suffered the bank
will take a share in it.

Services

Other banking services such as money transfers, bill collections, trade in foreign
currencies at spot rate etc. where the bank’s own money is not involved are provided on a
commission or charges basis.

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32
Ethical Guidelines

Social researchers work within a variety of economic, cultural, legal and political
settings, each of which influences the emphasis and focus of their research. They also
work within one of several different branches of their discipline, each involving its own
techniques and procedures and its own ethical approach. Many social researchers work in
fields such as economics, psychology, sociology, medicine, whose practitioners have
ethical conventions that may influence the conduct of researchers and their fields. Even
within the same setting and branch of social research, individuals may have different
moral precepts that guide their work. Thus no declaration could successfully impose a
rigid set of rules to which social researchers everywhere should be expected to adhere,
and this document does not attempt to do so. The aim of these guidelines is to enable the
social researcher’s individual ethical judgements and decisions to be informed by shared
values and experience, rather than to be imposed by the profession. The guidelines
therefore seek to document widely held principles of research and to identify the factors
which obstruct their implementation. They are framed in the recognition that, on
occasions, the operation of one principle will impede the operation of another, that social
researchers, in common with other occupational groups, have competing obligations not
all of which can be fulfilled simultaneously. Thus, implicit or explicit choices between
principles will sometimes have to be made. The guidelines do not attempt to resolve these
choices or to allocate greater priority to one of the principles than to another. Instead,
they offer a framework within which the conscientious social researcher should, for the
most part, be able to work comfortably. Where departures from the framework of
principles are contemplated, they should be the result of deliberation rather than of
ignorance.

The guidelines’ first intention is thus to be informative and descriptive rather than
authoritarian or rigidly prescriptive. The case for an educational code of this type is
argued more fully in Jowell (1983). Secondly, they are designed to be applicable as far
as possible to different areas of methodology and application. For this reason the
provisions are fairly broadly drawn. Thirdly, although the principles are framed so as to
have wider application to decisions than to the issues specifically mentioned, the

33
 guidelines are by no means exhaustive. They are written with full acknowledgement
that they will require periodic updating and amendment by the SRA. Fourthly, neither
the principles nor the commentaries are concerned with general written or unwritten
rules or norms such as compliance with the law or the need for probity. The guidelines
restrict themselves as far as possible to matters of specific concern to social research.
How to use these guidelines. This update of the guidelines aims to take account of
suggestions made about the 2002 update. Commentators suggested a variety of ways in
which they could be made more user-friendly, workable in practice and encouraging to
new researchers and students of social research. Consequently the text is divided into
nine sections. The core of the ethical code can be found in Sections 1 to 5. These first
five sections should be approached on three different “levels” of accessibility. Level A
is a simple basic statement of the basic principles of the SRA’s ethical “code”. The next
level – B – expands each of the elements of the basic code to explain why each element
is important to the maintenance of ethical practice and at this level the vital educational
and discursive part of the guidelines are to be found. The emboldened sections in Level
B are particularly useful in pinpointing the essential principles and the dilemmas. These
are followed by short. Commentaries on the conflicts and difficulties inherent in the
operation of the core principles – here the dilemmas of ethical decision making in social
research are raised and considered in detail. Level C contains short annotated
bibliographies for those who wish to pursue the issues or to consult more detailed texts.

The basic ethical principles are interrelated and may well conflict with one another in
certain circumstances. Therefore they need to be considered together; their order of
presentation should not be taken as an order of precedence. The final sections (6
onwards) offer practical advice and guidance for engaging in ethical research and offer
useful contacts and references for further reading that might aid the researcher in making
difficult decisions.

The core principles summarized at this level should not be read or adopted in isolation.
They are highlighted here as a convenient way of alerting the reader to the relevant
content of the full code. The nature of an educational code demands that the fuller

34
versions in Levels B and C be consulted before the reader can be satisfied with these
summary principles on their own.

Obligations to Society

If social research is to remain of benefit to society and the groups and individuals within
it, then social researchers must conduct their work responsibly and in light of the moral
and legal order of the society in which they practice. They have a responsibility to
maintain high scientific standards in the methods employed in the collection and analysis
of data and the impartial assessment and dissemination of findings.

Obligations to Finders and Employer

Researchers’ relationship with and commitments to finders and/or employers should be

clear and balanced. These should not compromise a commitment to morality and to the
law and to the maintenance of standards commensurate with professional integrity.

Obligations to Colleagues

Social research depends upon the maintenance of standards and of appropriate

professional behaviour that is shared amongst the professional research community.

Without compromising obligations to finders/employers, subjects or society at large, this

requires methods, procedures and findings to be open to collegial review. It also requires
concern for the safety and security of colleagues when conducting field research.

Obligations to Subjects

Social researchers must strive to protect subjects from undue harm arising as a
consequence of their participation in research. This requires that subjects’ participation
should be voluntary and as fully informed as possible and no group should be
disadvantaged by routinely being excluded from consideration.

35
OBLIGATIONS OF SOCIETY

The integrity and conduct of social research is dependent upon the cumulative behaviour
of individual researchers and the consequences of their actions in society at large. In
general, researchers have an obligation to conform to the ethical standards of the society
in which they conduct their work. In particular, researchers have an obligation to ensure
that they are informed about the appropriate legislation of the country in which they are
conducting research and how that legislation might affect the conduct of their research.
Researchers should not knowingly contravene such legislation. In most contemporary
societies there are threats to the scope of social enquiry from legislative pressure intended
to protect the rights of individuals. Such legislation may lead to diluted research activity
as a consequence of the fear of litigation. In the course of time case law is likely to
resolve legal uncertainties about acceptable practice, but waiting for test cases can halt
progress and limit the assumed benefits to society of social research activity. Any
dilemmas arising from the contradictions of data protection, human rights and scientific
research legislation can only be resolved by the judgements of individual members of the
research community in the short term. Concern for individual rights needs to be balanced
against the benefits to society that may accrue from research activity. Such ethical
conflicts are inevitable. Above all, however, researchers should not automatically assume
that their priorities are shared by society in general.

Widening the scope of social research

Social researchers should use the possibilities open to them to extend the scope of social
enquiry and communicate their findings, for the benefit of the widest possible
community.

Social researchers develop and use concepts and techniques for the collection, analysis or
interpretation of data. Although they are not always in a position to determine their work
or the way in which their data are ultimately disseminated and used, they are frequently
able to influence these matters (see clause 4.1). Academic researchers enjoy probably the
greatest degree of autonomy over the scope of their work and the dissemination of the

36
results. Even so, they are generally dependent on the decision of funding agencies on the
one hand and journal editors on the other for the direction and publication of their
enquiries. Social researchers employed in the public sector and those employed in
commerce and industry tends to have less autonomy over what they do or how their data
are utilized. Rules of secrecy may apply; pressure may be exerted to withhold or delay
the publication of findings (or of certain findings); inquiries may be introduced or
discontinued for reasons that have little to do with technical considerations. In these cases
the final authority for decisions about an inquiry may rest with the employer or client (see
clause 2.3).

Professional experience in many countries suggests that social researchers are most likely
to avoid restrictions being placed on their work when they are able to stipulate in advance
the issues over which they should maintain control. Government researchers may, for
example, gain agreement to announce dates for publication for various statistical series,
thus creating an obligation to publish the data on the due dates regardless of intervening
political factors. Similarly, researchers in commercial contracts may specify that control
over at least some of the findings (or details of methods) will test in their hands rather
than with their clients. The greatest problems seem to occur when such issues remain
unresolved until the data emerge.

Considering conflicting interests

Social enquiry is predicated on the belief that greater access to well grounded information
will serve rather than threaten the interests of society. Nonetheless, in planning all phases
of an inquiry, from design to presentation of findings, social researchers should consider
the likely consequences for society at large, groups and categories of persons within it,
respondents or other subjects, and possible future research. No generic formula or
guidelines exist for assessing the likely benefit or risk of various types of social enquiry.
Nonetheless, social researchers must be sensitive to the possible consequences of their
work and should as far as possible, guard against predictably harmful effects (see clause
4.4).

37
The fact that information can be misconstrued or misused is not in itself a convincing
argument against its collection and dissemination. All information, whether
systematically collected or not, is subject to misuse and no information can be considered
devoid of possible harm to one interest or another. Individuals may be harmed by their
participation in social inquiries (again see clause 4.4), or group interests may be damaged
by certain findings. A particular district may, for instance, be negatively stereotyped by
an inquiry that finds that it contains a very high incidence of crime. A group interest may
also be harmed by social or political action based on research. For instance, heavier
policing of a district in which crime is found to be high may be introduced at the expense
of lighter policing in low crime districts. Such a move may be of aggregate benefit to
society but to the detriment of some districts.

Social researchers may not be in a position to prevent action based upon their findings.
They should, however, attempt to pre-empt likely misinterpretations and to counteract
them when they occur. But to guard against the use of their findings would be to
disparage the very purpose of much social enquiry.

Pursuing objectivity

While social researchers operate within the value systems of their societies, they should
attempt to uphold their professional integrity without fear or favour. They must also not
engage or collude in selecting methods designed to produce misleading results, or in
misrepresenting findings by commission or omission.

Research can never be entirely objective, and social research is no exception. The
selection of topics for attention may reflect a systematic bias in favour of certain cultural
or personal values. In addition, the employment base of the researcher, the source of
funding and a range of other factors may impose certain priorities, obligations and
prohibitions. Even so, the social researcher is never free of a responsibility to pursue
objectivity and to be open about known barriers to its achievement. In particular social
researchers are bound by a professional obligation to resist approaches to problem
formulation, data collection or analysis, interpretation and publication of results that are

38
likely (explicitly or implicitly) to misinform or to mislead rather than to advance
knowledge.
OBLIGATIONS TO FUNDERS AND EMPLOYERS
Most social research depends on specific prior funding, which carries with it certain
mutual obligations. The general content of a researcher’s obligations may be found
throughout these guidelines. But some specific obligations arise in commissioning
contracts handled at the organizational level, and it is the researcher’s responsibility to
ensure that such commitments do not compromise their own personal ethical and
methodological standards. Employing organizations must in turn bear responsibility for
their employees’ interests Thus they should not accept contractual conditions that are
contingent upon a particular outcome from a proposed inquiry, such as guaranteed
response rates or a previously conceived outcome. But individual researchers should also
consider the personal consequences for themselves. The rest of section 2 is written from
the perspective of positions to be taken by the individual researcher.
Clarifying obligations and roles
Social researchers should clarify in advance the respective obligations of employer or
finder and social researcher; they should, for example, refer the employer or finder to the
relevant parts of a professional code to which they adhere. Reports of findings should
(where appropriate) specify their role.
Assessing alternatives impartially
Social researchers should consider the available methods and procedures for addressing a
proposed inquiry and should provide the finder or employer with an impartial assessment
of the respective merits and demerits of Alternatives.
Guarding privileged information
Social researchers are frequently furnished with information by the finder or employer
who may legitimately require it to be kept confidential. Methods and procedures that
have been utilised to produce published data should not, however, be kept confidential.

39
An essential theme underlying each of the above principles is that a common interest
exists between finders or employer and the social researcher as long as the aim of the
social enquiry is to advance knowledge (see clause 1.1).
Although such knowledge may on occasions be sought for the limited benefit of the
finder or employer, even that cause is best served if the inquiry is conducted in an
atmosphere conducive to high professional standards. The relationship should therefore
be such as to enable social enquiry to be undertaken as objectively as possible (see clause
1.3) with a view to providing information or explanations rather than advocacy.
The independent researcher or consultant appears to enjoy greater latitude than the
employee researcher to insist on the application of certain professional principles. The
relationship between an independent researcher and fonder may be subject to a specific
contract in which roles and obligations may be specified in advance (see Deming, 1972).
Employee researchers’ contracts, by contrast, are not project-specific and generally
comprise an explicit or implicit obligation to accept instructions from the employer. The
employee researcher in the public sector may be restricted further by statutory regulations
covering such matters as compulsory surveys and official secrecy (see clause 4.4). In
reality, however, the distinction between the independent researcher and the employee
researcher is blurred by other considerations. The independent researcher’s discretion to
insist on certain conditions is frequently curtailed by financial constraints and by the
insecurity of the consultant’s status. These problems apply less to the employee
researcher, whose base is generally more secure and whose position is less isolated. The
employee (particularly the researcher in government service) is often part of a community
of researchers who are in a strong position to establish conventions and procedures that
comfortably accommodate their professional goals (see clause 1.1).Relationships with
employers or finders involve mutual responsibilities. The finder or employer is entitled to
expect from social researchers a command of their discipline, candor in relation to limits
of their expertise and of their data (see clause 3.1), and openness about the availability of
more cost-effective approaches to a proposed inquiry, and discretion with confidential
information. Social researchers are entitled to expect from a finder or employer a respect
for their exclusive professional and technical domain and for the integrity of the data.
Whether or not these obligations can be built into contracts or written specifications, they

40
remain preconditions of a mutually beneficial relationship. A conflict of obligations may
occur when the finder of an inquiry wishes to ensure in advance (say in a contract) that
certain results will be achieved, such as a particular finding or a minimum response level
in a voluntary sample survey. By agreeing to such a contract the researcher would be pre-
empting the results of the inquiry by having made implicit guarantees on behalf of
potential subjects as to their propensity to participate or the direction of their response.
To fulfill these guarantees, the researcher would then have to compromise other
principles, such as the principle of informed consent (see clause 4.2). Social researchers
have a responsibility to ensure that the quality of their “product” is maintained. Research
cannot be exempt from quality assurance procedures. High quality research demands high
qualities in ethical standards and a concern to ensure that procedures agreed to at the
design stage are maintained throughout a project.
Above all, social researchers should attempt to ensure that finders and employers
appreciate the obligations that social researchers have not only to them, but also to
society at large, to subjects, to professional colleagues and collaborators. One of the
responsibilities of the social researcher’s professional citizenship, for instance, is to be
open about methods in order that the research community at large can assess, and benefit
from their application. Thus, in so far as is practicable, methodological components of
inquiries should be free from confidentiality restrictions so that they can form part of the
common intellectual property of the profession (see clause 3.2).
Maintaining confidence in research
Social researchers depend upon the confidence of the public. They should in their work
attempt to promote and preserve such confidence without exaggerating the accuracy or
explanatory power of their findings.
Exposing and reviewing their methods and findings
Within the limits of confidentiality requirements social researchers should provide
adequate information about their methods to colleagues to permit procedures, techniques
and findings to be assessed by others. Such assessments should be directed at the
methods themselves rather than at the individuals who selected or used them.

41
Communicating ethical principles
To conduct certain inquiries social researchers need to collaborate with colleagues in
other disciplines, as well as interviewers, clerical staff, students, etc. In these cases social
researchers should make their own ethical principles clear and take account of the ethical
principles of their collaborators.
Each of these principles stems from the notion that social researchers derive their status
and certain privileges of access to data not only by their personal standing but also by
virtue of their professional citizenship. In acknowledging membership of a wider social
research community, they owe various obligations to that community and can expect
consideration from it.
The reputation of social research inevitably depends less on what professional bodies of
social researchers assert about their ethical norms than on the actual conduct of individual
researchers. In considering the methods, procedures, content and reporting of their
enquiries, researchers should therefore try to ensure that they leave a research field in a
state which permits further access by researchers in the future (see clause 4.1). Social
inquiries are frequently collaborative efforts among colleagues of different levels of
seniority and from different disciplines. The reputation and careers of all contributors
need to be taken into account. The social researcher should also attempt to ensure that
social inquiries are conducted within an agreed ethical framework, perhaps incorporating
principles or conventions from other disciplines, and that each contributor’s role is
sufficiently well defined. The World Medical Association’s Declaration of Helsinki
(1975), for instance, gives excellent guidance to researchers working in the field of
medicine. A principle of all scientific work is that it should be open to scrutiny,
assessment and possible validation by fellow scientists. Particular attention should be
given to this principle when using computer software packages for analysis by providing
as much detail as possible. Any perceived advantage of withholding details of techniques
or findings, say for competitive reasons, needs to be weighed against the potential
disservice of such action to the advancement of knowledge. In fact any principled
suggestion about “meeting obligations to colleagues” may be compromised by other
competitive pressures which apply throughout the scientific community: competitive
tendering, scarcity of funding sources, priority disputes etc. There is a delicate balance to

42
be maintained between professional integrity and the need for the autonomous action and
independent judgement of researchers, against accountability for research interventions
which may have consequences for professional colleagues. Some form of independent
ethical review is proposed as the best mechanism for addressing this (see Section 5). This
in itself cannot absolve researchers from addressing moral dilemmas entailed in their
work for themselves, as well as part of a community of peers. One of the most important
but difficult responsibilities of social researchers is that of alerting potential users of their
data to the limits of the reliability and applicability of that data. The twin dangers of
either overstating or understating the validity or degree to which the data can be
generalized are nearly always present. No general guidelines can be drawn except for a
counsel of caution. Confidence in research findings depends critically on their faithful
representation. Attempts by researchers to cover up errors (see Ryten, 1983), or to invite
over-interpretation, may not only rebound on the researchers concerned but also on the
reputation of social research in general (see clause 1.2). The reputation of each is
maintained by the actions of all.
Ensuring safety and minimizing risk of harm to field researchers
Social researchers have a moral obligation to attempt to minimize the risk of physical
and/or mental harm to themselves and to their colleagues from the conduct of research.
Research managers may, in addition, have a legal obligation in terms of health and safety
regulations to ensure that risk to field researchers is minimized.

While it has to be acknowledged that risk is a part of everyday life, it is also certainly the
case that some research activities may place the researcher in the field in some degree of
extra risk of physical and/or mental harm.
Where possible research managers should anticipate the risks and ensure that field
researchers are protected, as far as possible, from dangers in the field.
The qualitative study of dangerous or threatening groups may place the researcher in
some situations of particular personal risk, but all research entailing direct contact with
the public presents a risk potential. Researchers should maintain awareness of such risk to
themselves and their colleagues and make every effort to diminish the dangers.

43
OBLIGATIONS TO SUBJECTS
In a very general sense meeting all of the preceding obligations as well as obligations to
subjects require that care is taken with research design. Poor design and trivial or foolish
studies can waste people’s time and can contaminate the field for future research. Thus
research design in itself raises many ethical considerations. It may be the case that the
general public and potential research subjects do not perceive confidentiality as likely to
be so rigorously maintained as ethical social researchers would like. Even if research
subjects do not perceive any danger to themselves of data disclosure, nevertheless it is the
task of the researcher to maintain principles of confidentiality as far as possible so that
the interests of subjects are protected (See 4.4).
Avoiding undue intrusion
Social researchers must strive to be aware of the intrusive potential of their work. They
have no special entitlement to study all phenomena. The advancement of knowledge and
the pursuit of Information are not.
Some forms of social enquiry may appear to be more intrusive than others. For instance,
statistical samples may be selected without the knowledge or consent of their members;
contact may be sought with subjects without advance warning; questions may be asked
which cause distress or offence; people may be observed without their knowledge; and
information about individuals or groups may be obtained from third parties. In essence,
people may be inconvenienced or aggrieved by enquiries in a variety of ways, many of
which are difficult to avoid or to anticipate although the researcher would be behaving
responsibly by the subsequent seeking of informed consent for participation in the
research (see also clause 1.3).
One way of avoiding inconvenience to potential subjects is to make more use of available
data instead of embarking on a new inquiry. For instance, the preferred option would be
to make greater statistical use of administrative records by conducting secondary analysis
of existing data for which informed consent had been granted. By linking existing
records, valuable social research information may be produced that would otherwise have
to be collected afresh. But there are often issues of confidentiality in linking records
which may affect what can be done. Individual subjects should not be affected by such
uses provided that their identities are protected and that the purpose is statistical, not

44
administrative. On the other hand, subjects who have provided data for one purpose may
object to its subsequent use for another purpose without their knowledge (see clauses 4.3
iii, 4.6. and 4.7). This is particularly sensitive in the case of identified data.
Decisions in such cases have to be based on a variety of competing interests and in the
knowledge that there is no “correct” solution (see clause 4.4). Under the UK Data
Protection Act one can use data collected for one purpose for other statistical and
research purposes without explicit this is assumed to be granted under the process for
collection of the original data. The key concern is that there should be no unanticipated
consequences for the original data subject. As CASs ell (1982b) argues, people can feel
wronged without being harmed by research: they may feel they have been treated as
objects of measurement without respect for their individual values and sense of privacy.
In many of the social enquiries that have caused controversy, the issue has had more to
do with intrusion into subjects’ private and personal domains, or by overburdening
subjects by collecting “too much” information, rather than with whether or not subjects
have been harmed. In some cases a researcher’s attitudes, demeanor or even their latent
theoretical or methodological perspective can be interpreted as doing an injustice to
subjects. Examples include an offhand manner on the part of a survey interviewer or
studies which depend upon some form of social disruption. By exposing subjects to a
sense of being wronged, perhaps by such attitudes, by such approaches, by the methods
of selection or by causing them to acquire self knowledge that they did not seek or want,
social researchers are vulnerable to criticism. Participants’ resistance to future social
enquiries in general may also increase as a consequence of such ‘inconsiderateness’ (see
also clauses 3.1, 4.3c, 4.6 and 4.7). (See Erich 2001 for more explicit examples.)

Obtaining informed consent

Inquiries involving human subjects should be based as far as practicable on the freely
given informed consent of subjects. Even if participation is required by law, it should still
be as informed as possible. In voluntary inquiries, subjects should not be under the
impression that they are required to participate. They should be aware of their entitlement
to refuse at any stage for whatever reason and to withdraw data just supplied.

45
Information that would be likely to affect a subject’s willingness to participate should not
be deliberately withheld, since this would remove from subjects an important means of
protecting their own interests.
Gaining informed consent is a procedure for ensuring that research subjects understand
what is being done to them, the limits to their participation and awareness of any
potential risks they incur. The principle of informed consent from subjects is necessarily
vague, since it depends for its interpretation on unstated assumptions about the amount of
information and the nature of consent required constituting acceptable practice. The
amount of information needed to ensure that a subject is adequately informed about the
purpose and nature of an inquiry is bound to vary from study to study. No universal rules
can be framed. At one extreme it is inappropriate to overwhelm potential subjects with
unwanted and incomprehensible details about the origin and content of a social inquiry.
At the other extreme it is inappropriate to withhold material facts or to mislead subjects
about such matters (see clauses 4.3d and 4.4). The appropriate information requirement
clearly falls somewhere between these positions but its precise location depends on
circumstances. The clarity and comprehensibility of the information provided are as
important as the quantity. An assessment needs to be made of what information is likely
to be material to a subject’s willingness to participate. Examples of what might be
considered appropriate information can be seen in the checklist in Section 7. In selecting
from such a list, the social researcher should consider not only those items that he or she
regards as material, but those which the potential subject is likely to regard as such. Each
party may well have special (and different) interests. As a means of supplementing the
information selected, the social researcher may choose to give potential subjects.
Declaration of their entitlements (see Jowell, 1983) which informs them of their right to
information but leaves the selection of extra details in the subject’s control. Just as the
specification of adequate information varies, so does the specification of adequate
consent. A subject’s participation in a study may be based on reluctant acquiescence
rather than on enthusiastic co-operation. In some cases, the social researcher may feel it is
appropriate to encourage a sense of duty to participate in order to 1minimise volunteer
bias. The boundary between tactical persuasion and duress is sometimes very fine and is
probably easier to recognize in practice than to stipulate.

46
In any event, the most specific generic statement that can be made about adequate
consent is that it falls short both of implied coercion and of full-hearted participation. On
occasions, a “gatekeeper” blocks access to subjects so that researchers cannot approach
them directly without the gatekeeper’s permission. In these cases, social researchers
should not devolve their responsibility to protect the subject’s interests on to the
gatekeeper. They should also be wary of inadvertently disturbing the relationship
between subject and gatekeeper. While respecting the gatekeeper’s legitimate interests
they should adhere to the principle of obtaining informed consent directly from subjects
once they have gained access to them. The principle of informed consent is, in essence,
an expression of belief in the need for truthful and respectful exchanges between social
researchers and human subjects. It is clearly not a precondition of all social enquiry.
Equally it remains an important and highly valued professional norm. The acceptability
of social research depends increasingly not only on technical considerations but also on
the willingness of social researchers to accord respect to their subjects and to treat them
with consideration (see clause 4.1).
A major limitation upon gaining informed consent lies with “vulnerable” populations.
Such groups include children, those with an intellectual disability, or those in a dependent
relationship to the researcher or commissioning body. College students, for example, are
a frequently studied group who may find difficulty in resisting cooperation. In conducting
research with vulnerable populations, extra care must be taken to protect their rights and
ensure that their compliance is freely entered in to. Some would argue that sending a field
researcher to ask a subject to participate in a study does not constitute informed consent
since the researcher is seeking to persuade the subject to participate. The degree of
“persuasion” might be enhanced with vulnerable groups. In order to protect the
researcher from accusations of failing to secure informed consent a practice has grown of
having subjects sign a consent form. While this may serve as some indication that the
subject understands some of the implications of their consent to participate it may also
compromise principles of confidentiality and anonymity – equally valuable an obligation
to subjects (see clause 4.7). Signed consent forms might only be appropriate for
longitudinal and/or more intrusive studies. Both researcher and subject could gain extra
protection from having a witness to the process of informed consent, but this does raise

47
resource implications. In general, researchers should be explicit about their rationale for
gaining consent and upon how “informed” their subjects can be considered to be. It may
be impossible to anticipate all potential harm to the subject from participation in a study –
subjects in clinical trials, for example, are not guaranteed protection from harm. But there
should, at least, be clarity about opt-in and opt-out arrangements, about the length and
degree of commitment required of respondents, and about the precise goals of the
research. Adequate subject de-briefing also seems essential to this last aim.

Modifications to informed consent

As a consequence of data base enhancements and the ‘matching’ or ‘fusion’ of data sets
the probabilities of disclosure of participants’ identities has been increased in recent years
so that it becomes harder to guarantee anonymity. The release of non-anonymous data,
such as in sharing data between governmental agencies when the identities of individuals
could be discovered, should be agreed with participants in advance. This may not be
necessary when there are adequate safeguards to ensure that confidentiality is ensured.
Where technical or practical considerations inhibit the achievement of prior informed
consent from subjects, the spirit of this principle should be adhered to. For example:
a) Respecting rights in observation studies
In observation studies, where behavior patterns are observed without the subject’s
knowledge, social researchers must take care not to infringe what may be referred to as
the “private space” of an individual or group. This will vary from culture to culture.
Where practicable, social researchers should attempt to obtain consent post hoc. In any
event, they should interpret behavior patterns that appear deliberately to make
observation difficult as a tacit refusal of permission to be observed.
b) Dealing with proxies
In cases where a proxy is utilized to answer questions on behalf of a subject, say because
access to the subject is uneconomic or because the subject is too ill or too young to
participate directly, care should be taken not to infringe the ‘private space’ of the subject
or to disturb the relationship between subject and proxy. Where indications exist or
emerge that the subject would object to certain Information being disclosed, such
information must not be sought by proxy.

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c) Secondary use of records
In cases where subjects are not approached for consent because a social researcher has
been granted access, say, to administrative or medical records or other research material
for a new or supplementary inquiry, the custodian’s permission to use the records should
not relieve the researcher from having to consider the likely reactions, sensitivities and
interests of the subjects concerned. Where possible and appropriate, subjects could be
approached afresh for consent to any new enquiry. (Although this is not required under
the UK Data Protection Act as long as there are no additional consequences for the data
subject.) There now exist extremely thorough guidelines for best practice on the
secondary use of data, these should be consulted by all researchers interested in the
sharing, preservation and analysis of archived data (University of Essex and Royal
Statistical Society, 2002).
d) Misleading potential subjects
In studies where the measurement objectives preclude the prior disclosure of material
information to subjects, social researchers must weigh up the likely consequences of any
proposed deception. To withhold material information from, or to misinform, subjects
involves a deceit, whether by omission or commission, temporarily or permanently. Such
manipulation will face legitimate censure and must not be contemplated unless it can be
justified. Instead, consideration should be given to informing subjects in advance that
material information is being withheld, and when or if such information will be disclosed.
A serious problem arises for social researchers when methodological requirements
conflict with the requirement of informed consent. Many cases exist in which the
provision of background information to subjects (say, about the purpose or sponsorship
of a study), or even the process of alerting them to the fact that they are subjects (as in
observation studies), would be likely to produce a change or reaction that would defeat or
interfere with the objective of the measurement. These difficulties may lead social
researchers to waive informed consent and to adopt either covert measurement techniques
or deliberate deception in the interests of accuracy. The principles above urge extreme
caution in these cases and advice social researchers to respect the imputed wishes of the
subjects. Thus, in observation studies or in studies involving proxies, the principle to be
followed is that mere indications of reluctance on the part of an uninformed or

49
unloosening subject should be taken as a refusal to participate. Any other course of action
would be likely to demonstrate a lack of respect for the subject’s interests and to
undermine the relationship between, say, proxy and subject on the one hand, and between
researcher and subject on the other.
The US Office for Protection from Research Risks allows observational research to be
exempt from consent unless:
a) “information obtained is recorded in such a manner that human subjects can be
identified, directly or through identifiers linked to the subjects; and
b) any disclosure of the human subjects’ responses outside the research could reasonably
place the subjects at risk of criminal or civil liability or be damaging to the subjects’
financial standing, employability, or reputation.”
Cultural variations as to what constitutes “public” and what “private” space must be
acknowledged in covert, unobtrusive observational studies. Once established, there can
be no reasonable guarantee of privacy in “public” settings since any one from journalists
to ordinary members of the public may constitute “observers” of such human behavior
and any data collected thereby would remain, in any case, beyond the control of the
subjects observed.

Social enquiries involving deliberate deception of subjects (by omission or commission)

are rare and extremely difficult to defend. Clear methodological advantages exist for
deception in some psychological studies, for instance, where revealing the purpose would
tend to bias the responses. But as Diener and Crandall (1978) have argued, “science itself
is built upon the value of truth”; thus deception by scientists will tend to destroy their
credibility and standing (see clause 3.1). If deception were widely practiced in social
inquiries, subjects would, in effect, be taught not to “trust those who by social contract
are deemed trustworthy and whom they need to trust” (Baumrind 1972).
Nonetheless, it would be as unrealistic to outlaw deception in social enquiry as it would
be to outlaw it in social interaction. Minor deception is employed in many forms of
human contact (tact, flattery etc.) and social researchers are no less likely than the rest of
the population to be guilty of such practices. It remains the duty of social researchers and
their collaborators, however, not to pursue methods of enquiry that are likely to infringe

50
human values and sensibilities. To do so, whatever the methodological advantages, would
be to endanger the reputation of social research and the mutual trust between social
researchers and society which is a prerequisite for much research (see clause 3.1).
Covert observation and any other forms of research which use deception can only be
justified where there is no other ethically sound way of collecting accurate and
appropriate data. If research requires any kind of deception, then only by the clear
demonstration of the benefits of the research can it be justified. In cases where informed
consent cannot be acquired in advance, there is usually a strong case, for the reasons
above, for seeking it post hoc. Once the methodological advantage of covert observation,
of deception, or of withholding information has been achieved, it is rarely defensible to
allow the omission to stand.
Protecting the interests of subjects
Neither consent from the subjects nor the legal requirement to participate absolves the
social researcher from an obligation to protect the subject as far as possible against
potentially harmful effects of participating. The social researcher should try to minimize
disturbance both to subjects themselves and to the subjects’ relationships with their
environment. Social researchers should help subjects to protect their own interests by
giving them prior information about the consequences of participating (see clause 4.2).
Harm to subjects may arise from undue stress through participation, loss of self esteem,
psychological injury or other side effects. Various factors may be important in assessing
the risk benefit ratio of a particular inquiry, such
as the probability of risk, the number of people at risk, the severity of the potential harm,
the anticipated utility of the findings, few of which are usually quantifiable (see Levine,
1978).
The interests of subjects may also be harmed by virtue of their membership of a group or
section of society (see clause 1.2). Consequently social researchers can rarely claim that a
prospective inquiry is devoid of possible harm to subjects. They may be able to claim
that, as individuals,
Subjects will be protected by the device of anonymity. But, as members of a group or
indeed as members of society itself, no subject can be exempted from the possible effects
of decisions based on research. When the probability or potential severity of harm is

51
great, social researchers face a more serious dilemma. A social researcher may, for
instance, be involved in a medical experiment in which risks to subjects of some
magnitude are present. If volunteers can be found who have been told of risks, and if the
researcher is convinced of the importance of the experiment, should he or she nonetheless
oppose the experiment in view of the risk? In these circumstances, probably the best
advice is to seek advice from colleagues and others, especially from those who are not
themselves parties to the study or experiment. The major UK legislation to have a
potential effect in this area is the Human Rights Act 1998 (which came into force in
October 2000). The Act incorporates into UK law rights and freedoms guaranteed by the
European Convention on Human Rights. Strictly it applies to action by “public
authorities” so it should not directly affect research conducted by private and independent
research organizations – unless such work is being carried out on behalf of a Government
department. However, in e-mail communication the Human Rights Unit has suggested
that the full implications of the Act for social research are as yet unclear and untested:
“The Act does not specifically cover issues of research. Some of the Convention rights
may have indirect implications for research policy, but this depends on the individual
case. Whether a particular research organization might be regarded as a ‘public authority’
for the purposes of the Act would also depend very much on the individual
circumstances.” So it is too soon to tell what the likely effects on research practice of
such legislation might be. Further information can be gained directly from the Human
Rights Unit on: http:// www.homeoffice.gov.uk/hract/ In fact, the UK Medical Research
Council have issued a thorough and comprehensive guidance document – Personal
Information in Medical Research – which offers advice of use to all researchers working
with personal data of any kind. This document can be found on: http://
www.mrc.ac.uk/ethics_a.html

Enabling participation
Social researchers have a responsibility to ensure inclusion in research projects of
relevant individuals or groups who might otherwise be excluded for reasons of
communication, disability, comprehension or expense.

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Some people are likely to be excluded from opportunities to take part in research unless
social researchers routinely offer to make arrangements that fit with particular
requirements. What this means in practice is paying attention to the potential need for
language interpretation, signers, or communication aids; potential respondents’
requirements for flexibility in appointment times and length of interviews, and, in some
limited situations, preference for an interviewer of particular gender and/or ethnic
background. Correspondence about research, including invitations and information sheets
should be sent in large print using Plain English and, where relevant,
in minority ethnic group languages, in Braille or on audio cassettes. Some people may
only be able to take part if costs are met for expenses incurred in traveling to venues, or
child/adult care required for their participation.
Such issues should be considered at the design stage of the research. There are resource
implications for research budgets in adopting such strategies, and researchers have a
responsibility to explain the issues to finders. There is increasing understanding of such
obligations among research finders, who also understand how findings are strengthened
by adopting approaches that improve representative ness. There are particular issues in
respect of research involving people with learning difficulties or sensory/communication
impairments, and children, where there is an obligation on the researcher to find the most
appropriate medium of communication to enable participation. Relying solely on verbal
methods of communication is likely to exclude some children, and some disabled people.

Maintaining confidentiality of records

Research data are unconcerned with individual identities. They are collected to answer
questions such as ‘how many?’ or ‘what proportion?’ not ‘who?’ The identities and
records of co-operating (or non-cooperating) subjects must therefore be kept confidential,
whether or not confidentiality has been explicitly pledged.
Data that does not enable identification should not be passed on without consent and
should be stored safely with restricted access. The requirements of data protection and
human rights legislation together with modern computer technology make this principle
harder to maintain with complete security. Researchers must be clear about who should
and who should not be able to gain access to information about identifiable individuals

53
and what grounds are reasonable for them doing so. Data should not routinely be released
to clients (even responsible public authorities) in any form that could identify
respondents, unless explicit consent was given by the respondents and guarantees of
anonymity and/or confidentiality had not been made. Thus, for example, it should be
made clear in “informed consent” information to subjects that complex data sets with
postcodes and other geographic identifiers applied to case records could be used to
identify individuals.
Although it has to be acknowledged that some risk of disclosure is always present,
researchers should at least guarantee that they have taken all reasonable steps to prevent
the disclosure of identities as in 4.7.

Preventing disclosure of identities

Social researchers should take appropriate measures to prevent their data from being
published or otherwise released in a form that would allow any subject’s identity to be
disclosed or inferred. The disclosure of identity in itself represents a potential risk of
harm to a subject. Researchers cannot however be held responsible for any subject that
freely chooses to reveal their participation in a study.
There can be no absolute safeguards against breaches of confidentiality – that is, the
disclosure of identified or identifiable data in contravention of an implicit or explicit
obligation to the source. Respondents should be informed if their data is to be deposited
in a data archive. Data deposited with data archives are usually subject to specific
conditions for deposit and release. Many methods exist for lessening the likelihood of
confidentiality breaches, the first of which is anonymity. Anonymous data should be
distinct from non-disclosure data. Non-disclosure guarantees security. Anonymity helps
to prevent unwitting breaches of confidentiality; as long as data travel incognito, they are
more difficult to attach to individuals or organizations.
Although debatable, there is a case for identifiable data to be granted ‘privileged’ status
in law so that access to them by third parties is legally blocked in the absence of the
permission of the responsible social researchers (or their subjects). Even without such
legal protection, however, it is the social researcher’s responsibility to ensure that the

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identities of subjects are protected even when (or perhaps especially when) under
reassure from authoritative sources to divulge identities (Grinyer 2001).
Neither the use of subject pseudonyms nor anonymity alone is any guarantee of
confidentiality. A particular configuration of attributes can, like a fingerprint, frequently
identify its owner beyond reasonable doubt. So social researchers need to remove the
opportunities for others to infer identities from their data. They may decide to group data
in such as way as to disguise identities (see Boruch & Cecil, 1979) or to employ a variety
of available measures that seek to impede the detection of identities without inflicting
very serious damage to the aggregate dataset (see Flaherty, 1979). Some damage to
analysis possibilities is unavoidable in these circumstances, but it needs to be weighed
against the potential damage to the sources of data in the absence of such action (see
Finney, 1984).
The widespread use of computers is often regarded as a threat to individuals and
organizations because it provides new methods of disclosing and linking identified
records. On the other hand, the social researcher could exploit the impressive capacity of
modern information technology to disguise identities and to enhance data security. Some
subjects may wish their identities to be disclosed in order to maintain “ownership” of the
data (Grinyer 2002) and, while the researcher has a responsibility to present the potential
disadvantages of removing anonymity, they cannot be held responsible for subjects who
choose to disclose their identities themselves. On the other hand the researcher should
certainly resist requests for the identity disclosure of any individual subject or subjects
when such disclosure could lead to the failure to preserve the anonymity of other subjects
who choose not to disclose their identity.

ETHICS COMMITTEES AND IRB’S

With the growth of research governance serious consideration has to be given by
researchers and by research organizations to the use of human subjects review
committees (also known as Ethics Committees, or institutional Review Boards (IRB’s).
In some organizations and research sites, a formal “ethical review” must have taken place
before researchers are allowed to conduct the research. Dilemmas of accountability and
independence may have to be resolved when seeking permission from ethics committees.

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For 41 examples, researchers in the USA have had problems with IRBs being more
concerned about legal threats to the employing organization than with the “benefits to
society” (see Section 1) of the proposed research. Thus ethics committees may serve
more as a means of institutional protection than operating in the interests of either subject
or researcher. Over-protective and bureaucratic procedures can pose a danger of
restricting valuable, particularly innovative, social research methods. Medical or health
service ethics committees may not fully understand the checks and balances of social
research. To illustrate, there may be a difference over what precisely constitutes informed
consent. Medical models can be inappropriate in social settings and vice versa. For
example, allowing an interviewer to attempt to persuade people to take part in a study is
regarded as coercion in social research and, therefore, not regarded as informed consent.
In clinical trials, however, such persuasion is a common feature of subject recruitment.
Where they do not exist researchers should consider the establishment of ethics
committees and the formal checks and safeguards to be gained from using them. In some
areas and with some population types, subjecting a research proposal to a research ethics
committee may be mandatory. In the UK for example any research on NHS staff or
patients must be subject to local and/or regional committees for ethical approval. Even
then, there are some anomalies which leaves a lot of responsibility in the hands of the
researcher – there are no legal penalties or sanctions for not submitting for ethical
approval or for not fulfilling the requirements of the ethics committee even though there
may be organizational penalties for doing so. There are some concerns about both the
competence and the knowledge of some of these committees which can unnecessarily
restrict research activity to the detriment of social scientific progress. Murray L. Wax,
Professor Emeritus of Anthropology at Washington University, Saint Louis, when
testifying before the US National Bioethics Advisory Commission in April 2000 denied
that anthropologists can do much harm to those they study, instead he said the “gravest
ethical problem… is posed by unknowing and overzealous IRBs, and by governmental
regulators attempting to force qualitative ethnographic studies into a biomedical mould.”
This has to be balanced against the need for researchers to accept ethical responsibility
and to be seen to be formally ensuring that ethical obligations are fulfilled. IRB’s in the
USA grew from the need to meet the requirements of the Nuremburg code established as

56
guidelines for human subject research in response to the iniquities of the Nazi era.
Legally they apply only to government research, but most non-governmental
organizations apply the guidelines to their own procedures.

The primary function of an ethics committee is to apply the sorts of ethical standards and
principles discussed in these SRA guidelines, and to maintain some form of institutional
memory for decisions taken and permission given. Many believe that ethics committees
apply only to “interventionist” research such as medical experiments or pharmaceutical
trials. In fact most unrealizable social research is interventionist – interviews and surveys
are interventions in the life of the population studied and so should also be subject to
ethical approval when possible. One key function of an ethics committee may be to
conduct a Project Audit. Thus after approval has been given for the project to be
conducted a follow-up process will confirm whether or not the project has been
completed or abandoned or if there are any difficulties with the study which were not
anticipated in the original application. Some commentators suggest that, since ethical
decision taking may occur throughout the life of a project, ethics committees should
maintain review of the project throughout and not consider their job as merely to cast
ethical judgment at the outset. However, to avoid the ‘big brother’ connotations of such a
supervisory model, ethics committees should instead ensure at the outset ensure that
researchers have established a system for the maintenance of ethical “awareness”
throughout the project to allow for the occurrence of unanticipated ethical problems, or
problems that could not have been foreseen at the outset. Researchers cannot assume that
all ethical problems have been resolved when their project has been endorsed by formal
ethical review. Section 6 provides a list of the sorts of items considered by ethical
approval committees. We offer it separately as an incentive for all researchers to check
against any issues that emerge as worthy of ethical concern during the planning and
design of a research project.

57
VALIDITY & RELIABILITY OF ISLAMIC FINANCE SYSTEM

58
Islamic Finance has emerged in recent decades as one of the most important trends in the
financial world. There has always been a demand among Muslims for financial products
and services that conform to the Shariah (Islamic law). With the development of viable
Islamic alternatives to conventional finance, Muslims are beginning to find Shariah
compliant solutions to their financial needs.
The Islamic banking system may just be the answer to the zero-sum game of capitalism.
Published by John Wiley & Sons (Asia) Pte Ltd, Islamic Money & Banking: Integrating
Money in Capital Theory (ISBN: 978-0-470-82319-4) seeks to prove that Islamic
economics, in general, and Islamic banking, in particular – with their premises of
cooperation among individuals, and ultimate goal of justice – are the answers to restoring
positive synergy to the ailing capitalist system. The concept is lauded an effective
solution to check greed and remove the conflict between equity and efficiency.
Islamic Money & Banking presents many new and original ideas that hail the Islamic
Banking system as the path to full employment, stable prices, equitable wealth and
income distribution, and sustained growth, and finally counter-cyclical apparatus built in
the system. It also investigates the nature and functions of money in an interest-less
banking system and then for the first time, integrates money in capital theory.
This authoritative study is a maverick amongst the existing literature in Islamic Finance
and a must-read for anyone who is interested in this field or
in search of an ideal economic system.

Note: All information provided by you will be used only for research work. Your

59
recognition will keep confidential.

Name:_____________________
Designation:______________________

Organization:
______________________________________________________________

Strongly agree Agree Neutral Disagree Strongly disagree

1 2 3 4 5

No Questionnaires 1 2 3 4 5
Interest and Interest Free
1 Do you prefer Interest-free banking, i.e on the basis of
profit/loss sharing over the interest-oriented banking system?
2 Do you think that interest destabilize the economy?
3 Do you agree with “capitals receive compensation in the form
of interest”?
Financial Crisis
4 Do you think that financial crisis occurred due to interest?
5 Do you think that financial crisis occurred due to the collapse
of major banks?
6 Do you agree that current financial crisis less/not affect
Islamic banking system?
Capitalism and Islam
7 Do you agree that rich is richer and poor is poorer due to
capitalism?
8 Do you agree that capitalism is a solution of financial crisis?
9 Do you think that solution of financial crisis lies in Islamic
system?

Comments:
____________________________________________________________________

60
61
FINANCIAL CRISIS

The term financial crisis is applied broadly to a variety of situations in which some
financial institutions or assets suddenly lose a large part of their value. In the 19th and
early 20th centuries, many financial crises were associated with banking panics, and
many recessions coincided with these panics. Other situations that are often called
financial crises include stock market crashes and the bursting of other financial bubbles,
currency crises, and sovereign defaults. Financial crises directly result in a loss of paper
wealth; they do not directly result in changes in the real economy, may indirectly do so,
notably if a recession or depression follows.

Many economists have offered theories about how financial crises develop and how they
could be prevented. There is little consensus, however, and financial crises are still a
regular occurrence around the world.

Types of financial crisis

Banking crisis

When a bank suffers a sudden rush of withdrawals by depositors, this is called a bank
run. Since banks lend out most of the cash they receive in deposits (see fractional-reserve
banking), it is difficult for them to quickly pay back all deposits if these are suddenly
demanded, so a run may leave the bank in bankruptcy, causing many depositors to lose
their savings unless they are covered by deposit insurance. A situation in which bank runs
are widespread is called a systemic banking crisis or just a banking panic. A situation
without widespread bank runs, but in which banks are reluctant to lend, because they
worry that they have insufficient funds available, is often called a credit crunch. In this
way, the banks become an accelerator of a financial crisis. Examples of bank runs include
the run on the Bank of the United States in 1931 and the run on Northern Rock in 2007.
The collapse of Bear Stearns in 2008 has also sometimes been called a bank run, even

62
though Bear Stearns was an investment bank rather than a commercial bank. The U.S.
savings and loan crisis of the 1980s led to a credit crunch which is seen as a major factor
in the U.S. recession of 1990-91.

Speculative bubbles and crashes

Economists say that a financial asset (stock, for example) exhibits a bubble when its price
exceeds the present value of the future income (such as interest or dividends) that would
be received by owning it to maturity.[4] If most market participants buy the asset primarily
in hopes of selling it later at a higher price, instead of buying it for the income it will
generate, this could be evidence that a bubble is present. If there is a bubble, there is also
a risk of a crash in asset prices: market participants will go on buying only as long as
they expect others to buy, and when many decide to sell the price will fall. However, it is
difficult to tell in practice whether an asset's price actually equals its fundamental value,
so it is hard to detect bubbles reliably. Some economists insist that bubbles never or
almost never occur.[5]

Well-known examples of bubbles (or purported bubbles) and crashes in stock prices and
other asset prices include the Dutch tulip mania, the Wall Street Crash of 1929, the
Japanese property bubble of the 1980s, the crash of the dot-com bubble in 2000-2001,
and the now-deflating United States housing bubble.

International financial crises

When a country that maintains a fixed exchange rate is suddenly forced to devalue its
currency because of a speculative attack, this is called a currency crisis or balance of
payments crisis. When a country fails to pay back its sovereign debt, this is called a
sovereign default. While devaluation and default could both be voluntary decisions of the
government, they are often perceived to be the involuntary results of a change in investor
sentiment that leads to a sudden stop in capital inflows or a sudden increase in capital
flight.

63
Several currencies that formed part of the European Exchange Rate Mechanism suffered
crises in 1992-93 and were forced to devalue or withdraw from the mechanism. Another
round of currency crises took place in Asia in 1997-98. Many Latin American countries
defaulted on their debt in the early 1980s. The 1998 Russian financial crisis resulted in a
devaluation of the ruble and default on Russian government bonds.

Causes and consequences of financial crises

Strategic complementarities in financial markets

Main articles: Strategic complementarity and Self-fulfilling prophecy

It is often observed that successful investment requires each investor in a financial market
to guess what other investors will do. George Soros has called this need to guess the
intentions of others 'reflexivity'. Similarly, John Maynard Keynes compared financial
markets to a beauty contest game in which each participant tries to predict which model
other participants will consider most beautiful. Furthermore, in many cases investors
have incentives to coordinate their choices. For example, someone who thinks other
investors want to buy lots of Japanese yen may expect the yen to rise in value, and
therefore has an incentive to buy yen too. Likewise, a depositor in IndyMac Bank who
expects other depositors to withdraw their funds may expect the bank to fail, and
therefore has an incentive to withdraw too. Economists call an incentive to mimic the
strategies of others strategic complementarity. It has been argued that if people or firms
have a sufficiently strong incentive to do the same thing they expect others to do, then
self-fulfilling prophecies may occur. For example, if investors expect the value of the yen
to rise, this may cause its value to rise; if depositors expect a bank to fail this may cause it
to fail.[14] Therefore, financial crises are sometimes viewed as a vicious circle in which
investors shun some institution or asset because they expect others to do so.

Regulatory failures

Governments have attempted to eliminate or mitigate financial crises by regulating the

financial sector. One major goal of regulation is transparency: making institutions'

64
financial situations publicly known by requiring regular reporting under standardized
accounting procedures. Another goal of regulation is making sure institutions have
sufficient assets to meet their contractual obligations, through reserve requirements,
capital requirements, and other limits on leverage.

Some financial crises have been blamed on insufficient regulation, and have led to
changes in regulation in order to avoid a repeat. For example, the Managing Director of
the IMF, Dominique Strauss-Kahn, has blamed the financial crisis of 2008 on 'regulatory
failure to guard against excessive risk-taking in the financial system, especially in the
US'. Likewise, the New York Times singled out the deregulation of credit default swaps
as a cause of the crisis. However, excessive regulation has also been cited as a possible
cause of financial crises. In particular, the Basel II Accord has been criticized for
requiring banks to increase their capital when risks rise, which might cause them to
decrease lending precisely when capital is scarce, potentially aggravating a financial
crisis.

Fraud

Fraud has played a role in the collapse of some financial institutions, when companies
have attracted depositors with misleading claims about their investment strategies, or
have embezzled the resulting income. Examples include Charles Ponzi's scam in early
20th century Boston, the collapse of the MMM investment fund in Russia in 1994, the
scams that led to the Albanian Lottery Uprising of 1997, and the collapse of Madoff
Investment Securities in 2008.

Many rogue traders that have caused large losses at financial institutions have been
accused of acting fraudulently in order to hide their trades. Fraud in mortgage financing
has also been cited as one possible cause of the 2008 subprime mortgage crisis;
government officials stated on September 23, 2008 that the FBI was looking into possible
fraud by mortgage financing companies Fannie Mae and Freddie Mac, Lehman Brothers,
and insurer American International Group.[26]

65
Contagion

Contagion refers to the idea that financial crises may spread from one institution to
another, as when a bank run spreads from a few banks to many others, or from one
country to another, as when currency crises, sovereign defaults, or stock market crashes
spread across countries. When the failure of one particular financial institution threatens
the stability of many other institutions, this is called systemic risk.

One widely-cited example of contagion was the spread of the Thai crisis in 1997 to other
countries like South Korea. However, economists often debate whether observing crises
in many countries around the same time is truly caused by contagion from one market to
another, or whether it is instead caused by similar underlying problems that would have
affected each country individually even in the absence of international linkages.

Recessionary effects

Some financial crises have little effect outside of the financial sector, like the Wall Street
crash of 1987, but other crises are believed to have played a role in decreasing growth in
the rest of the economy. There are many theories why a financial crisis could have a
recessionary effect on the rest of the economy. These theoretical ideas include the
'financial accelerator', 'flight to quality' and 'flight to liquidity', and the Kiyotaki-Moore
model. Some 'third generation' models of currency crises explore how currency crises and
banking crises together can cause recessions.

Theories of financial crises

Marxist theories

Recurrent major depressions in the world economy at the pace of 20 and 50 years have
been the subject of studies since Jean Charles Léonard de Sismondi (1773–1842)
provided the first theory of crisis in a critique of classical political economy's assumption

66
of equilibrium between supply and demand. Developing an economic crisis theory
become the central recurring concept throughout Karl Marx's mature work. Marx's law of
the tendency for the rate of profit to fall borrowed many features of the presentation of
John Stuart Mill's discussion Of the Tendency of Profits to a Minimum (Principles of
Political Economy Book IV Chapter IV) Empirical and econometric research continue
especially in the world systems theory and in the debate about Nikolai Kondratiev and the
so-called 50-years Kondratiev waves. Major figures of world systems theory, like Andre
Gunder Frank and Immanuel Wallerstein, consistently warned about the crash that the
world economy is now facing. World systems scholars and Kondratiev cycle researchers
always implied that Washington Consensus oriented economists never understood the
dangers and perils, which leading industrial nations will be facing and are now facing at
the end of the long economic cycle which began after the oil crisis of 1973

Minsky's theory

Hyman Minsky has proposed a post-Keynesian explanation that is most applicable to a

closed economy. He theorized that financial fragility is a typical feature of any capitalist
economy. High fragility leads to a higher risk of a financial crisis. To facilitate his
analysis, Minsky defines three approaches to financing firms may choose, according to
their tolerance of risk. They are hedge finance, speculative finance, and Ponzi finance.
Ponzi finance leads to the most fragility.

• for hedge finance, income flows are expected to meet financial obligations in
every period, including both the principal and the interest on loans.
• for speculative finance, a firm must roll over debt because income flows are
expected to only cover interest costs. None of the principal is paid off.
• for Ponzi finance, expected income flows will not even cover interest cost, so the
firm must borrow more or sell off assets simply to service its debt. The hope is
that either the market value of assets or income will rise enough to pay off interest
and principal.

67
Financial fragility levels move together with the business cycle. After a recession, firms
have lost much financing and choose only hedge, the safest. As the economy grows and
expected profits rise, firms tend to believe that they can allow themselves to take on
speculative financing. In this case, they know that profits will not cover all the interest all
the time. Firms, however, believe that profits will rise and the loans will eventually be
repaid without much trouble. More loans lead to more investment, and the economy
grows further. Then lenders also start believing that they will get back all the money they
lend. Therefore, they are ready to lend to firms without full guarantees of success.
Lenders know that such firms will have problems repaying. Still, they believe these firms
will refinance from elsewhere as their expected profits rise. This is Ponzi financing. In
this way, the economy has taken on much risky credit. Now it is only a question of time
before some big firm actually defaults. Lenders understand the actual risks in the
economy and stop giving credit so easily. Refinancing becomes impossible for many, and
more firms default. If no new money comes into the economy to allow the refinancing
process, a real economic crisis begins. During the recession, firms start to hedge again,
and the cycle is closed.

History

The bursting of the South Sea Bubble and Mississippi Bubble in 1720 is regarded as the
first modern financial crisis.

A noted survey of financial crises is This Time is Different: Eight Centuries of Financial
Folly (Reinhart & Rogoff 2009), by economists Carmen Reinhart and Kenneth Rogoff,
who are regarded as among the foremost historians of financial crises. In this survey, they
trace the history of financial crisis back to sovereign defaults – default on public debt, –
which were the form of crisis prior to the 18th century and continue, then and now
causing private bank failures; crises since the 18th century feature both public debt
default and private debt default. Reinhart and Rogoff also class debasement of currency
and hyperinflation as being forms of financial crisis, broadly speaking, because they lead
to unilateral reduction (repudiation) of debt.

68
2007-2010 financial crisis

• Robert J. Shiller (2008), The Subprime Solution: How Today's Global Financial
Crisis Happened, and What to Do About It. ISBN 0691139296.
• JC Coffee, ‘What went wrong? An initial inquiry into the causes of the 2008
financial crisis’ (2009) 9(1) Journal of Corporate Law Studies 1
• Fratianni M., Marchionne F. (2009), The Role of Banks in the Subprime Financial
Crisis available on SSRN: http://papers.ssrn.com/sol3/papers.cfm?
abstract_id=1383473
• Markus Brunnermeier (2009), 'Deciphering the liquidity and credit crunch 2007-
2008'. Journal of Economic Perspectives 23 (1), pp. 77–100.
• Paul Krugman (2008), The Return of Depression Economics and the Crisis of
2008. ISBN 0393071014.
• "The myths about the economic crisis, the reformist left and economic
democracy" by Takis Fotopoulos, The International Journal of Inclusive
Democracy, vol 4, no 4, Oct. 2008.
• Nitasha Kaul (2009), "The economics of turning people into things". Open
Democracy 20 April, Available online http://www.opendemocracy.net/article/the-
economics-of-turning-people-into-things
• Funnell, Warwick N. In government we trust : market failure and the delusions of
privatisation / Warwick Funnell, Robert Jupe and Jane Andrew. Sydney :
University of New South Wales Press, 2009. ISBN 9780868409665 (pbk.)
• Read, Colin, 1959- Global financial meltdown : how we can avoid the next
economic crisis / Colin Read. New York : Palgrave Macmillan, c2009. ISBN
9780230222182
• The American housing crisis / Susan Hunnicutt, book editor. Farmington Hills,
Michigan : Greenhaven Press, c2009. ISBN 9780737743104 (hbk.) ISBN
9780737743098 (pbk.)

69
• United States. Congress. House. Committee on the Judiciary. Subcommittee on
Commercial and Administrative Law. Working families in financial crisis :
medical debt and bankruptcy : hearing before the Subcommittee on Commercial
and Administrative Law of the Committee on the Judiciary, House of
Representatives, One Hundred Tenth Congress, first session, July 17, 2007.
Washington : U.S. G.P.O. : For sale by the Supt. of Docs., U.S. G.P.O., 2008. 277
p. : ISBN 9780160813764 ISBN 016081376X
http://purl.access.gpo.gov/GPO/LPS99198
• Davis Polk Financial Crisis Manual

70
71
Conclusion

The preceding discussion makes it clear that Islamic banking is not a negligible or merely
temporary phenomenon. Islamic banks are here to stay and there are signs that they will
continue to grow and expand. Even if one does not subscribe to the Islamic injunction
against the institution of interest, one may find in Islamic banking some innovative ideas
which could add more variety to the existing financial network.

One of the main selling points of Islamic banking, at least in theory, is that, unlike
conventional banking, it is concerned about the viability of the project and the
profitability of the operation but not the size of the collateral. Good projects which might
be turned down by conventional banks for lack of collateral would be financed by Islamic
banks on a profit-sharing basis. It is especially in this sense that Islamic banks can play a
catalytic role in stimulating economic development. In many developing countries, of
course, development banks are supposed to perform this function. Islamic banks are
expected to be more enterprising than their conventional counterparts. In practice,
however, Islamic banks have been concentrating on short-term trade finance which is the
least risky.

Part of the explanation is that long-term financing requires expertise which is not always
available. Another reason is that there are no backup institutional structures such as
secondary capital markets for Islamic financial instruments. It is possible also that the
tendency to concentrate on short-term financing reflects the early years of operation: it is
easier to administer, less risky, and the returns are quicker. The banks may learn to pay
more attention to equity financing as they grow older.

It is sometimes suggested that Islamic banks are rather complacent. They tend to behave
as though they had a captive market in the Muslim masses who will come to them on

72
religious grounds. This complacency seems more pronounced in countries with only one
Islamic bank. Many Muslims find it more convenient to deal with conventional banks and
have no qualms about shifting their deposits between Islamic banks and conventional
ones depending on which bank offers a better return. This might suggest a case for more
Islamic banks in those countries as it would force the banks to be more innovative and
competitive. Another solution would be to allow the conventional banks to undertake
equity financing and/or to operate Islamic 'counters' or 'windows', subject to strict
compliance with the Shariah rules. It is perhaps not too wild a proposition to suggest that
there is a need for specialized Islamic financial institutions such as mudaraba banks,
murabaha banks and musharaka banks which would compete with one another to
provide the best possible services.

Recommendations
The set of recommendations presented seeks to build the necessary foundations in terms
of capacity building, the provision of infrastructure and regulatory framework
development, to achieve the vision and objectives outlined above. The efforts by BNM
need to be complemented by that of the IBIs and takaful operators to bring about the
crystallization of an efficient, progressive and comprehensive Islamic banking and
takaful industry. The recommendations are therefore designed to focus on three main
areas:
Institutional capacity enhancement
Strategic steps will be taken to prepare the Islamic banking and takaful industry players
to be among the best managed institutions, capable of capitalising on the unique features
of Islamic banking and takaful to achieve significant competitive edge. The
recommendations involve measures to ensure that the scarcity of skilled manpower in
Islamic banking and takaful are adequately addressed. In addition, the development of
management teams and the continuous application of benchmarking to elevate the
performance level will be given due focus.

Vision and Objectives

73
The overall objective is to create an efficient, progressive and comprehensive Islamic
financial system that contributes significantly to the effectiveness and efficiency of the
Malaysian financial sector while meeting the economic needs of the nation. The specific
recommendations are formulated with a view of building the capabilities of IBIs and
takaful operators to compete effectively and to increase the significance of their market
share in the financial system. In addition, the underpinning financial infrastructure needs
to be strengthened to support the expansion of Islamic banking and takaful operations
envisaged. It is envisioned that the Islamic banking and takaful industry landscape in
2010 would evolve in parallel with conventional banking and insurance to achieve the
following:
• Constitute 20% of the banking and insurance market share with an effective
contribution to the financial sector of the Malaysian economy;
• Represented by a number of strong and highly capitalised IBIs and takaful operators
offering a comprehensive and complete range of Islamic financial products and services;
• Underpinned by a comprehensive and conducive Syariah and regulatory framework;
• Supported by a dedicated institution (Syariah commercial court) in the judiciary system
that addresses legal issues related to Islamic banking and takaful;
• Supported by a sufficient number of well-trained, high calibre individuals and
management teams with the required expertise; and
• Epitomise Malaysia as a regional Islamic financial centre.

74
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