Finance

In banking industry, the key to attract people to put their money in savings is the attractive products, the establishment of branches in an area, joint marketing with other industries and many others. One strategy that retail bank carry out is to establish the shariah unit to target not only Moslem people worldwide but also others.

Concerning the banking industry, this paper will discuss about the main concepts of Islamic finance laws (Shariah) and its comparison to the conventional banking practice. In addition, the focus is on the Islamic financial sector in the Middle East, particularly in the largest 3 active markets of United Arab Emirates, Saudi and Kuwait.

Introduction
Over the century, the conventional banking has been evolving in number of banks and assets as they reach remote areas to target large number of customers. However, the steady development of conventional banking has been tested during the incident of credit crunch period since 2007 that causes some banks to collapse.

At this time of crisis, most economists would believe that the collapse of some of worlds greatest banks is attributable to the global financial crisis. Some observers however, believed that a systemic error that exist within the banks, was partially contributing to the downtrend of these banks growth rates. It is suspected that a failure to perform proper risk management and financial control was also a main cause of these banks decreasing performance quality.

Despite the development of conventional banking practices, within the past two decades, the Islamic banking appears to fulfill the demands of Moslem customers that want to be free of Riba (usury or interest) that conventional banking practices. Concerning these underlying reasons, therefore, the research question for this paper is

As Islamic banks have different characteristics and rule as depicted in Shariah law, how is the level of debt impairment of Islamic Banks during the credit crunch (compared to conventional)

I choose this research statement or question since it may be different from others who only focus on discussing the benefits of Islamic banking without explaining the debt impairment of Islamic Banks during the credit crunch. Therefore, instead of discussing the partial discussion on Islamic banking development, I decide to put emphasis on highlighting the benefits of Islamic banking and its development.

Relation to Previous Research

Shariah law
In the Islamic law concerning the life, in addition to the ban of interests, there are also other laws that Moslem cannot infringe such as drinking alcoholic liquor, gambling, eating pork, pornography and anything else in which in Islamic law (Shariah) this actions considered as Haram (unlawful). Moreover, in Islamic financial banking practice, there are some orders characterizing the development. Some of the features as following
Islam permits individuals to gather their economic well-being. However, Islam makes a strict guidance between what is Halal (lawful) and what is Haram (forbidden).

Islam justifies the ownership of wealth for individuals but Islam obligates their believers to spend a portion of their wealth for the Needy and prohibit them to squander and waste it.

Surplus that Moslems got from any business activity is justified and they can retain it but Islam rule to reduce the margin of the surplus for the benefits of the community as a whole. This kind of social participation is called Zakat.

Islam also prevents the collection of wealth in few people by ruling its laws of inheritance.
In general, the economic system that Islam practices is back to the social justice principle by preventing any attempts that would cause any injurious impact and individually self-destructive
(Islamic Banking, 2008 HSBC, 2009b)

Principle of Islamic Bank
The basic principle of Islamic bank practice is the prohibition of Riba (Usury or interest). In this manner, it means that Islamic banking outlaws not only riba, a term that describes the concept of usury but also the concept of interest. The underlying reasons behind the prohibition of Riba are based on Islamic moral guidance and common sense, which becomes the foundation of many religions in the world, including Islam (Islamic Banking, 2008).

Instead of giving interest to their customers, Islamic banking practice adopts the concept participation in the enterprise where customers will put the funds at risk on a profit-and- loss-sharing basis. However, unlike the investment in conventional stock market, this kind of Islamic banking practice does not exhibit speculative scheme since this risks can be alleviated by conducting diversification of risks, careful investment policy, and proper management by Islamic banking or financial institutions (Islamic Banking, 2008).

Based on this laws, in Shariah concept, profit and loss sharing basis become one key financial transaction. This fair treatment will then distinguishes good performance from the bad and the mediocre. By adopting this financial practice, Islamic banking is encouraged to have better resource management since Islamic banks are built to have a clear differentiation between shareholders capital and clients deposits in order to have fair and correct profit sharing based in Islamic Law (Shariah) (Islamic Banking, 2008).

Research Method
To be precise, this paper employs qualitative approaches to a research. Furthermore, there are two approaches in qualitative research, interviews and observations, but this paper carries out the observations methods, especially we employ non-participant observation method especially by analyzing qualitative information from journals, books, magazines and many more.

The reason we choose observation method is due to the fact observation is an important research tool in which it allows us to observe other people in a natural setting or in a more artificial experimental situation. Moreover, by using observation method we can collect and gather data in natural settings concerning what is really going on in a real-life situation.

The most important of conducting observation is it provides researchers with an understanding about the perceptions about things or people we observe. However, since observation deals with someones perception, we plan to avoid preconceptions since it would provide this research with some bias.

The method does not involve direct interviews, which will slightly reduce objectivity and the accuracy of information. We are retrieving data from experts analysis, journals and various publications from available media. Using the data resources above, we are hoping to present an independent and objective analysis toward the matter of Islamic banking practice.

Reflection
The Islamic banking industry shows tremendous development within the past two decades. However, some of the basic principle that Islamic banking practices have been adopted by conventional financial institutions over the centuries ago. This is obvious as depicted in Islamic Finance a Euromoney Publication (1997) that reveals although the western media sees the Islamic banking just evolve at presents but in fact the practice has been evolved since seventh centuries.

In addition to the prohibition of interests, Islamic banking institutions also carefully collect funds from customers or investors in which they only allow source of funds from lawful business practices. Figure 1 shows the comparison between Islamic and conventional banking practices

Due to the benefits of practicing the Islamic banking, many retail banking start offering the Shariah unit of their banking practice. HSBC, for example, have presented a Shariah unit of their bank. According to Iqbal Khan, formerly the founding CEO of HSBC Amanah and now become Chief Executive of Fajr Capital, reveals that Islamic finance becomes a fastest financial service that continues exhibiting the positive growth within the past two decades (Zawya, 2009). The reason is clear since Moslem population holds the second largest population in the world (Figure 2).

HSBC Amanah ( HYPERLINK httpwww.hsbcamanah.com www.hsbcamanah.com), for example, also has appetite to expand into foreign markets that have majority of Moslem population. HSBC Amanah, says that the presence of HSBC Amanah currently exist in Qatar, UAE, Indonesia, Brunei, Bangladesh, Saudi Arabia, Malaysia, UK, US and Turkey and other countries will follow (HSBC, 2009a).

The attractive market of Islamic financing in Moslem countries, HSBC immediately expand into offices Dubai in which at first the development of Islamic Bank was only existed in several Arab countries. But as the benefits and offering of Islamic Banks are attractive, the phenomenon of Islamic Banking shows tremendous growth not only in Moslem countries but also in other part of the world.
 
For Islamic banks, innovation also becomes significant factors in the development of the banks. This is because in developing products and services for Islamic banks, they should carefully plan the products and discuss it with the government and Council of Ulamas. Ulamas are considered as collective name that become top class of religious officials in Islam that composes of scholars and other Moslem who understand the Islamic law.

Among the services that are common in Islamic Bank is for personal and business. For personal services, the offering usually covers personal loans, home and vehicle financing, and also investments. Meanwhile, for corporate accounts, the services include investments, trade services etc. Figure 4 shows many kinds of personal and business services that HSBC Amanah offers to customers.

The Fall of Lehman Brothers
The global crisis that hit the financial industry has brought down the Lehman Brothers to file for bankruptcy. This becomes the largest victim of the global credit crisis and forces the institutions to sell its investment management business and put the company to be the biggest investment bank to collapse since 1990 (the case of Drexel Burnham Lambert). The case of Lehman Brothers represents the bankruptcy worth 639 billion at the end of May far surpassing the WorldCom bankruptcy that accounts for 107 billion when the telecommunication company file for bankruptcy protection in 2002 (Paulson, 2008).

Since the fall of conventional banking sector due to the exposure to risks, Islamic banks avoid to the complex debt-based structures and rely heavily on the retail deposits and financed real estate, private equity, and equities. In other words, Islamic banks have never been exposed to the risks that have affected their conventional counterparts (Syed Imad-ud-Din Asad, 2009).

This case of inability to pay debt also occurs in the case of Al-Gosaibi where the company has defaulted debt more than 15 billion. This situation asks Saudi Arabias central bank to buy up the debt but the governor asserts that they would not buy up debts.

Conclusion
Islamic banking is viewed as way out in managing the crisis as the nature of the Islamic banking practice. Concerning the issue, this paper has elaborated about the main concepts of Islamic finance laws (Shariah) and its comparison to the conventional banking practice. In addition, the focus is on the Islamic financial sector in the Middle East, particularly in the largest 3 active markets of United Arab Emirates, Saudi and Kuwait. The success practice is performed by HSBC that open their Sharia unit called HSBC Amanah.