Islamic Bank Research Paper

The Globalization and Challenges to Islamic Bank and Finance

The development of the contemporary economy is characterized by the increasing role of the process of globalization. Basically, practically all countries of the world are affected by the process of globalization and the more integrated in the world economy and cooperation countries are the more significant the impact of globalization is. At the same time, it should be said that globalization is an extremely controversial process. On the one hand, it stimulates the economic integration and growing cooperation between different countries of the world. As a result, companies can easily enter international markets and enlarge the presence on the global arena. On the other hand, there is still the question of effects of globalization on national economies, especially those of developing countries. In this respect, it is particularly noteworthy to focus on the impact of globalization on countries of the Middle East, which are predominantly Islamic countries. These countries possess a significant economic potential and, at the present moment, their economy is booming that naturally stimulates the development of financial market of Islamic countries, but still there are certain risks that are traditionally associated with the process of globalization and its impact on Islamic countries of the Middle East. It is important to underline that financial sector and banking system of national economies is particularly susceptible to changes in the global market. In such a situation, it is extremely important to analyze possible effects of globalization on the Islamic bank since, at the present moment, this is the largest and the most significant financial institution which affects the economic development of the country.

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First of all, it should be said that Islamic bank is considerably affected by the process of globalization that, to a significant extent, determined by the current economic trends which inevitable influence all countries of the world. In fact, countries become more and more integrated in the world economy because of their economic potential and their specialization. What is meant here is the fact that countries of the Gulf area, for instance, are traditionally oriented on the export of natural resources, especially oil, which is the main source of the economic prosperity of the Middle East that makes the economies highly dependable on external markets and oil prices.

It should be pointed out that the progress of financial markets was naturally accompanied by the development of the banking system which could operate effectively in the new economic conditions. In such a situation, the necessity to develop the Islamic bank became obvious. Basically, it is possible to estimate that the integration of Islamic countries into the global economy stimulated the development of the national banking system and financial market, while the Islamic bank became the major financial institution. Naturally, such a situation was quite beneficial for national economy because it contributed to the formation of contemporary banking systems and financial markets. Obviously, such a progress provided the possibility to increase the speed and quality of transactions, increase their reliability and, therefore, stimulate business activities in the national economy. It proves beyond a doubt that the development of banking system opened new opportunities for the development of local business because banks could loan money and participate in investment projects that increased the potential of the local economy.

In such a context, it is important to underline that the role of the Islamic bank can hardly be underestimated. In fact, the Islamic bank contributes consistently to the maintenance of stability of the national financial market as well as economy at large. Basically, such a position of the Islamic bank is achieved due to the number of advantages the bank posses. In this respect, it should be said that the Islamic bank uses the strategy of the allocation of financial resources on the basis of profit-and-loss sharing. Such an approach gives the maximum profit for the investments. This fact is extremely important in the contemporary business environment because investments play increasing more important role and the growing amount of direct foreign investments can produce the stimulant effect on the development of the national economy. At the same time, the growth of the national economy will naturally contribute to the stability of the financial market and, therefore, this will strengthen the position of the Islamic bank.

By the way, the stability is another characteristic of the Islamic bank, which may be viewed as one of the major advantages of the bank in the contemporary business environment. In fact, the stability is determined by the minimization of the risk of shocks through the introduction of equity-based system. Moreover, the bank assets are created in response to investment opportunities in the real sector of the economy. In such a way, the Islamic bank focuses on the stimulation of investments which are made in the real sector of the economy. In actuality, this means that such investments contributes to the substantial growth of the national GDP and, what is even more important, the basis for the long-run economic development is created. At the same time, the long-run economic development is a guarantee of the stable financial situation that naturally is beneficial for the Islamic bank. In fact, the deterioration of the marketing performance of national companies or economic crisis will inevitably affect the financial market and, therefore, the stability of the Islamic bank will be under a threat. Consequently, the higher level of investments means the higher level of stability of the economy and the Islamic bank.

The similar effect, i.e. the economic growth, is achieved by the Islamic bank through the substitution of an interest-based system by a system based on profit sharing. However, the Islamic bank shares not only profits but also risks and this fact is of a paramount importance because it contributes consistently to the normal development of the bank and it also improves the public image of the bank and increases the trust of partners in the reliability of the bank. In fact, risk sharing means that the Islamic bank is ready to take responsibilities and it can overcome possible negative effects of external threats, which, by the way, may be provoked by the process of globalization. For instance, there may be the deterioration of the situation in the financial market because of the financial crisis in other countries or in the international markets, but through the risk sharing the Islamic bank takes responsibility for the possible deterioration of the situation in the national market.

In addition, the Islamic bank is focused on the productivity rather than on the credit-worthiness. What is meant here is the fact that the soundness of the business project is more important for the bank than its credit-worthiness. Basically, such a policy may be viewed as a part of the strategy of risk sharing because such a focus on the productivity involves the Islamic bank in the financing of quite daring projects.

At the same time, the Islamic bank pays a lot of attention to the moral and ethical issues. In this respect, it should be said that the maintenance of the positive public image and face of the bank are the major priorities in the development of the bank. On the other hand, the Islamic relies not only on its positive public image, but it readily introduces progressive ideas and technologies. In this respect, it is possible to possible to mention the fact that the bank introduced new accounting standards that meet the high international accounting standards and they increase substantially the effectiveness of the bank accounting system.

Nevertheless, in spite of the considerable progress and significant advantages of the Islamic bank, it should be said that the bank faces certain difficulties, which it has to solve in the nearest future in order to keep progressing. In this respect, it is possible to name the problem of the lack of experts in Islamic banking. In fact, it is a very serious problem, taking into consideration the significance of the factor of human resources in the contemporary business environment. Obviously, highly qualified experts can improves consistently the performance of the Islamic bank, while the lack slows down the progress of the bank and puts in disadvantageous position compared to its major competitors.

By the way, the growing competition is another serious problem, which basically derives from the process of globalization. To put it more precisely, the elimination of fiscal barriers leads to the increasing pressure from the part of other banks and the expansion of foreign banks. As a result, the Islamic bank has to deal with the higher pressure from the part of its competitors.

Thus, in conclusion, it should be said that the process of globalization affects consistently the development of the Islamic bank and exposes the bank to new threats. Nevertheless, at the present moment the position of the Islamic bank is still quite strong and stable.

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