Finance

Santander Bank



















Table of Contents
1.0INTRODUCTION ........................................................................................................................................ 3
2.0 The Capital Markets ................................................................................................................................ 4
2.1Significance Of capital markets ................................................................................................................ 5
2.2Capital Markets and associated Risks ...................................................................................................... 5
3.The rise of Islamic capital markets ............................................................................................................. 6
4.0Concerns for the Islamic capital market .................................................................................................. 6
4.1Transactional Cost Factors ....................................................................................................................... 7
4.2 Regulatory bodies ................................................................................................................................... 7
4.3The product basket Limitations ............................................................................................................... 7
4.4Compliance with rules ............................................................................................................................. 7
4.5 The Clash with Investment Banking ........................................................................................................ 8
4.6 Development of Trained professionals ................................................................................................... 8
4.7 Awareness of investors for growth and development ........................................................................... 8
4.8Need for spread of knowledge ................................................................................................................ 8
5.0 The correlation between the Islamic Finance, global recession and instability ..................................... 9
5.1Introduction ............................................................................................................................................. 9
5.2The prime causes of global economic downfall and recession ............................................................... 9
5.3. The Islamic Financial System ................................................................................................................ 10
6.0Conclusion .............................................................................................................................................. 13







1.0INTRODUCTION
Islam happens to be one of the oldest, profound and most widespread of all the religions of
the world. It is one of those religions which has enlightened and touched upon all the various
spheres of human life be it social or cultural, economic or political. Islam literally means, to
submit oneself to the will of the almighty. Islam preaches that in order to lead a complete and
peaceful life one should lead life according to His Divine Laws .It centers on the basic idea
of monotheism and regards Allah (God) as the supreme power and man is his representative
on earth. Quran was his final message to mankind that was mediated by the enlightened soul
of Prophet Muhammad and it took him 23 years. The holy Quran is regarded as the purest
form of Gods word unlike most other religious scriptures.


The Sharia Law laid down in Quran bans the use of conventional Interest and regards it as a
sin. Islam believes in Zakah or almsgiving which is in direct contradiction to the rest of the
world financial concept. Therefore the dire need to build a market the foundations and
principles of which would lay deep into conventional Islamic principle and show the world
the right path and do away with the ways of Haram(forbidden).The focus is thus on debt
financing rather than equity financing. Islam thus introduced the Sukuk market or the bond
market in general terminology. Islam does not object creation of capital markets when they
are in accordance with the principles laid down in the Sharia Law. There is an Islamic
organization known as Accounting and auditing organization for Islamic financial institutions
(AAFOI) which has laid down the principle for trding of sukuk ,they have to owned only by
sukuk holders ,and this ownership would be in the form of real assets(Ahmed et al .2011).
Quran considers this as legitimate and vouches that God has never forbidden trade and
business but there should not be any indulgence in the Riba (Interest ) or
Gharar(Uncertainty).

2.0 The Capital Markets


The basic market structure which provides which bridges the investors to deal in long tern
equity backed or debt backed securities is known as capital markets. The saver here by
entering into long term investments facilitates in funding other governments, entrepreneurs,
banks or other companies to use them and in turn they return some saver profits. It may be
comparable to bond markets in case of conventional banking or Sukuk markets when it
comes to Islamic banking as opined by Dusuki(2008). Issue of these Sukuks is potent enough
in proving ample opportunities to the British Muslims and may help in metamorphosing
London into one of the leading centers of world finance according to an article published by
HM treasury in the United Kingdom.









2.1Significance Of capital markets
The capital markets and mode of business is a mutual symbiosis between business houses,
banks, various financial institutions and common people as well to together work as
machinery which will help grow not only organizations but also nations and in turn generate
some return on their money, as money has always a time value attached to it according to
Cizaka(2013) .These markets facilitate in the mass scale privatization of various
organizations.

2.2Capital Markets and associated Risks
The conventional banking system has many risks of various kinds associated with it .The
banks offer various kinds of loans and that too in huge amounts to its prospective customers,
especially the banks of USA. The premier interest of the financial institutions was profit
maximization. But this resulted in weakening the asset side of the balance sheet and the
liability side kept piling up .Bad debts and Non performing assets were on an ever increasing
surge (Banaji,2007).This slowly and steadily contributed to worldwide economic crunch and
a debt crisis which led to the worldwide economic recession. But with the kind of strong
principles in which the Islamic capital markets are based on and technically since they have
an equity based debt structure the risk is much less .

3.The rise of Islamic capital markets.
Since its inception in the year 1998 Islamic financial markets have steadily grown. Their
foundation principles which prohibit any kind of doubtful transactions, contracts based on
interest generation, and non-Islamic revenue generation have helped the most. They gained
world attention during the period of 2001-2003.the recession hit global market in 2007
provided it the much needed breakthrough and world economists started supporting the cause
(Ibrahim and Rahaman,2005).


4.0Concerns for the Islamic capital market
The Islamic financial systems are still on the growing phase and have lot of obstacles to
overcome. Since there is already a much used conventional banking and financing system so
there is urgent need that the masses change their general outlook and culture towards the
same .The growth of the Islamic financial organizations and capital markets are not of
uniform nature across the globe. The non Islamic countries which are slowly introducing the
Islamic way of banking are doing so but on a micro level and with small business houses as
opined by Harris and Warde(2010).. The economic powerhouses on the other hand suffer
from lack of proper institutionalization .It has been revealed by the World bank(2006),that
only 21 of the 57 Islamic countries have a structured stock market .again there different
system from conventional banking system stands contradictory with established institutes
like GAAP and IAS.

4.1Transactional Cost Factors
The developing Islamic capital market is plagued by tax issues such as Double stamp duty,
real property gains .income tax .Moreover there is a marked cost difference in the securities
issued by the Islamic capital market and conventional capital markets.

4.2 Regulatory bodies
According to Hasan (2010) there are great differences of opinions among the 30 various
Sharia boards, which happen to be the regulatory and supreme authority on Islamic Banking
and Financial institutions .The Sharia laws as it is stand very much contradictory to the
standard banking regulatory authorities. This is one of the major hurdles in establishing a
sound Islamic capital market.

4.3The product basket Limitations
All the Islamic banking and financial instruments need to be approved by the sharia board
.Most of the products cannot be liquidated easily and too add to that there are not enough
different product options available. This is one of the major area of concerns that needs to be
looked into.

4.4Compliance with rules
There are discrepancies which arise to due to the distinguishing feature of Islamic banking
from conventional banking which is its compliance to the Sharia laws. This results in
considerable delay, as any Islamic capital market product would have to be first verified by
their in house board. Then the central sharia board has to clear the same. What complicates
things even further is that different sharia boards opine differently about the same product
says Khan(2000).While some strictly adhere to the laws which are laid ,there are a few others
who have undergone a change in their attitudes and believe in some of the modern principles.
so there is a significant lack of adequate structure and standardization of all various kinds of
products.

4.5 The Clash with Investment Banking

The general and natural tendency of Islamic banking is that refutes innovation, the Riba or
interest principle and it more concerned towards retail rather than customer banking. But
investment banking on the other hand is creative, innovative rapidly evolving and provide
great money making opportunities to all. This is in direct clash with the foundation principles
of the Islamic system of finance.

4.6 Development of Trained professionals
There is a considerable lack of professional who are trained and knowledgeable about all the
minute details of Islamic finance. This does not help to the cause and there is therefore very
slow development when it comes to diversification of products .to bring about the necessary
changes trained professionals are required, who have sound knowledge of economics as well
as the sharia laws (Obaidullah,1996).
4.7 Awareness of investors for growth and development
The investors are wary about the Islamic concept of banking and finance. There is no proper
campaigning from the banks to draw investors or convince them to invest to their cause. This
lack in communication between the investors and the Islamic banks needs to be worked to
improve the situation. Without them understanding the concept in a crystal clear manner
there would always considerable difficulty in the investments pouring in.


4.8Need for spread of knowledge
There are no proper information channels which the customers and general public may access so
that they can take informed decisions .Database building more access to Islamic banking
products is the need of the hour. A lot of investors believe in proper statistical analysis so that
they can do their researching which would aid them in the benchmarking of products.
5.0 The correlation between the Islamic Finance, global recession and
instability

5.1Introduction
The economic disturbances and collapse of the banking system of the west had brought in the
global economic crisis in 2007.The excess debt and leveraging which was given by the various
banks of the world was mainly due to the removal of the trade and tariff barriers internationally.
The nature of transactions carried out by the banks, mainly the uncontrolled selling to third
parties brought about the downfall..The deals were made in papers which were hardly of any
economic value.
5.2The prime causes of global economic downfall and recession
After a insightful study of the causes of global recession, the economists derived that debt and
leveraging are the main causes of financial volatility in the current system along with the
following defoliating factors:
There have been excessive levels of risk and debt floating in the market along with
comprehensive deregulation of various monetary and fiscal instruments. Shadow banking
operations were also done by many organizations. Insufficient supervision by managers and
officials was another major reasons which needs to be considered. Superfluous low interest rates
the shortcomings and inefficiency of credit rating agencies and fraudulent activities were on the
surge.The practices of mark-to-market bookkeeping. Again the existence of too many of the sub-
prime borrowers in the USA also affected and contributed significantly to the downfall.
According to Sole (2007) The failure of one system effected the other financial systems as a
chain reaction. To add to all this was excessive printing of money in trillions supplied to meet
the financial needs which resulted in higher inflation. Lastly approving various mortgages
without proper evaluations increased the debts and also contributed significantly in bringing
about the downfall.


5.3. The Islamic Financial System
There is a need of a procedure that could prevent the excessive debt and risk shifting, and would
work in favour of risk sharing and equity financing. This is Islamic financial system unlike the
traditional procedure which favours excessive risk and debt for increased profits. The Islamic
banking system daunts borrowing and encourages risk sharing, resulting in decreasing the asset-
liability gap. The Islamic financial arrangement is based on asset backed financing and risk
sharing between the banks and the customers. This system has two great advantages:
asserts the inflation rate to the minimum irreducible
compatibility between the investor and the entrepreneur
Islam, according to Holy Quran, does not permit, exchanging money for money, interest (Riba);
rather it supports an alternative of shared exchange, allowing both the participants of the contract
to share marketing risks, production, and transportation. Allah has mentioned at different places
in Quran the prohibition of receiving and giving of Interest (Riba) (Al-Roun Chapter 30, Verse
39; Al-Nisa Chapter 4, Verse 160-162; Al-Imran Chapter Chapter 3, Verse 130-136; Al-Baqarah
Chapter 2, Verse 275-277; Al-Baqarah Chapter 2, Verse 278- 281).

Controlled asset-linked securities are the oppose part of debt in Islamic Financing. The
fundamental difference between the conservative securities and Islamic securities is the transfer
of ownership to the investor. Undiluted commitment to the larger benefit of society, socio-
economic justice, and justice are some of the vital values on which Islamic finance works.
Firstly, Islamic finance is against the unjust wealth allocation that is caused by the interest. This
will help in reducing the debt. Secondly, Islamic finance does not allow pointless risk to be taken
and therefore avoids any undesirable loss to the society.




5.4 Impact of the Islamic financial System even during recession


Figure 1 World Islamic banking Competitiveness Report
A scrutiny in the underlying causes would reveal the reason for this stunning exceptional
performance.
To begin with, the Islamic banking system is very strongly regulated with the Sharia System.
They cannot by any means overwhelm these laws. Instead of printing billions and trillions of
money in the form of paper to restore the balance of economy and attain equilibrium, the Islamic
financial system is majorly based on asset financing. The conventional banking policy led to
increasing rates of inflation, causing excess liquidity by printing and increasing the global debts
by leaps and bounds.
The Islamic finance by its moral policing keeps a necessary check on the society. It forbids and
prevents investment into activities which are non Islamic in nature like high risk investments of
various kinds, any form of gambling and also in activities which have a high interest rate
associated with it. This helps in prevention of excess debts as opined by Wilson(2000).
To prevent any form of disparity between two the concerned parties Islamic finance prohibits
and is against any deal which has any form of predetermined interest rates attached to it. This
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Kuwait Qatar Saudi
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UAE Malaysia Indonesia
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kind of interest rate generally widens the societal economic misbalances between the poor and
the rich. Predetermined interest rate generating projects generally create wealth without being
directly involved to any good real economic activities. If due to political or economic causes the
interest rage surges the tenure for the loan payment automatically increases and in the end the
customer has to pay much more, and the feeling of oppression and injustice crops up and causes
various problems in the society.
Entrepreneurship forms the core of Islamic finance. The idea behind Islamic finance is to
promote activities that will enhance trade and commerce. Trading helps in attaining the much
needed equilibrium that is missing from the society. This virtually shields the Islamic financing
organization from potential economic threats and the negativities of excess globalization. The
essence of the philosophy of Quran is charity, and if charitable there would be no dearth and will
have the blessings of Allah.
The greatest benefit of Islamic finance according to Ibrahim and Rahman (2005) lies in the
unique concept they have laid in sharing of the profit or loss. The Islamic finance contracts have
two clauses embedded in them known as Musharakah and Mudarabah. In accordance with these
clauses both the parties entering into a contract have to share their profit or loss whichever they
incur according to the terms and conditions set .In accordance withYudistira(2004)This
facilitates in reducing the burden of a loss and debt considerably ,is more humanitarian and
philosophical in nature The business ethics which Islamic finance has brought in is unheard of
and exemplary in nature. More and more economists and social scientists are vouching for better,
attitude, behavior and societal responsibility from the main stream banking industry. With the
abolition of the Riba ,or the very concept of interests in banking, Islamic finance is leaps and
bounds ahead in the ethical necessities demanded from the banking and financial sector. They
also have a concept known as Ibn Majah, according to which is any Muslim or anyone following
Islam sells any kind of defective item without any knowledge of the other person ,the forfeiting
seller would be under the grudge of Allah .Thus the Quran with its Sharia which has been laid
down for the Muslim society ensures that it has to remain as fair and sensible possible along
with the much needed philanthropic angle to go with it. Even the non Muslim community are
finding Islamic banking to be more humanitarian these days and are influenced by the truth that
there is much less burden here than the conventional form of banking opines

Lastly the Islamic banking strongly believes and focuses in the upbringing and development of
the society rather than become unjust and deadly system of money maximizing instruments in
the brutal hands of global economical forces. They do not believe in profit maximization which
is the premier aim of conventional banking across all corners of the world (Sole,2007). The very
concept of profit sharing eliminates the threat of excessive loss and is of immense philanthropic
value. It also grows a sense of responsibility from within ion the minds of the people and ensures
enhanced discipline and better morality among the ge4neral masses, poor and rich alike.
Therefore, it would be fair and sensible to claim that each and every financial activity that
complies with the Sharias rules and guidelines is a socially responsible activity.
6.0Conclusion
Why and what exactly engineered in bringing about the global economic crisis and recession is a
debate that has stirred the best economic minds in the recent times. Though they could not single
out any single factor, what most of the equivocally agreed to is the fact of excessive profit
maximization .to attain this excessive sanctions of loans By lowering interest rates to lure more
and more customers, the US sub prime mortgages, debt based financing model and the basic
flaws that are inherent in conventional banking can all be held responsible and guilty as opined
by Mills and Presley (2007)
Contrary to this is Islamic finance regarding which experts are of the opinion that it is still in its
nascent stage and is yet to bloom totally and attain its full potential. The economic scholars of
the Islamic system of finance have yet not been able to fully grasp the underlying potential of the
banking system that remains unearthed. It can safely be said that the global economy would be
relatively much safer and the future chances of another great recession may be avoided if one
follows the principles of Islamic banking and financial structure. One of the prime reasons of
development of the Islamic Capital market may be attributed to this according to.The abolition of
Riba(Interest) and the strict regulations that are integral to the Islamic banking system is both
unorthodox and tough follow (Khan,2000). No religion ever is easy to follow and when religion
forms the base of economy it would be harder, since people are used to following their
incredulous easy ways and discrepancies, scams are common place occurrences. This printing
causes surplus liquidity and eventually granting more loans, and hence causative to global debt.

Islamic banking and financing is a new concept which opens up a new horizon of opportunities
and yet is considerably immune to global economy. If it is followed properly with strict
governance and adherence which is integral to it would create a much more stable and healthy
economy and yet usher prosperity into the global economy. However what is requires is patience
and time , both of which are found wanting in the modern day context and public. Due to its
strict adherence to the Sharia principles, global recession may be averted. Forbidding the unfair
practices and passing them as law gives it the much needed edge to thrive in this tough global
scenario. Its instruments provide the necessary edge and sharpness to fend off all the
malpractices.
The necessary improvements that are required, the sea of opportunities have all been identified in
this research. Emphasis is given to the various good practices that have been brought forth by the
Islamic banking, of which Santander bank is an integral part of. The bank believes in the laws of
Sharia and adheres to the principles laid by the governing body of Sharia extensively without fail
with immense respect for the Holy Quran. Also if this rate of interest is, somehow, increased
during the term, this will increase the loan payment and hence the term and the paying party will
end up paying more which amounts to domination and injustice to the society. To accept, follow
and introduce an entirely new system and format of banking is not a very easy thing to do
practically. The slow growth & maturity is the resultant of a entirely new concept of banking
which is entirely asset based. The onus is thus on the regulatory and governing bodies to promote
Islamic banking as it brings in a very noble and humanitarian approach to banking and thereby
sets it apart from any other contenders. The regulatory boards also need to unite and act as one
single entity to all laws and references, which shall give in the final verdict on any matter or any
discrepancy .a much needed laying down of laws which all the common people will know is thus
the need of the hour. There are few countries where the system of Islamic banking is very good
like Malaysia, Pakistan and the Middle East with Australia fast following taking the cue from
these nations.






















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