“THE STUDY OF ISLAMIC BANKING WITH

SPECIAL REFERENCE TO DUBAI ISLAMIC BANK”

PROJECT REPORT SUBMITTED

TO THE
BIRLA INSTITUTE OF TECHNOLOGY, MESRA
(DEEMED UNIVERSITY)
FOR THE PARTIAL FULFILLMENT OF DEGREE OF
MASTER OF BUSINESS ADMINISTRATION

SHEIKH OMAR SHARIF

MBA/8030/09

Under the Supervision of

Dr. K.Durga Prasad

BIRLA INSTITUTE OF TECHNOLOGY

INTERNATIONAL CENTER
RAK, UAE.

June, 2011
 DECLARATION

This is to certify that the present report (The Study of Islamic Banking with
Special Reference to Dubai Islamic Bank) is based on my original work and data
collected and indebtedness to other works/publications has been duly acknowledged
at the relevant places. It has not been submitted in part or full for any other diploma
or degree of any other university.

Sheikh Omar Sharif

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 CERTIFICATE

This is to certify that the project entitled “The Study of Islamic Banking with
Special Reference to Dubai Islamic Bank” is the project work Carried out by
Sheikh Omar Sharif, MBA/8030/09 of MASTER OF BUSINESS
ADMINISTRATION, Department of Management, Birla Institute of Technology,
International Center, Ras Al Khaimah, during the academic period (2009 – 2011), in
partial fulfillment of the requirements, as per subject code MBA 4004 for the award
of the degree of Master of Business Administration.

Signature of the Guide Signature of the Head of the

Department

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 ACKNOWLEDGEMENT

I would like to give my sincere thanks to my project guide Dr. K.Durga Prasad, who
had provided me complete guidance during my project.

And a special thanks to all my colleagues and other faculties as well who have
helped me a lot about the study of Islamic Banking.

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 CONTENTS

Chapter/Serial Contents Page No.

Number
CHAPTER1 : INTRODUCTION 1
1.1 Introduction 2
Islamic Banking 4
History of Islamic banking 5
Islamic Banking as an Idea 5
Classical Islamic banking 6
The coming into being of interest-free banks 6
Modern Islamic banking 7
1.2 Theoretical Framework 8
Islamic Banking Movement In The World 8
Principles 10
Riba 12
Islamic Modes Of Financing 13
1.3 Company Profile 19
Company Overview 20
Business Description 20
Corporate Strategy 23
History 23
Major Products and Services 26
1.4 Purpose of the Study 28
CHAPTER 2: RESEARCH METHODOLOGY 29
2.1 Statement of Problem 30
2.2 Scope of the Study 31
2.3 Objectives of the study 31
2.4 Methodology 32
Sources of Data 32
2.5 Limitations 32
CHAPTER 3: LITERATURE REVIEW 33
3.1 Literature Review 34
CHAPTER 4: ANALYSIS AND INTERPRETATION 37
4.1 How does an Islamic bank differ from a non-Islamic bank? 38
4.2 Islamic Banking v/s Conventional Banking 38
4.3 SWOT Analysis 42
Strengths 42
Weakness 44

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 Opportunities 45
Threats 47
4.4 New Products 49
4.5 Islamic Banking: A growing market 49
4.6 Why Islamic banking is more viable than conventional 52
banking system?
4.7 Issues in Islamic Banking with regard to Dubai Islamic Bank 53
CHAPTER 5: FINDINGS AND SUGGESTIONS 55
5.1 Findings 56
5.2 Suggestions 57
CHAPTER 6: CONCLUSION 58
6.1 Conclusion 59
Bibliography 61

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 List of Tables

Name Page No.

Table 1: History 23

List of Figures

Name Page No.

Figure 1: Growth of the Islamic Banking Industry 50
Figure 2: Number of Islamic Mutual Funds 51

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 CHAPTER -1
INTRODUCTION

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1.1 INTRODUCTION
Islam is not simply one of the greatest monotheistic religions, signifying submission
to the will of Allah, but as system of life in entirety. It prescribes a complete code of
conduct for every day human life in all its spheres and manifestations. It does not
confine itself to a spiritual relationship between man and Allah or describes the
Almighty only with an inspirational reference but also regulates, in right
proportions, an interactive relationship between man and man, and between man and
society with moral, political and economic genesis. As a result, it is a religion lived
in everyday life and no Muslim is in any doubt as to exactly how he should carry on
the events of his day.
On the other hand, capitalism has not been able to narrow down the gap
between the “haves and “have-nots”. Material affluence, wherever it exists, is
marked by a conspicuous absence of a broad based sharing of fortunes and thus real
happiness to a large number of people is seriously missing. Likewise, socialism
advocating collective ownership of the means of production and control of
distribution has failed to provide the necessary motivation for collective
development and personal self-actualization, and thus retarded the process and rate
of economic growth.
Similarly, communism, stressing ownership of property and control of
production, distribution and supply by the whole of classless society, could not get
along with the human potential, dynamism and aspirations, and fell too short to
bring about economic satisfaction or progress, in individual and collective life.
Looking at the inadequacies of the prevailing economic system, in
promoting real economic well-being of the masses, Muslims all over the world
stared to re-discover the wisdom and balance of Islamic economic system. This led
to a renaissance, during the last few decades of economic thought and system as
enunciated by Islam. The upsurge gained momentum with the discovery of oil and
resultant ballooning up of the national income of many Middle Eastern countries. In

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the process, attention was focused on Islamic Economic System ,Islamic banking
and elimination of interest (Riba) in conformity with the injunctions contained in
the Holy Qur’an and sayings of the Holy Prophet (Peace be upon him).
Modern banking system was introduced into the Muslim countries at a
time when they were politically and economically at low ebb, in the late 19th
century. The main banks in the home countries of the imperial powers established
local branches in the capitals of the subject countries and they catered mainly to the
import export requirements of the foreign businesses. The banks were generally
confined to the capital cities and the local population remained largely untouched by
the banking system. The local trading community avoided the “foreign” banks both
for nationalistic as well as religious reasons. However, as time went on it became
difficult to engage in trade and other activities without making use of commercial
banks.
With the passage of time, however, and other socio-economic forces
demanding more involvement in national economic and financial activities, avoiding
the interaction with the banks became impossible. Local banks were established on
the same lines as the interest-based foreign banks for want of another system and
they began to expand within the country bringing the banking system to more local
people. As countries became independent the need to engage in banking activities
became unavoidable and urgent. Governments, businesses and individuals began to
transact business with the banks, with or without liking it. This state of affairs drew
the attention and concern of Muslim intellectuals. The story of interest-free or
Islamic banking begins here. In the following paragraphs we will trace this story to
date and examine how far and how successfully their concerns have been addressed.

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Islamic Banking
Islamic banking refers to a system of banking or banking activity that is consistent
with Islamic law (Shari’ah) principles and guided by Islamic economics. In
particular, Islamic law prohibits usury, the collection and payment of interest, also
commonly called Riba. Generally, Islamic law also prohibits trading in financial risk
(which is seen as a form of gambling). In addition, Islamic law prohibits investing in
businesses that are considered unlawful, or Haraam. 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.
Islamic banks are those banks that operate according to Islamic rule of
Shari’ah (rule for transactions). The basic principle of Islamic Banking is the sharing
of profit and loss and the prohibition of riba (interest). Amongst the common Islamic
concepts used in Islamic banking are profit sharing (Mudarabahh), safekeeping
(Wadiah), joint venture (Musharakah), cost plus (Murabahah) and leasing (Ijarah).
Islamic finance has been gaining momentum on a global scale for the last 30
years.
Many Islamic Banks have sprung up over the last few years. These changes
are occurring both in Muslim and in western countries, and are driven by a global
trend amongst Muslims to become more observant of their faith. It might have been
the reason why Islamic Banking emerged, however, today Islamic Banking is sought
by Muslims and non-Muslims due to the benefits it offers.
Industry size is currently estimated at more than $400 billion, with projected
growth of 15% per annum.
In my own view, Islamic banking is "... a form of modern banking based on
Islamic legal concepts developed in the first centuries of Islam, using risk-sharing as
its main method, and excluding financing based on a fixed, pre-determined return".
History of Islamic banking

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It seems that the history of interest-free banking could be divided into two parts.
First, when it still remained an idea; second, when it became a reality -- by private
initiative in some countries and by law in others. We will discuss the two periods
separately. The last decade has seen a marked decline in the establishment of new
Islamic banks and the established banks seem to have failed to live up to the
expectations. The literature of the period begins with evaluations and ends with
attempts at finding ways and means of correcting and overcoming the problems
encountered by the existing banks.

Islamic Banking as an Idea

The scholar of the recent past in early fifties started writing for Islamic Banking in
place of Interest Free Banking. In the next two decades Islamic Banking attracted
more attention.
Early seventies saw the institutional involvement. Conference of the Finance
Ministers of the Islamic Countries was held. The involvement of institutions and
Government led to the application of theory to practice and resulted in the
establishment of the Islamic Banks. In this process the ‘Islamic Development Bank
(IDB)’ was established in 1975.

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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 introduced in early
Islamic banking, including bills of exchange, the first forms of partnership
(Mufawada) such as limited partnerships (Mudarabahh), and the earliest forms of
capital (Al-Mal), capital accumulation (Nama al-Mal), cheques, promissory notes,
trusts, startup companies, transactional accounts, loaning, ledgers and assignments.
Organizational enterprises similar to corporation’s independent from the state also
existed in the medieval Islamic world, while the agency institution was also
introduced. Many of these early capitalist concepts were adopted and further
advanced in medieval Europe from the 13th century onwards.

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-forties and another in Pakistan in the late-fifties.
Neither survived. In 1962 the Malaysian government set up the “Pilgrim’s
Management Fund” to help prospective pilgrims to save and profit. The savings
bank established in 1963 at Mit-Ghamr in Egypt was very popular and prospered
initially and then closed down for various reasons. However this experiment led to

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the creation of the Nasser Social Bank in 1972. Though the bank is still active, its
objectives are more social than commercial.
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 and 1984. The numbers have declined considerably in the following years.
In most countries the establishment of interest-free banking had been by
private initiative and was 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.

Modern Islamic banking

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 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, by which time there were nine such banks in the country.
In 1972, the Mit Ghamr Savings project became part of Nasr Social Bank
which, till date, is still in business in Egypt. In 1975, the Islamic Development Bank
was set-up with the mission to provide funding to projects in the member countries.
The first modern commercial Islamic bank, Dubai Islamic Bank, opened its doors in
1975. In the early years, the products offered were basic and strongly founded on
conventional banking products, but in the last few years the industry is starting to
see strong development in new products and services.

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1.2 Theoretical Framework
Islamic Banking Movement in the World
Islamic Banking, based on the Islamic economic system, is not restricted to Muslims
only. The objective of Islam injunction is welfare of the whole humanity. Islamic
Banking is no longer confined to concepts and ideas only. Until the first half of the
20th century, it was more or less an abstract concept. Islamic Banking and finance
started in 1963 when Mit Ghamr Savings Bank began offering interest free banking
in Egypt.
Starting from 1980s various Islamic Banks and Islamic financial institutions
have begun their operations in different Islamic countries. While the countries of
Iran and Pakistan have implemented Islamic Banking in the whole banking sector,
other countries have permitted Islamic Banking institutions operate with the other
traditional banks.
Malaysia is the first country to issue bonds on Islamic basis. Malaysian
government allowed conventional banks to offer Islamic instruments as well if they
want. Examination of the progress of these institutions in Iran and Pakistan reveals
that in Pakistan this process is a gradual one. On the other hand in Iran the process
of conversion of traditional banks and financial institutions into Islamic ones was
very rapid.
The government of Iran has nationalized all the banks during the period of
1979-1982 after the Islamic revolution. In August 1983, the Iranian government had
passed the law for riba free banking and asked all banks to convert their deposits and
finish Islamisation of all their operations within three years. After this period
government has started to exert control on the banks so that the banks provide
interest free loans to public for housing and for small-scale projects. The banks have
also provided funds for government projects. The six commercial banks and three
specialized banks are mainly engaged in short term projects and profit sharing

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agreements are only small percentage of their activities. Since then Islamic Banks
have steadily been growing.
There are thirty-one Islamic Financial Institutions and “interest-free mode of
financing” which are practical and more than 48 countries as well as more than 300
Islamic Banks are working on these non-interest modes and interest-free methods all
over the globe. The international Islamic Financial Institutions are providing a wide
range of services in accordance with the basic principles of Shari’ah. The products
are Mudarabah, Murabaha, Musharaka, Ijarah, Istisna and Salam.
Conventional banks operate under the concept of lender-borrower relationship
where interest is considered as the rental income on capital. The depositors are
assumed to be capital providers. Profits of the banks are distributed at the discretion
of the bank managements.
But the Islamic Banks follow the concept of Mudarabah (profit sharing) based
on investor entrepreneur relationship. Here Islamic Banks consider depositors as
entrepreneurs. The profits generated through this relationship are divided between
the two parties as per agreed ratio.
Further, researchers divide Islamic Bank customers into three broader
categories (a) religiously motivated customers (b) high profit motivated customers
(c) customers who are religiously motivated but also expect returns at least similar
to conventional banks. Customers of second and third categories generally dominate
in terms of numbers in any Islamic bank. They expect returns on deposits similar to
conventional banks.
In the money market, the main objective is to meet short-term liquidity
requirements. The market facilitates banks with deficit in cash to borrow from the
banks having surplus money. Islamic money market conducts a similar function of
meeting the short-term liquidity needs. Instead of interest, it allows Islamic Banks to
share surplus capital on profit-sharing basis.

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 Islamic and conventional money markets can be assumed to offer similar
returns on investments. Low returns in Islamic money markets may badly affect the
overall profitability of Islamic Banks in the initial stages of their development.
According to the Institute of Islamic Banking and Insurance, there are more
than 300 Islamic Financial Institutions in the world. These institutions are working
in the following countries: Albania, Algeria, Australia, Bahamas, Bahrain,
Bangladesh, and British Virgin Islands, Brunei, Canada, Cayman Islands, Cyprus,
Djibouti, Egypt, France, Gambia, Germany, Guinea, India, Indonesia, Iran, Iraq,
Italy, Ivory Coast, Jordan, Kazakhstan, Kuwait, Lebanon, Luxembourg, Malaysia,
Mauritania, Morocco, The Netherlands, Niger, Nigeria , Oman, Pakistan, Palestine,
Philippines, Qatar, Russia, Saudi Arabia, Senegal, South Africa, Sri Lanka, Sudan,
Switzerland, Tunisia, Turkey, Trinidad and Tobago, United Arab Emirates, United
Kingdom, United States, Yemen.

Principles
Islamic banking has the same purpose as conventional banking except that it
operates in accordance with the rules of Shari’ah, 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 (Mudarabah), 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. 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.

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Islamic banks handle loans for vehicles in a similar way (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, Mudarabah 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.

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Riba
The word "Riba" means excess, increase or addition, which correctly interpreted
according to Shari’ah 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 made no logical sense as its value remained constant relative to all
other materials: these metals could be added to but not created.
Applying interest was acceptable under some circumstances. Currencies that
were based on guarantees by a government to honor the stated value [fiat money] 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).
There are two types of riba; an increase in capital without any services provided,
which is prohibited by the Qur'an, and that prohibited in the Sunnah which
comprises commodity exchanges in unequal quantities.
The Islamic system order based on a set of principles constituting the concept
and philosophy as enunciated explicitly in the Quran. This philosophy provides what
can be understood as the Islamic system of social justice.

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Islamic Modes of Financing:-
The important modes of financing are
• Musharakah
• Mudarabahh
• Murabaha
• Salam
• Istisna
• Ijarah
• Musawamah
• Bai Muajjal
• Hiba
• Wadiah

Musharakah (Joint Venture)

Musharakah means a relationship established under a contract by the mutual consent
of the parties for sharing of profits and losses in the joint business. It is an agreement
under which the Islamic bank provides funds, which are mixed with the funds of the
business enterprise and others. All providers of capital are entitled to participate in
management, but not necessarily required to do so. The profit is distributed among
the partners in pre-agreed ratios, while the loss is borne by each partner strictly in
proportion to respective capital contributions. A working partner gets a greater profit
share compared to a non-working partner. The difference between Musharakah and
Mudarabah is that, in Musharakah, each partner, e.g. a financial institution provides
all the capital and the other partner, the entrepreneur, provides no capital.

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Mudarabah (Profit Sharing)
A form of partnership where one party provides the funds while the other provides
expertise and management. The latter is referred to as the Mudarib. Any profits
accrued are shared between the two parties on a pre-agreed basis, while loss is borne
by the provider of the capital. It is a profit sharing contract, with one party providing
100% of the capital and the other providing its specialist knowledge to invest the
capital and manage the investment project. Compared to Musharakah, in a
Mudarabah only the lender of the money has to take losses.

Murabaha (Cost Plus)

Literally it means a sale on mutually agreed profit. Technically, it is a contract of
sale in which the seller declares his cost and profit. As a financing technique, it
involves a request by the client to the bank to purchase a certain item for him. The
bank is compensated for the time value of its money in the form of the profit-
margin. This is a fixed income loan for the purchase of a real asset (such as real
estate or vehicle), with a fixed rate of profit determined by the profit margin. The
bank cannot charge additional profit on late payments; however, the asset remains as
a mortgage with the bank until the default is settled.

Salam
Salam means a contract in which advance payment is made for goods to be delivered
later on. The seller undertakes to supply some specific goods to the buyer at a future
date in exchange of an advance price fully paid at the time of contract. It is
necessary that the quality of the commodity intended to be purchased is fully
specified leaving no ambiguity leading to dispute. The objects of this sale are goods
and cannot be gold, silver or currencies. Barring this, ′Salam covers almost
everything, which is capable of being definitely described as to quantity, quality and
workmanship.

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Istisna
It is a contractual agreement for manufacturing goods and commodities, allowing
cash payment in advance and future delivery or a future payment and future
delivery. Istisna can be used for providing the facility of financing the manufacture
or construction of houses, plants, projects, and building of bridges, roads and
highways.

Ijarah (Leasing)
Ijarah means lease, rent or wage. Generally, Ijarah concept means selling benefit or
use or service for a fixed price or wage. Under this concept, the Bank makes
available to the customer the use of service of assets/equipments such as plant,
office automation, motor vehicle for a fixed period and price. A contract under
which an Islamic bank finances equipment, building or other facilities for the client
against an agreed rental together with a unilateral undertaking by the bank or the
client that at the end of the lease period, the ownership in the asset would be
transferred to the lessee.
The undertaking or the promise does not become an integral part of the lease
contract to make it conditional. The rentals as well as the purchase price are fixed in
such manner that the bank gets back its principal sum along with profit, which is
usually determined in advance.

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Advantages of Ijarah:
Ijarah provides the following advantages to the Lessee:
• Ijarah conserves the Lessee' capital since it allows up to 100% financing.
• Ijarah gives the Lessee the right to access the equipment on payment of the
first installment. This is important as it is the access and use (and not
ownership) of equipment that generates income.
• Ijarah arrangements aid corporate planning and budgeting by allowing the
negotiation of flexible terms
• Ijarah is not considered Debt Financing so it does not appear on the Lessee'
Balance Sheet as a Liability. This method of "off-balance-sheet" financing
means that it is not included in the Debt Ratios used by bankers to determine
financing limits. This allows the Lessee to enter into other lease financing
arrangements without impacting his overall debt rating.
• All payments towards Ijarah contracts are treated as operating expenses and
are therefore fully tax-deductible. Leasing thus offers tax-advantages to for-
profit operations.
• Many types of equipment (i.e. computers) become obsolete before the end of
their actual economic life. Ijarah contracts allow the transfer of risk from the
Lessee to the Lessor in exchange for a higher lease rate. This higher rate can
be viewed as insurance against obsolescence.
• If the equipment is used for a relatively short period of time, it may be more
profitable to lease than to buy.

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Musawamah
Musawamah is a general and regular kind of sale in which price of the commodity to
be traded is bargained between seller and the buyer without any reference to the
price paid or cost incurred by the former. Thus, it is different from Murabaha in
respect of pricing formula. Musawamah is the negotiation of a selling price between
two parties without reference by the seller to either costs or asking price. While the
seller may or may not have full knowledge of the cost of the item being negotiated,
they are under no obligation to reveal these costs as part of the negotiation process.
This difference in obligation by the seller is the key distinction between Murabaha
and Musawamah with all other rules as described in Murabaha remaining the same.
Musawamah is the common type of trading negotiation seen in Islamic commerce.
Unlike Murabaha, seller in Musawamah is not obliged to reveal his cost. Both the
parties negotiate on the price. All other conditions relevant to Murabaha are valid for
Musawamah as well. Musawamah can be used where the seller is not in a position to
ascertain precisely the costs of commodities that he is offering to sell.

Bai Muajjal (Credit Sale)

Literally it means a credit sale. Technically, it is a financing technique adopted by
Islamic banks that takes the form of Murabaha Muajjal. It is a contract in which the
bank earns a profit margin on his purchase price and allows the buyer to pay the
price of the commodity at a future date in a lump sum or in installments. It has to
expressly mention cost of the commodity and the margin of profit is mutually
agreed. The price fixed for the commodity in such a transaction can be the same as
the spot price or higher or lower than the spot price. Bai Muajjal is also called as
deffered-payment sale. However, one of the essential descriptions of riba is an
unjustified delay in payment or either increasing or decreasing the price if the
payment is immediate or delayed.

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Hiba (Gift)
This is a token given voluntarily by a creditor to a debtor in return for a loan. Hiba
usually arises in practice when Islamic banks voluntarily pay their customers a ‘gift’
on savings account balances, representing a portion of the profit made by using
those savings account balances in other activities.
It is important to note that while it appears similar to interest, and may, in
effect, have the same outcome, Hiba is a voluntary payment made (or not made) at
the bank’s discretion, and cannot be ‘guaranteed’. However, the opportunity of
receiving high Hiba will draw in customer’s savings, providing the bank with capital
necessary to create its profits; if the ventures are profitable, then some of those
profits may be gifted back to its customers as Hiba.

Wadiah (Safekeeping)
Wadiah means custody or safekeeping. In a Wadiah arrangement, you will deposit
cash or other assets in a bank for safekeeping. The bank guarantees the safety of the
items kept by it. In Wadiah, a bank is deemed as a keeper and trustee of funds. A
person deposits funds in the bank and the bank guarantees refund of the entire
amount of the deposit, or any part of the outstanding amount, when the depositor
demands it.

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1.3 Company Profile

Dubai Islamic Bank has the unique distinction of being the world’s first fully-
fledged Islamic bank, a pioneering institution that has combined the best of
traditional Islamic values with the technology and innovation that characterise the
best of modern banking. Since its formation in 1975, Dubai Islamic Bank has
established itself as the undisputed leader in its field, setting the standards for others
to follow as the trend towards Islamic banking gathers momentum in the Arab world
and internationally.
Islamic banking and finance is now one of the world’s fastest-growing economic
sectors that comprise more than 400 institutions with assets under management in
excess of US$ 1 trillion (US$1,000 billion).
In this context, the role of Dubai Islamic Bank is even more impressive. Yet, the
bank remains true to its roots as a customer-centered organisation where close
personal service and understanding form the basis of all its relationships. Tradition
and heritage join with a commitment to flexibility, innovation and modernity, so that
customers of every nature are provided with comprehensive solutions to all their
financial needs.

xxvi
Company Overview
Dubai Islamic Bank P.J.S.C. is a UAE-based Islamic banking institution offering a
wide range of products and services to its clients. The bank’s market position as a
leading Islamic bank, its financial stability, and funding profile are its major
strengths, even as asset quality and exposure to real estate remain areas of concern.
Going forward, regulatory changes and stiff competition may impact the bank’s
performance. However, expansion of distribution channel and growing global
Islamic finance market could present growth opportunities for the bank.
Dubai Islamic Bank P.J.S.C. (DIB or bank) offers banking services which is based
on the Islamic Shari’ah. The bank offers retail and corporate services to its retail and
institutional customers. The retail banking products and services of the bank include
current, savings and investment accounts; home and personal finance; credit cards;
and safe deposit boxes. The wholesale banking products and services offered by the
bank include letters of credit, letters of guarantee, Murabaha, Sukuk, Istisna, Ijara,
Musharaka and Mudarabah. The bank also provides direct equity investment,
international investment and treasury services. In addition, DIB provides real estate
services like property management, community services and real estate financing.
DIB is headquartered at Dubai, the UAE.

Business Description
Dubai Islamic Bank P.J.S.C. is a financial service provider based in UAE. The bank
offers retail banking, wealth management, business banking, wholesale banking,
private banking, Johara banking, investment banking, real estate finance, and
contracting finance services. The bank operates in Bahamas, Cayman Islands,
Ireland, Pakistan, Sudan and UAE. The bank also has business operations in Bosnia,
Bahrain, Lebanon, Turkey, Cayman Islands, Sudan, the UK and Yemen. In the
UAE, the bank jointly operates with Al Bustan Center Company L.L.C., Waqf Trust
Services L.L.C., Gulf Tankers L.L.C. and Al Rimal Development. As of December

xxvii
31, 2010, the bank operated through a network of 66 branches. The bank also
provides specialist banking services for women customers namely, Johara services.
The bank service includes a wide range of banking facilities which offers shopping
discounts and health and educational benefits. Johara offers exclusive health
privileges in the UAE at renowned hospitals and health clubs. The shopping
discounts are offered at selected stores for perfumes, clothing and accessories,
books, etc. The bank offers Johara services in 10 branches throughout the UAE. The
bank’s operates its business under four reportable segments namely, Retail and
Business Banking; Wholesale and Investment Banking; and Real Estate and Others.
The bank through its Retail and Business Banking segment manages deposits of
small and medium businesses and individual customers. The segment products
include current, savings and investment accounts, home and personal finance, and
credit cards. It provides consumer and commercial Murabaha, Ijarah, credit card and
funds transfer facilities, and trade finance facilities. The bank has a wide network of
branches and ATM‟s in the UAE. The bank’s services are integrated with its
complete range of electronic solutions such as Internet, mobile phone and telephone
banking. The bank offers business banking solutions including short-term loans;
ease cash-flow management; financing property, import and export shipping,
mergers and acquisitions, and the other requirements related to business
environment. During the fiscal year ended 2010, the segment generated a net
operating revenues of AED 1,615.12m, representing 49.3% of the company’s total
net revenues. The bank's Wholesale and Investment Banking segment manages
financing and offers other credit facilities and deposit and current accounts to
corporate and institutional customers as well as investment banking services. The
bank provides these services to large corporate, public sector and middle markets.
The segment provides services including advice on corporate strategy and structure,
capital-raising in equity and Islamic funding markets and risk management. During
the fiscal year ended 2010, the segment generated a net operating revenues of

xxviii
AED1,076.99m, representing 32.9% of the company’s total net revenues. Through
Real Estate segment the bank provide services including property development and
other real estate investments activities. The bank has strong footstep in Commercial
Real Estate Finance in UAE regions. The bank also supports real estate
development. It includes construction of commercial property, multi-storey
buildings and residential estates. The Real Estate Finance team offers advisory
services, project funding and new product development services. The Treasury
segment of the company manages liquidity and market risk of the company. The
bank provides treasury services to its customers. It also manages its own Islamic
Sukuk portfolios and financial instrument book. During the fiscal year ended 2010,
the segment generated a net operating revenues of AED360.22m, representing
11.0% of the company’s total net revenues. The others segment of DIB includes
functions other than core business. During the fiscal year ended 2010, the segment
generated a net operating revenues of AED435.66m, representing 13.3% of the
company’s total net revenues. The bank also offers private banking and contracting
finance services to its customers. The bank also offers services such as online
banking, mobile banking, phone banking and e-statement to its customers. The bank
operates its business through its 44 subsidiaries and 25 associate companies in
different geographic locations.
Geographically, the bank operates in two major regions, namely, Domestic, and
International. In 2010, the Domestic region accounted for 88.4%, followed by
International 11.6% of the bank’s total gross income. In March 2011, the bank
received the HR Development Award in Banking and Financial category at the
Sharjah National Career Exhibition. In February 2011, the bank received the “A”
rating in the Fitch Ratings, a global ratings agency headquartered in London. In
November 2010, the bank entered into a joint venture to launch Real Estate
Investment Trust (REIT).

xxix
Corporate Strategy
Dubai Islamic Bank P.J.S.C. is one of the largest Islamic banks in the UAE offering
full range of products and services in compliance with Shari’ah. DIB, the first full-
service Islamic bank, provides retail banking, wealth management service, business
banking, corporate banking, investment banking, real estate finance and contracting
finance services. The bank is focused on building its retail banking services which
already serves more than 1 billion customers. DIB’s strategic focus is on
diversification and managed organic growth, including expansion of branch network
and growth in its overall customer base. The bank also takes part in various
government initiatives for the overall development of the economy of the UAE.

History
197 Incorporation/Establishment DIB was incorporated in 1975.
5
200 Acquisitions/Mergers/Takeovers DIB acquired Arab Islamic Insurance
1 Company.
200 Corporate Awards DIB won J. P. Morgan Chase Quality
4 Recognition Award.
200 Corporate Awards DIB won the Best Consumer Internet
5 Bank Award by Global Finance.
200 Corporate Awards DIB received JPMorgan Chase 2004 Elite
5 Quality Recognition Award.
200 Acquisitions/Mergers/Takeovers DIB acquired Al Khartoum Bank SA
5 privatized by Sudan.
200 Corporate Awards DIB won Golden Trophy in UAE Web
6 Awards Ceremony.
200 Corporate Awards DIB won Euromoney’s Best Islamic Bank
6 in Middle East and Best Global Sukuk
House Awards.
200 Acquisitions/Mergers/Takeovers Deyaar acquired Omega Engineering Co.
6
200 Corporate Awards DIB won Real Estate 'Best Investment
7 Management' Bank Award.

xxx
200 Corporate Awards DIB won Euromoney 'Best Islamic Bank
7 in the Middle East' award.
200 Contracts/Agreements The bank signed an AED 266 million
8 Islamic financing agreement with Parkway
International Contracting.
200 Corporate Awards DIB won “Best Islamic Bank at Banker”
8 in Middle East Awards.
200 Corporate Awards The bank was named as world’s Best
8 Islamic Retail Bank by Global Finance.
200 Acquisitions/Mergers/Takeovers Dubai Islamic Bank, Jordan Dubai Capital
8 and Dubai International Capital LLC
acquired curtail interest in International
Development Bank.
200 Corporate Changes/Expansions Dubai Islamic Bank introduced a new
8 subsidiary.
200 Acquisitions/Mergers/Takeovers Dubai Islamic Bank entered into a
8 strategic alliance with Nakheel
200 Corporate Changes/Expansions Dubai Islamic Bank opened three new
9 branches in the UAE.
200 New Product Approvals Launch of Wajaha which is a
9 distinguished Wealth Management service
for ultra-high net worth individuals
201 New Products/Services DIB launched Al Islami Muthmir, an
0 investment plan that offers a built-in
family Takaful covers.
201 Corporate Changes/Expansions The bank's subsidiary Jordan Dubai
0 Islamic Bank opened a new branch in
Amman.
201 Regulatory Approval DIB received the ISO accreditation for
0 quality management.
201 Corporate Changes/Expansions The bank opened a branch in Al Nahda.
0
201 New Products/Services DIB launched new accidental death and
0 disability insurance plan, Al Islami
Takaful Riayati.
201 Corporate Awards The bank named as the Best Islamic Bank
0 in the UAE by Asiamoney magazine.

xxxi
201 Corporate Awards DIB named as the Best Islamic Bank by
0 Global Finance magazine.
201 New Products/Services The bank launched new product, Al Islami
0 Salam Finance, which offers liquidity
through personal financing.
201 New Products/Services DIB launched Real Estate Investment
0 Trust.

xxxii
Major Products and Services
Dubai Islamic Bank P.J.S.C. is a financial services company based in United Arab
Emirates. The bank's key services include:
• Retail Banking
• Private Banking
• Johara Banking (Ladies Banking)
• Business Banking
• Corporate Banking
• Investment Banking
• Mobile banking
• Phone banking
• Online banking
• Real Estate finance
• Contracting finance
• Shari’ah Board services
• Structure Trade Finance
• Treasury & Investment
• Asset Management
• Syndication services
• Project Financing

xxxiii
Moreover Dubai Islamic bank receives two types of deposits:
• Deposits not committed for investment which takes the form of current
accounts or savings accounts; and
• Deposits committed for investment which are called investment accounts.
The current account is operated in the same way as it is operated in the
conventional banking system, but the saving accounts and investment
accounts are operated differently.
1. Savings account
This is an account where customers can deposit their savings. Though the
depositors allow the bank to use their money, they get a guarantee of getting
the full amount from the bank.
The bank guarantees their savings but is not obliged to pay any rewards to the
savers. Some banks, however, may pay cash rewards from their profits at the
end of the financial year or give some privilege to the holders of these
accounts as for example providing financial assistance for small projects.
2. Investments accounts
The account holder authorizes the bank to invest the money in any of its
projects and after the expiry of the specified period the account holder will
get an agreed share of the profits.
The facilities that are provided by Dubai Islamic bank will in general be
similar to those provided by other commercial banks. Its customers can
maintain current accounts and deposit accounts, however no interest is
payable. In addition, the customers can deposit their money in the investment
accounts in which the profits and will be shared with the bank. Dubai Islamic
bank also provide services for the transmission and transfer of money, the
purchase and sale of currency and the financing of trade documents, for all of
which Dubai Islamic bank can charge commissions.

xxxiv
1.4 Purpose of the Study
The main purpose of the study of this topic is to focus on the growth of Islamic
Banking sector in UAE with special reference to Dubai Islamic Bank.
It is true that external financing is utmost important almost for every kind of
business in an economy and banking industry is the main facilitator in this regard.
Islamic banking system plays its role in the banking industry as its minor part. Even
though it’s a minor part it can’t be left behind because banks are the citadels of the
economic growth. So, studying Islamic banking system in detail will not only
benefit the researcher but also will be a source of effective information for many
classes of bank customers. It will help better understanding Islamic banking system
and its salient features.
Interest free banking, based on Islamic principles, which is in operation in
more than 25 countries, has a strong potential in UAE like several Muslim and non-
Muslim countries. Once the regulatory framework is in place, it could offer a viable
alternative to the conventional banking system.
Hence the focus of the study is to compare the Islamic banking with conventional
and to study its different activities.

xxxv
 CHAPTER -2
Research Methodology

xxxvi
2.1 Statement of Problem
Over the last decade, Islamic banking has evolved dramatically. It has
developed global rates of 10-15 per cent per annum and has gotten an increasing
number of conventional financial systems. Currently Islamic financial institutions
have spread through 51 countries globally. Accordingly, the contemporary banking
system was introduced to Islamic nations during the time when these countries were
economically and politically at low ebb, i.e. the late 19th century.
Most of the banks in the home countries of the Islamic regions established
local branches in the capitals of the subject nations and they catered mainly to the
import export needs of the foreign businesses. Banking industries were generally
confined to the capital cities as well as the local population remained largely
untouched by the banking system. The local trading community prevented the
foreign banks both for religious and nationalistic reasons. Nonetheless, as time went
on it became complex to involve in trade and other functions such as current
accounts and money transfers. Borrowing from the banks as well as depositing their
savings with the bank was rigorously prevented so as to keep away for transacting in
interest which is prohibited by their religion.
However, with the passage of time and other socio-economic forces which
demands more involvement in national economic and financial activities, avoids the
interaction with the banks became possible. Islamic banking is a banking activity
which is coherent with the Islamic law. Islamic Banking does not permit the
receiving and paying of riba’ (interest) and encourages greater degree of fairness as
well as equity in the conduct of banking operations.
Within the UAE market the Dubai Islamic bank has recorded average growth
rate higher than the standard growth average rate. Such growth rate are said to be
competitive as compared to other banking industries.

xxxvii
2.2 Scope of the Study
• What are the factors that will make Dubai Islamic Bank successful in UAE?
• What are the rules and regulations of UAE that will affect Islamic Banking?
• The difference between Islamic Banks and Conventional Banks.
• The market growth will be seen.
• Since Islamic Banks don’t charge interest so where do they get profit?
• Is it good for the investment and therefore, as lot of economist have make use
of it because of the ethical banking feature provided by it and new innovative
derivative instruments have been revolutionized for the financial activities.

2.3 Objectives of the study

• To study investment avenues for both Muslim and non-Muslim according to
Shari’ah principles.
• To develop a conceptual framework of Islamic Banking.
• To highlight salient features of Islamic banking system.
• To simulate future prospects of Islamic banking system, if people are made
aware of the viability of Islamic banking system.
• To review the History and Development of Islamic Baking. This will enable
the readers in understanding the evolution of Islamic Banking and will
consequently enable them in evaluating its need in present times.
• To see the SWOT analysis of Dubai Islamic Bank.
• The problems and issues in Islamic Banking system with regard to Dubai
Islamic Bank.
• The ways to overcome the problems.
• To compare the Islamic Banking with Conventional Banking.

xxxviii
2.4 Methodology

Sources of Data
The data obtained for the study is secondary in nature as the data is collected
from secondary sources of data collection like Internet, journals, books, articles,
newspapers, magazines, blogs, various publications of Dubai Islamic Bank and
Islamic Banking. Finally the data collected would be analysed and presented in way
that a common man can understand.

2.5 Limitations
• Information available is secondary and is limited on the internet, magazine
may not be appropriate.
• Due to the time and financial restriction the study may not give the proper
result.
• The authenticity of the secondary data depends on its source

xxxix
 CHAPTER -3
Literature Review

xl
3.1 Literature Review
There has been large scale growth into the Islamic banking in Muslim countries and
around the world during the last twenty years as the performance growth is
influenced by factors including the introduction of broad macroeconomic and
structural reforms in financial systems, the liberalization of capital movements,
privatization, the global integration of financial markets, and the introduction of
innovative and new Islamic products. Islamic finance is now reaching new levels of
sophistication. However, there has been presence of Islamic financial system with its
identifiable instruments and markets are still very much at an early stage of
evolution. Many problems and challenges relating to Islamic instruments, financial
markets, and regulations must be addressed and resolved. In Islamic banking rules
apply which differ from those in traditional banking as there consequences of
Islamic banking for financial operations as there goes in examining in several
Islamic procedures as being introduced by other Islamic banking sector ever since
the year 1985. Considering the drastic change in procedures, the effect of
Islamization on the banking sector performance has been moderate. One reason for
the reality, is that Islamic Banks have consistently opted for financial instruments
closely resembling interest based finance aside, certain behavior did have
determined within large extent by the fact that these banking sectors are owned by
the governed by Shari’ah law.

All the monotheistic religions have their own sets of divine values and norms
with regard to human behaviour, in particular economic behaviour. Islam, with its
1.2 billion followers is the second largest religion in the world and it requires
Muslims to lead their lives according to the Islamic legal code of ‘Shari’ah’
principles. Commerce is central to the Islamic tradition (Warde 2000). The
prohibition of riba, a term literally meaning an excess and interpreted ‘as any
unjustifiable increase of capital whether in loans or sales’ is the central tenet of the

xli
Islamic economy. This prohibition is based on arguments of social justice, equality
and property rights.
There are about 250 Islamic financial institutions worldwide with more than
$200 billion under their management. These Islamic banks have been growing at a
rate of around 10% p.a. over the last decade (Iqbal 2000). Their clientele is not
confined to Muslim countries but is spread over Europe, the United States and the
Far East. Realizing the potential of this emerging form of banking numerous
conventional banks started ‘Islamic windows’. Islamic banking continues to grow at
a rapid pace because of its value-orientated ethos, enabling it to draw finances from
both Muslims and non-Muslims alike. At the same time, Western attitudes are
changing, as can be seen in the recent growth of ‘ethical’ banking, where (non-
Islamic) customers refuse to invest in companies engaged in unethical and socially
harmful activities (e.g. armaments or tobacco).
Describing the Islamic financial system simply as interest-free does not provide a
comprehensive picture. Some key instruments of Islamic banking are briefly
discussed below.
• Murabaha: Under Murabaha, the Islamic bank purchase, in its own name, a
goods for an importer or buyer who cannot afford to pay directly, and then
sells them to him at an agreed mark-up. This is the sale of a commodity at a
price, which includes a stated profit known to both vendor and purchaser (a
cost plus profit contract). This technique is usually used for financing trade,
but because the bank takes title to the goods, and is therefore engaged in
buying and selling, its profit derives from a real service that entails a certain
risk, and is thus seen as legitimate. Simply advancing the money to the client
at a fixed interest rate would not be legitimate. Only a legitimate profit is
considered lawful under Islamic law; any excessive addition on account of
deferred payments would be disallowed as it would amount to a payment
based on the value of money over time i.e. interest.

xlii
 • Mudarabah: This implies a contract between two parties whereby one party,
the rabbul-mal (beneficial owner or the sleeping partner), entrusts money to
the other party called the Mudarib (managing trustee or the labour partner).
The Mudarib is to utilise it in an agreed manner and then return to the rabbul-
mal the principal and the pre-agreed share of the profit. The Mudarib (bank)
keeps for itself what remains of such profits. The division of profits between
the two parties must necessarily be on a proportional basis and cannot be a
lump sum or guaranteed return. The investor is not liable for losses beyond
the capital he has contributed. The Mudarib does not share in the losses
except for the loss of time and effort.
• Musharaka: This is a partnership, normally of limited duration, formed to
carry out a specific project. It is similar to a Western joint venture, and is also
regarded by some as the purest form of Islamic financial instrument, since it
conforms to the underlying partnership principles of sharing in, and
benefiting from, risk. Participation in a Musharaka can either be in a new
project, or by providing additional funds for an existing one. Profits are
divided on a pre-determined basis, and any losses shared in proportion to the
capital contribution.

Every Islamic bank has a committee of religious advisers whose opinion is sought
on the acceptability of new instruments and who provide a religious audit of the
bank's accounts. In Islam moral and equitable values form an integral part of the law
governing contractual and financial relations to such an extent that the relationship
between equity, law and religion is central to all business.

xliii
 CHAPTER -4
Analysis and Interpretation

xliv
4.1 How does an Islamic bank differ from a non-Islamic
bank?
First of all, in its mission and objectives: because Islam is the backbone of
Islamic banking, moral principles and objectives play a more important role in the
operations of an Islamic bank than in a non-Islamic bank.
Second, in its products: an Islamic bank offers no interest-bearing products or
services, for example, and is more oriented towards risk sharing products.
Third, in its organizational structure and corporate governance: Islamic banks
have an Islamic (religious) board, to ensure that the bank’s practices are in line with
the Shari’ah, and a strong social solidarity division.
Because of these elements, Islamic banks have the characteristics of
investment banks, commercial banks and development banks.

4.2 Islamic Banking v/s Conventional Banking

The main difference between Islamic banking and conventional banking is that
Islamic teaching says that money itself has no intrinsic value, and forbids people
from profiting by lending it, without accepting a level of risk – in other words,
interest (known as "riba") cannot be charged.
To make money from money is prohibited – wealth can only be generated
through legitimate trade and investment. Any gain relating to this trading is shared
between the person providing the capital and the person providing the expertise.
At Islamic Bank of Britain, we generate all our profit through Shari’ah
compliant trading and investment activities. We then share the profits with our
customers at a pre-agreed ratio. In order to share profits you must hold one of our
savings or investment accounts.

xlv
There are two major differences between Islamic Banking and Conventional
Banking:
• Conventional banking practices are concerned with "elimination of
risk" whereas Islamic banks "bear the risk" when involve in any
transaction.
• When Conventional banks involve in transaction with consumer they
do not take the liability only get the benefit from consumer in form of
interest whereas Islamic banks bear all the liability when involve in
transaction with consumer. Getting out any benefit without bearing its
liability is declared Haram in Islam.

While the basics of what the business is are the same, the term refers to
operating the business within Islamic law. The main thing that affects this business
under that law is that Islam prohibits the charging of interest. Certainly a problem in
modern banking!
However, what is considered to be interest has different definitions by different
Islamic scholars...some say it can only be considered on gold and silver...but paying
back the same weight as you borrowed (the same weight of paper money for
example), is not interest. Like in all religious things, there would seem to be some
conflict and differences between followers that may seem strange to outsiders.
So basically, modern Islamic banking may take many forms, each of which
strives to adhere to it's understanding of Islamic law.
The Shari’ah essentially means a way of doing things. This ought to reflect in
the working of Islamic banks at all levels: from doing transactions to record-keeping
and the skill-profile of the manpower. The conventional banks may not move into
the turf of the Islamic banks if there are fundamental differences between the
requirements of interest-based banking and Islamic banking. Otherwise, chances are

xlvi
that interest based banks may give Islamic banks a run for their money through
“Islamic windows”.
The fundamental difference between Islamic banks and the existing
commercial banks is the avoidance of Riba in Islamic banking. Islamic banks are
also universal or multipurpose banks and not purely commercial banks - a cross-
breed between commercial banks and investment banks, investment trusts and
investment-management institutions. Since the
The other differences are:
• Relationship
Basically the relationship between Islamic Bank and its customers is not of
debtor and creditor, but it is something of sharing risk and rewards. So the
relationship emerges as Mudarabah and Rabbul Maal. This basic assumption
leads to the following two things. No predetermined fixed return on
customer’s deposits.
• Sharing Profit/Loss
Dubai Islamic Bank share profit in pre-determined and declared ratio and the
capacity of Mudarabah and in case of loss they sacrifice the management
services rendered for operational activity. Dubai Islamic Bank, however,
shares the loss on investment of its equity. This ensures justification equity
and equality for correct payment of profit or sharing loss.
• Finances to customer
Unlike conventional bank, Dubai Islamic Bank does not allow cash loans.
Dubai Islamic Bank invests funds either through participation (Musharakah /
Mudarabah) or in the form of Islamic Instrument like Murabahah and Ijarah
Funds and other Islamic compliant mode of financing.
• Multi-purpose bank
Dubai Islamic Bank deals in short term, medium term and long-term
investment in various modes of financing including equity participation. So it

xlvii
 is a multi-purpose Bank, functions as commercial as well as investment bank
and plays the role of Non-Banking Financial Institution (NBFI).
• Use of financial resources
Dubai Islamic Banks use the financial resources in productive activities
thereby developing society as a whole, while conventional Bank attracts
financial resources and lends them without directing towards business or
productive preposition to earn profit. Although the profit is also kept in mind
by Islamic banking too but the same is not the main objective.
• Equity base banking
Dubai Islamic Bank is basically equity based as funds are employed in
Shirkah to share profit, while the conventional has no concern to this effect. It
only places funds at the disposal of the borrower for a fixed return.
• Value Oriented
Islamic Banking system is value oriented while conventional banking system
is value neutral. Dubai Islamic Bank shares profit earned by the Bank’s funds
while other Conventional Bank has no concern with the generation of income
or sustaining loss by utilization of funds.
• Review & Audit
Dubai Islamic Bank is required to be viewed by Shari’ah audit in addition to
the normal audit, while the conventional bank is satisfied with statutory audit
only.
• Islamic banking system increases the investment. In conventional banking
system, higher the level of interest the lower the level of investment and vice
versa. Thus financing the business on the basis of profit and loss sharing
instead of interest will increase level of productive investment.
• Target customers are partly different.

xlviii
4.3 SWOT Analysis (Strength, Weakness, Opportunity,
Threats)
Strengths:
• Leading Islamic Bank
Incorporated in 1975, DIB is the oldest full-service Islamic bank in the world.
DIB is one of the largest Islamic Banks in the UAE, complying with
Shari’ah. As of December 31, 2010, the bank reported total assets of
AED90.14 billion in 2010, as compared to AED84.3 billion in 2009,
representing an increase of 6.9%. DIB provides a broad range of financial
products and services that comply with Islamic Shari’ah as alternatives to
conventional banking products and services. The bank provides retail
banking; Wajaha banking, wealth management service; Johara banking,
banking services for women; business banking; corporate banking;
investment banking; real estate finance; and contracting finance services to
more than 1.2 billion customers. The leading market position of the bank
enables it to attract deposits and increase its lending portfolio. In 2010, DIB
recorded total financing assets of AED57.1 billion, as compared to AED49.9
billion in 2009, representing an increase of 14.4%. DIB’s leadership position
in the growing Islamic finance sector was reaffirmed by various industry
recognition and awards. DIB was named as the “Best Local Investment
Bank”, for third consecutive year, at emeafinance magazine’s annual Middle
East Banking Awards in November 2010. Dar Al Shari’ah, the Shari’ah
consultancy and Shari’ah advisory subsidiary of DIB, was recognized as the
“Best Shari’ah Advisory Firm” and “Best Islamic Consultancy Firm” by the
Islamic Finance News (IFN) Awards Best Service Providers Poll in October
2010. Earlier in 2010, DIB was named as the “Best Islamic Bank” by
Asiamoney Magazine.

xlix
• Financial Stability
DIB has strong financial stability and strong capitalization, which enhance
operational flexibility and reduces business risk related to its operations.
DIB’s strong capital base of AED10.53 billion as of December 2010, 17.2%
higher than previous year, ensures capital adequacy to support its organic and
inorganic growth with the secured and unsecured nature of its lending. The
bank’s ownership structure, and strategic importance in retail lending in the
UAE lend further long-term stability. DIB’s largest shareholder with 29.8%
shareholding, Investment Corporation of Dubai, is the investment arm of the
Dubai government. Other major shareholder of the bank with 7.2%
shareholding, the Lootah family, is the founding shareholder and a prominent
Dubai based business family. The strong capital adequacy of DIB and support
from the government strengthens its risk profile.
• Funding Profile
The bank leverages on its branch network and market position to attract a
large deposit base which forms a major part of its funding mix. DIB reported
total deposits of AED63.45 billion in 2010, as compared to AED64.2 billion
in 2009, representing a slight decline of approximately 1%. However, the
bank maintained a healthy financing to loan ratio of 90% in 2010. DIB
sources a large proportion of such deposits from the retail sector which
ensures a low cost stable deposit base. The current accounts and savings
accounts, combined, formed 39.6% and 37.2% of the total customer deposit
base in 2010 and 2009, respectively. The strong customer deposit base of
DIB ensures a healthy liquidity position for the bank and the low cost of such
funds improves its core earnings.

l
Weaknesses:
• Asset Quality
The bank’s lending portfolio was troubled with asset quality concerns
resulting in high impairment charges. DIB’s core pre-provisioning earnings
was troubled by continuous increase in impairment charges. The bank’s
Retail and Business Banking segment reported provision for impairment of
AED178.14m in 2010, as compared to AED134.04m in 2009, representing an
increase of 32.9%. DIB’s Wholesale Banking segment reported from the
provision for impairment of AED677.29m in 2010, as compared to
AED671.89m in 2009, representing an increase of 0.8%. Problems in the
private sector corporate and commercial real estate related issues led to the
increase in such impairment charges. The rise in impairment charges led to a
decline in net income of DIB which was partially affected by low investment
returns. The bank might continue to incur such impairment charges in the
future, although at a slower growth rate.
• Exposure to Real Estate
Historical focus on the real estate sector and asset based lending in Islamic
finances exposes DIB to fluctuations in the real estate sector. In 2010, the
Real Estate Segment of the bank reported net loss of AED1.15 billion, as
compared to AED354.09m in 2009. DIB held a large portfolio of property
investments which added to its exposure to the real estate segment. The bank
holds a 45% stake in Deyaar Development PJSC, an associate company,
which is one of the major real estate developers based in Dubai. In November
2010, DIB increased its stake in DIB increased its stake in Tamweel, the
UAE‟s key mortgage entity, to 57.33%. The decision was part of a Dubai
government led rescue effort to save Tamweel, after the Dubai real estate
collapse. DIB could report future losses from its real estate portfolio due to
the weak real-estate market in the UAE.

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 • Reliance on the Domestic Economy
The bank limits its revenue generation opportunities by having its operations
confined to a geographical region. DIB gets directly linked to the social,
political and economical conditions prevailing in its country of operations.
The financial services sector going global has seen many companies
expanding their foreign operations to enhance revenue generation. Many
foreign companies have also entered the Middle East market, which has
shown high growth potential in the recent past. In 2010, the bank generated
almost all its revenues from the UAE. The bank could look forward to expand
its operations geographically to mitigate the current concentration risk.

Opportunities:
• Expansion of Distribution Channel
The focus on distribution network expansion could provide new growth
opportunities to the bank. During 2010, the bank introduced six new branches
taking the total number of branches to 66 as of December 31, 2010. Two of
the six new branches were opened in November 2010, one in Abu Dhabi and
two in Dubai. DIB aims to strengthen its UAE-wide branch network by 10
more branches in 2011. DIB opened 44 ATMs during 2010 taking the total of
ATMs to over 450 as of December 31, 2010. The bank added 100,000 new
customers in 2010. DIB also expanded services offered through other
alternative delivery channels such as online banking and mobile banking,
offering enhanced services to its customers. In 2010, DIB launched a new
booking payment method for flydubai for its customers. The bank also
introduced its Al Islami Mobile Banking service which provides a wide range
of secure and convenient banking services through a customized mobile-
based website. The bank having presence in Pakistan, Jordan and Turkey
could look forward to expand such businesses to mitigate its geographic

lii
 concentration. The expansion of bank’s distribution network could deliver
strong revenue growth and also strengthen its market position.
• Launch of Products
The new products and services launched by the bank would help it sustain in
the highly competitive financial services market. In November 2010, DIB
entered into a joint venture with Eiffel Management, a France-based
company, to launch Dubai’s first Real Estate Investment Trust (REIT),
Emirates REIT. In June 2010, the bank launched three new account options;
Al Islami 2-in-1 Account, Al Islami Current Account Plus and Al Islami E-
Savings Account, to meet the needs of different customer segments. The bank
launched a two-year Islamic Certificate linked to the RBS Crescent Dynamic
Middle East 2 Strategy. This US dollar-denominated certificate issued by the
Royal Bank of Scotland Group and distributed by DIB’s Wealth Management
division offers a unique investment solution. DIB also introduces a new
Shari’ah-compliant product, Al Islami Salam, which offers liquidity through
personal financing. The introduction of these products and services would
facilitate the bank to earn more revenues and strengthen its market position.
• Growing Global Islamic Finance Market
Through its geographical presence, DIB is well positioned to benefit from the
growing global Islamic finance market. Islamic banking and Islamic
insurance products and services have registered strong growth around the
world; especially in Asian countries such as Malaysia, and the Middle East.
According to the Malaysia International Islamic Financial Centre, in 2010,
the global Shari’ah-complaint market comprising 628 players with presence
across 48 countries was valued at $1 trillion, of which Islamic banking
accounted for 83%, followed by Sukuk with 12%, Islamic funds with 4%,
and Takaful with 1%. The global Islamic finance market is forecast to
increase at a CAGR of 15% per annum until 2015, with Islamic banking

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 (comprising of retail, commercial and Sukuk) driving growth. As of 2015,
Shari’ah-complaint assets are expected to account for 2.5% of the global
banking assets. The demand drivers of Islamic finance market are
MENA/GCC and East Asian countries with strong economic growth, high
Muslim concentration, abundant liquidity and strong government and
regulatory support. In addition, emerging market such Egypt, Turkey,
Pakistan, Bangladesh, Indonesia, and the UAE are expected to drive growth
in retail, SME, commercial, and wealth, equity and fund management
markets. While global financial centers such as London, New York, Hong
Kong, Frankfurt, Sydney, Singapore, Tokyo, and Seoul are expected to drive
growth in Sukuk, corporate, commercial, and treasury and private equity
markets. Participating in such demanding markets could offer ample growth
opportunities to the bank.

Threats:
• Intense Competition
DIB operates in a highly competitive financial services market. The bank
competes with various conventional and Islamic banks. As of February 2011,
the UAE had 23 local and 28 foreign banks offering banking and financial
services. A few of DIB’s key competitors include First Gulf Bank PJSC,
Emirates NBD PJSC, Mashreqbank PSC, Abu Dhabi Commercial Bank
P.J.S.C., Abu Dhabi Islamic Bank, and Commercial Bank of Dubai. Intense
competition from established players and consolidation of their financial
products could have a negative impact on the bank’s operations. This highly
competitive market could adversely affect DIB’s profitability, if it fails to
retain and attract clients and customers. The bank should come up with
innovative ways of serving its customers so as to remain profitable in the
highly competitive financial services market.

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• Regulatory Changes
DIB’s operations are subject to regulation and supervision in each of the
jurisdictions where it is domiciled and licensed to conduct business. It has
been supervised and administrate by regulators for issues such as licenses,
standards of solvency, capital adequacy, policy forms, investments, security
deposits, and methods of accounting. Due to the recent economic crisis, the
regulatory agencies around the world are expected to adopt stricter norms for
the banking sector. Implementation of new global regulatory standards such
as BASEL III may impact the capital adequacy and liquidity position of
banks. In February 2011, the UAE Central Bank issued a statement detailing
new borrowing limits and caps on fees charged by banks in the UAE, which
might bring changes in operations for many banks. New regulations, which
are outside the bank’s control, may increase its compliance cost and cost of
capital.
• Fluctuations in Interest Rates
The fluctuation in interest rates could have a material adverse effect on the
book value of the bank. DIB’s investment portfolio contains interest rate
sensitive-investments, such as municipal and corporate bonds. The increase
in market interest rates would decrease unrealized capital gains on fixed
income securities of investment portfolio. However, the decline in market
interest rates could have an adverse impact on the bank’s investment income.
The bank could witness pressure on interest rate margins if the domestic
interest rate increased in future. A large proportion of Islamic financing is on
fixed rates and such a scenario could aggressively impact interest earnings of
the bank if interest rate were to significantly change. DIB’s earnings from
investments, especially Sukuk and inter-bank placements could also be
affected due to change in interest rates. Interest rates are highly sensitive to

lv
 governmental monetary policies, domestic and international economic and
political conditions and other factors beyond the bank’s control.

4.4 New Products

To the astonishment of some, Dubai Islamic Bank (DIB), which has a reputation for
being very strict in its Shari’ah compliance where new products are concerned, has
just launched a Salam product using salt to provide finance to personal individuals.
Basically, with some clever but Shari’ah compliant maneuvering, the client gets
unencumbered money now in return for an agreed future liability using salt as the
Shari’ah vehicle to accommodate this. Two consequences flow from this. Firstly
other banks are surprised that the Dubai Islamic Bank Shari’ah board has agreed the
product is Shari’ah compliant. Secondly, that DIB is targeting high ticket personal
lending, presumably to replace property and construction where its books must be
all but closed in practice if not publicly. Personal finance to high net worth
borrowers is not especially risk free.

4.5 Islamic Banking: A growing market

Historically, the growth in Islamic banking came mainly from the desire of retail
banking customers who were seeking to borrow and invest in accordance with their
personal beliefs. This was despite the fact that Islamic banking products were
initially not as competitive as their conventional counterparts.

In certain countries, governments fostered the development of the Islamic banking

sector. For example, in Malaysia, the Government was the driver behind the
development of the sector by funding Islamic financial services institutions and by
creating the enabling legal and regulatory frameworks.

lvi
Over time the growth in Islamic banking gathered pace. This has mainly been driven
by economic and demographic growth in mainly Muslim countries which has
spurred the demand for Shari’ah compliant solutions. However, the supply side has
also had a role to play; as more financial services institutions offer Islamic banking
products, this raises the level of awareness among customers and increases the
competitive intensity in the marketplace.

As a result, Islamic assets have grown between 15-20% per annum over the past five
years making Islamic banking one of the fastest growing sectors in the global
financial services industry. Exhibit 2 charts the growth in Islamic assets over the
past 5 years.

Figure 1: Growth of the Islamic Banking Industry

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The growth in Islamic banking has not been limited to retail and commercial
banking alone. On the asset management side, there has been exponential growth in
compliant funds in recent years. Exhibit 3 charts the growth in Islamic equity funds
over the past 5 years.

Figure 2: Number of Islamic Mutual Funds

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4.6 Why Islamic banking is more viable than
conventional banking system?
From the characteristics and the advantages of Islamic banking given in the
previous section, it can be easily concluded that Islamic banking is more viable than
conventional banking system. The main reasons for its viability are:
• Islamic banks have some definite edge over conventional banks because their
capital is secure. While, the capital of the conventional banks is at risk, due to
high leverage with their liabilities. The investments and deposits in an Islamic
bank are not the liability of the bank and can, at best, be termed as a
contingent liability as these funds are in trust with the bank. The liability of
the Islamic bank arises only when gross negligence is proved in carrying out
the trust functions as distinct from business losses. Islamic banks are,
therefore, highly leveraged institutions, unless of course their current account
balances are several times their paid up capital and reserves.
• The main selling point 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. In practice,
however, Islamic banks have been concentrating on short-term trade finance
which is the least risky.
• As Islamic banks do not have to pay fixed amount to borrowers, they need
not to keep additional liquidity with them. Thus they can lend more as

lix
 compared to conventional banks because they do not have to keep excess
money with them.

4.7 Issues in Islamic Banking with regard to Dubai

Islamic Bank
• Technology
Designing technological solutions around a concept requires
extensive knowledge of the domain. Conventional banking today is
technologically advanced; however, for crafting Islamic financial
solutions, considerable time and expertise are required.

• Public Awareness
Islamic financial model is feasible. There is no question about this. In fact,
with the availability of more financing modes than those recognized at
present.
Current Issues in the Practice of Islamic Banking is more versatile and
efficient. But it faces problem of general acceptability. This is mainly due to
unfamiliarity with the various Islamic modes of financing. This problem is
likely to be solved over time. But pace of development of Dubai Islamic
Bank can be expedited through the following:
 Public education campaigns,
 Inclusion of Islamic banking concepts in school curriculum,
 Making Islamic financing course a part of business administration
programs and
 Offering fully fledged degree programs in Islamic financing.

• Training of Banking Professionals especially Non-Muslims in the use of

Islamic Financial Products

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 Lack of qualified manpower is one of the biggest hurdles in the advancement
of Islamic banking. Pioneers in Islamic banking developed their financial
instruments and painstakingly trained their staff. There is no training institute
to meet manpower needs of existing and future Islamic banks. Some of the
reasons for this gap are understandable. For example, lack of consensus on
form and details of Islamic financial instruments and nonexistence of Islamic
reporting and accounting procedures. Some work has been done. But a lot
more is still needed, especially on the fundamentals. Nevertheless, there is
enough material to offer short training courses in Islamic banking.

• Accounting
Accounting represents by far the biggest challenge in the implementation of
the Islamic financial paradigm. At present, efforts at AAOIFI are leading
toward standard accounting norms for Dubai Islamic Bank.

• Need for Professional Bankers

The need for professional bankers or managers for Dubai Islamic Bank
cannot be over emphasized. Some banks are currently run by direct
involvement of the owner himself, or by managers who have not had much
exposure to Islamic banking activities, nor are conversant with conventional
banking methods. Consequently, many Islamic banks are not able to face
challenges and stiff competition. There is a need to institute professionalism
in banking practice to enhance management capacity by competent bankers
committed to their profession. Because, the professionals working in Islamic
banking system have to face bigger challenge, as they must have a better
understanding of industry, technology and the management of the business
venture they entrust to their clients. They also have to understand the moral
and religious implications of their investments with the business ventures.

lxi
 CHAPTER -5
Findings and Suggestions

lxii
5.1 Findings
• Islamic banks like Dubai Islamic Bank charge interests but in the name of
service charge and commission.
• More than half portion of Muslim does not invest in any financial product.
• Lack of awareness about the Islamic Banking system.
• Main influencing factor related with investment is by friends.
• Businessmen prefer reinvest in businesses rather than investing in financial
products.
• Most of Muslims are aware of Shari’ah principles and try to follow those
principles fully or partially. This is also one constraint for investment.
• Lack of Coordinated Research Work on Islamic Economics, Banking and
finance.
• Lack of co-ordination and co-operation among the Islamic banks.
• Rigidness because it follows strict Islamic Banking system.
• Most of the Non-Muslim people don’t know about the terms used in Islamic
Banking because it’s too complicated to understand.

lxiii
5.2 Suggestions
• Customers need to be more aware of the Islamic products by the Banking
department.
• They can set up training institutions on Islamic banking and can instruct
training to borrowers and other public to increase their business.
• More detailed approach of marketing should be followed.
• Proper training should be given to its employees and staffs especially Arabs.
• To promote teaching, training and research in Islamic banking and finance
and to produce and disseminate authentic information on their activities with
a view to develop new Islamic financial products, it is proposed that Islamic
banks strengthen their cooperation with the assistance of the Islamic Research
and Training Institute.

• Well-informed individual and corporate consumers, knowledgeable

about Islamic banking.
• There is an urgent need for more extensive cooperation among Islamic banks
throughout the world. There should, therefore, be more organized and
systematic meetings, seminars, conferences and workshops to exchange
experiences and expertise and to foster closer cooperation in all spheres of
operations.

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CHAPTER -6
Conclusion

lxv
6.1 Conclusion
At present, businesses are becoming more focused on different aspects that
influence their organizational performance and competitive position in the
marketplace. Although, competition in banking and insurance industry is tough, it
can be said that Islamic Banking is still able to compete well because of their
effective management strategies as well as their Islamic rules and policies, their
ability to cope with different factors that affects the business as well as their core
competencies.

Islamic banking is a part of over-all value system of Islam. It is, therefore,

imperative that simultaneously genuine efforts are made to ensure that the people are
imbued with honesty of purpose and their actions conform to Islamic values. The
basic values that Islam seeks to establish are:
• Freedom
• Brotherhood
• Equality
• Justice
• Trust i.e. treating the God – given capabilities and resources as trust.
• Honest Consciousness i.e. sense of responsibility and care for one’s
obligations.

Islamic banking is a very young concept. Yet it has already been implemented as the
only system in two Muslim countries; there are Islamic banks in many Muslim
countries and a few in non-Muslim countries as well. Despite the successful
acceptance there are problems. These problems are mainly in the area of financing.

Islamic banks can satisfy most of the efficiency conditions if they can operate as a
sole system in an economy. Conventional banking, on the other hand, does not
satisfy any of the efficiency conditions analyzed above. However, when Islamic

lxvi
banks start operation within the conventional banking framework, their efficiency
goes on decreasing in a number of dimensions.
Islamic banking and finance now is the strong industry in the Islamic and Western
markets, but will continue to face struggles in the process. Due to the religious
underpinning, the Islamic finance industry faces a set of unique challenges.

Because of the prohibition of interest in Islam, Islamic Banking had been introduced
which enables the pious Muslim people to involve in banking system. Avoiding
interest and conducting banking business in profit and loss sharing basis, Islamic
banking have been successful to attract clients and expand its activities all over the
world since its introduction in 1963 in Egypt.

lxvii
 Bibliography
Books:
• A Basic Guide to Contemporary Islamic Banking and Finance - Mahmoud
Amin El-Gamal - Rice University

Journals:
• Dubai Islamic Bank P.J.S.C. (DIB) Financial and Strategic SWOT Analysis
Review – Global Data – April 2011
• 'Islamic banking', Journal of Islamic Banking and Finance, Abdallah, A.,
1987. January-March 2010
• “Islamic banking: state-of-the-art", Islamic Economic Studies, Ahmad, Z, 1994.
• 'Islamic economics, finance and banking - theory and practice', Journal of
Islamic Banking and Finance, l986.
• Interest-Free Banking, Orient Press of Pakistan, Karachi, l964.
• "Development in Islamic banking: a financial risk-allocation approach",
Journal of Risk Finance, Vol. 9 Issue: 1, 2008.

Internet:
• http://www.dib.ae
• http://www.muslim-investor.com
• http://www.islamicIQ.com
• http://www.islamic-banking.com
• http://islamic-finance.net
• http://www.muslimsonline.com/ief
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• http://www.zawya.com/Story.cfm/sidZAWYA20091211065734/Iran%202nd
%20in%20Islamic%20Banking%20Assets%20

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• http://zakatpages.com/2007/01/19/alhamdulillah-for-lloyds-tsb-bank/
• http://www.badralislami.com/glossary/a-h.asp
• http://www.wikipedia.org
• http://www.google.com
• http://www.scribd.com
• http://www.docstoc.com
• http://www.parsoli.com
• http://www.islamicequity.co.in
• http://www.financeinislam.com
• http://www.iiibf.org
• http://www.islamicnews.com
• http://www.nseindia.com
• http://www.khaleejtimes.com
• http://www.gulfnews.com
• http://www.investopedia.com/articles/07/islamic_investing.asp
• http://islamic-economy.com
• http://riba-free-banking.com
• http://www.gdrc.org/icm /islamic-banking.html
• http://www.islamicbankingnetwork.com
• http://islamic-economics.com
• http://www.islamic-banking.com/ibanking/whatib.php

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