Islamic Banking Performance Versus Commercial Banking Performance In Kuwait Stock Exchange (KSE)

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Acknowledgement

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Abstract

Islamic banking emerged in the 1970s as alternative to conventional or commercial banks because of certain inconsistencies between the practices of commercial banks and Islamic teachings. Commercial banks require a satisfactory guarantor in granting loans. The investigation compares the Islamic bank Kuwait Finance House with the commercial bank National Bank of Kuwait in terms of performance in the Kuwait Stock Exchange to clarify the assumptions about Islamic and commercial banks and provide information useful to consumers and investors. As a significant part of the banking and finance sector, Islamic banks compete not only with each other but also with commercial banks. The biggest Islamic banks are concentrated in Saudi Arabia, United Arab Emirates, Iran and Kuwait and these banks compete over the market in the Middle East and North Africa. The banking industry in Kuwait where Islamic banks operate has become highly competitive over the market.

Chapter I: Introduction

Background of the Study

Many entrepreneurs or merchants seeking loans offer their personal reputation and business plans as guarantee in seeking loans but commercial banks require certainty of payment in assessing guarantors. Commercial banking imposes interests on loans and other interest-based transactions, which goes against Islamic principles of not exacting interests on any bank transaction regardless of purpose and not earning money from money (Haiwad 2008). In transactions with commercial banks, the debtor shoulders most of the risk, which does not completely align with the idea of justice in Islam (Al-Jarhi 2002). As alternative, Islamic banking operated according to the Qur'an and Sunnah as incorporated into Shari' ah law (Vogel & Hayes 1998). Since the emergence of Islamic banks, these experienced growth in terms of customers and capital in predominantly Muslim countries such as Kuwait, with the first Islamic bank established in 1977 (Haiwad 2008). Since then, Islamic banks have become significant players in Kuwait's financial sector.

Islamic banking in Kuwait adopted banking policies from conventional banks that were consistent with Islamic teachings and developed banking practices consistent with Shari' ah law. The murabaha or cost-plus sales involve customers requesting banks to purchase commodities on their behalf for a profit margin. The bay' bithaman 'ajil or credit sales allow customers to secure the role of banks as middlemen in a deferred payment scheme with profit margin. The 'ijarah or leasing agreement is another permitted transaction. The musharakah and mudarabah are partnership transactions between customers and Islamic banks in support of enterprise and other ventures. (Vogel & Hayes 1998; Al-Jarhi 2002; Haiwad 2008) To address contemporary ...