5.1. Critical Discussion of Findings in Relation to Literature and Theory Essay

5. 1. 1. Over Restrictive Regulatory Environment The respondents to the question of whether the environment of overly restrictive regulations was a challenge indicated almost without exception that indeed the restrictive aspect was stifling to at least some extent. This indicates that the regulatory environment currently being experienced in the Kuwaiti banks surveyed is in keeping with the general view of Islamic banks as reported in the literature reviewed. The banking environment created has proved to be unsound, and it accords with the ideas of Windy (2003) demonstrating that it has not been conducive to the effectiveness and efficiency of nine of the ten financial institutions surveyed. The current state of the Kuwaiti banking system, though improving, demonstrates that reporting and the monitoring of capital and risk have suffered due to the heavier restrictions placed on the Shariah compliant banks. See more: Old Age Problem essay Since the restrictions are greater for these banks in comparison with the conventional banks, the Islamic banks have indeed been placed at a disadvantage within the market and this has caused them to be less efficient and therefore less attractive to prospective customers. This lack of attractiveness makes it even more likely that these banks will remain niche focused and relatively small in comparison with the competition. 5. 1. 2. Uniform Regulatory and Legal Framework The respondents to the survey indicated unanimously that the lack of a uniform regulatory and legal framework poses a challenge to the current Islamic financial state. The response to this question might seem enigmatic in light of the previous one. However, though the Shariah imposes restrictions on the types of transactions that might be performed in Islamic financial institutions, it is the regulation of these restrictions that have proven to be without uniformity. This lack of uniformity has been shown to have crippling effects on the Kuwaiti institutions surveyed. The fact is that once regulations become uniform, this serves as a support mechanism to the institutions that follow the regulations (Dudley, 1998). The problem with this lack of regulation is that Islamic institutions have been trying to conduct business according to Shariah, yet this has to be done within the conventional Western financial framework which does not lend the proper type of support to Shariah banking policies. This has been especially problematic in Kuwait since so many of its banks are Islamic and yet the uniform regulations that govern are often at odds with the Shariah principles by which these banks are run. There apparently still continues to be problems despite the 2005/06 regulation attempts by the Central Bank of Kuwait, and it makes it clear that the mere addition of a separate Shariah section to the regulatory laws is insufficient. What is needed, apparently, is full and complete integration of the Shariah into the regulatory system at every pertinent level so that financial institutions will know how to act in a wide array of situations. 5. 1. 3. Underdeveloped Regulatory and Supervisory Regime. Akin to the aforementioned problem, and perhaps stemming directly from it, is the fact that all respondents agree that the supervisory system of regulations is underdeveloped in their financial institutions. When no systematic regulatory doctrines have been formulated, the difficulty arises because supervisory activity has no clear knowledge of what to supervise or guard against. Because of the underdeveloped nature of the supervisory elements, Islamic financial institutions in Kuwait continue to fumble as it regards the attainment of success and customer satisfaction. Customers in these institutions cannot be secure in receiving fair treatment from institutions that have no active and systematic supervision. The respondents did not consider the current state of regulation supervision to be completely inadequate, as their responses hint toward the acknowledgement that the IFSB’s efforts at establishing co-operation among standard-setting bodies have had some favourable impact on the Kuwaiti situation. However, capital adequacy and risk management represent only two of the many areas in which supervision is necessary to the health of Kuwait’s Islamic financial institutions. The responses also indicate that the IFSB’s intentions of extending supervisory cooperation to the areas market transparency and discipline as well as corporate governance are warranted. 5. 1. 4. Capital and Liquidity Requirements The requirements of capital and liquidity within the financial market sector have been theorized as having the potential to be damaging to the Islamic financial institutions around the world. However, the reasons given for this potentially problematic effect reflect a division among theoreticians and those employed within the financial sector. This existence of controversy is confirmed within this research of the Kuwaiti institutions, as three respondents considered liquidity and capital issues to be of medium to high importance, while the others considered the issue to be of very little importance. One side of the controversy identifies the issue of capital and liquidity as stemming from the Basel Committee’s over-estimation of the risks that might accrue to (or as a result of) the assets of Islamic institutions. These theorists indicate that they believe the risks are not as great as others might believe, and it is with this view that those respondents agree—who indicated that liquidity and capital were not an issue. The alternate theoretical view, with which the survey shows three respondents agreeing, is that Islamic financial institutions present more risk than other banks do. The fact that these banks are generally smaller and carry a narrower capital base seems to reflect a large part of what these respondents refer to when they consider liquidity and capital to be a risk in such institutions. The respondents do not, however, indicate any aversion to the establishment of a capital market that would trade in Sukuk and other instruments, and even deepen the market so that additional liquidity might be created. 5. 1. 5. Accounting Standards Harmonization According to the responses given, the issue regarding the standardization and harmonisation of accounting practices ranks highly on the list of things that need to be dealt with within the Islamic financial institutions of Kuwait. The importance of this harmonization has made itself clear within the institutions being studied, as the lack thereof has contributed to the existence of a shallow capital market that lacks fairness, efficiency, and transparency (IOSCO, 2004). The credibility granted Islamic financial institutions as a result of recent work by AAOIFI has improved operations enough to emphasise the importance of accounting harmonisation. As it now stands, the harmonisation initiative has improved the ability for Kuwaiti financial institutions to communicate with other non-Islamic banks as accounting standards have been expressed in harmony to a greater degree. This appears to have also accorded the banking system a reasonable amount of credibility in the estimation of other institutions and accorded to Islamic bank workers a higher level of respect among their peers. Yet more needs to be done, as has been indicated by the interviewees’ responses. Continued efforts to broaden the scope of harmonisation promise to improve the status of Kuwaiti banks within a financial situation in which the majority of institutions do work according to international accounting standards. 5. 1. 6. Standardization of Shariah The respondents were universally agreed that the proper standardization of Shariah was necessary not only to the proper understanding of the Islamic banking principles, but ultimately to the proper governing of all financial institutions in Kuwait. The survey highlights the confusion that currently exists within the market and the formation of a common platform, as suggested by Kahf, does have the potential to improve the existing problem. The standardization of the Shariah would have the added benefit of making it easier for non-Islamic bankers to understand the provisions and requirements of the Shariah as it regards banking. The facilitation of Halal transactions might then be put into effect between such banks and Islamic institutions in Kuwait. Such standards will help non-Islamic members of the banking community understand such ideas as the necessity that an underlying asset exist as the subject of any financing contract, so that institutions will be better prepared to provide more than just a debt paper when conducting Shariah transactions . Therefore, any transaction that resembles Riba, Maisir or any other action prohibited by Shariah may be avoided. Halal practices might be set up even within non-Islamic banking institutions, and this may facilitate increased competition and better practice all round. 5. 1. 7. Competition from Conventional Institutions Competition is itself considered by theoreticians to be a problem for Islamic financial institution as these businesses are usually small and possess a smaller capital base than their competitor institutions. The respondents themselves have also indicated that competition is an important consideration for the Islamic banks of Kuwait. However, the degree of importance to which these respondents have admitted have varied across the spectrum from low to high. The Islamic institutions of Kuwait appear also to have gained a vast amount of capital (via Sukuk and other methods) by appealing on religious grounds and the establishment of a capital market through those means (Iqbal, Ahmad and Khan, 1998). This would indicate why some respondents consider the threat of competition to be low, especially since the Islamic institutions have a religious claim to customer loyalty that competitor institutions may not possess. However, the importance of competition between Islamic institutions appears not to be overlooked by those respondents who considered the threat of competition to be high. Still, though competition may be high, the actual threat it poses may still be low as competition has the advantage of presenting a barrier to the entry of further banking institutions. Furthermore, the existence of non-Islamic financial institutions within the Islamic sector may have been considered favourable by those persons who responded that the threat is low. This may be because the presence of these institutions validates the viability of the Islamic banking sector (Al Omar & Abdel-Haq, 1996). 5. 1. 8. Availability of Data The issue of data availability rates highly within the Kuwaiti Islamic financial sector according to the respondents. These interviewees appear to understand and have had problems arising from the difficulty with which data and statistics are obtained regarding the Islamic capital markets (IOSCO, 2004). The necessity of scientific research and the indispensability of such statistical market data are also addressed in this response by the interviewees; such research has rarely been undertaken by Islamic banks. The unavailability of data is a major reason for this lack of valuable research, and it appears that respondents realize that this has prevented Kuwaiti banks from reaching their fullest potential. The current information possessed for banks on a broad Islamic scale is lacking, inadequate and subject to qualifications. This appears also to be the case for the banks in question represented by the respondents. 5. 2 Micro Level Changes 5. 2. 1. Liquidity Management All respondents considered liquidity management to be of high importance, and this is in direct contrast to the controversial nature of the issue regarding liquidity and capital requirements. This is in keeping with the literature and theory prevailing within the Islamic banking community, which identifies this to be of major importance, especially in light of Islamic banks’ bid for global expansion. In Kuwait too this proves to be of interest to the Islamic bankers, and the many challenges which face the market are likely to be the reason respondents invariably indicated it to be of high concern. Certainly ideas abound regarding how to manage the liquidity within the Islamic market. Methods as have already been identified such as the shuffling (unbundling and repackaging) of assets in order to make them more marketable and liquefiable (Iqbal, 1997). These methods, along with the identification of potentials for inter-bank market development (El Qorchi, 2005), are ones that would doubtless prove valuable within the Islamic financial market represented by these respondents. The depth of the market would be increased in such a situation, and this would prove to be beneficial in the Kuwaiti market that is expanding both within the country and on a global scale. However, these measures would depend on further developments that may present difficulties materializing, and the gravity of this is also reflected in the response to the questionnaire. Such developments would include the installation of a facility that provides a lender of last resort. It would also involve securitization for the purposes of managing the spectrum of risk as well as maturity issues (El Qorchi, 2005). 5. 2. 2. Maturity Mismatch The maturity mismatch issue appears to have contributed to a division among the respondents regarding their responses. While some considered this problem to be of high importance, these opinions were balanced by those who considered the issue to be of medium or low importance. Those respondents who identify maturity mismatch as a low-ranking problem gain assurance from the possibility of using Tawarroq (debt rollover) as a method of financing maturities. The fact that the Kuwaiti Islamic banks they represent have the ability to finance the debt of the ultimate creditor using customer money allows these respondents to feel secure (Al-Suwailem, 2006). However, those who consider maturity mismatch to be a high-ranking issue do so likely because, as has been indicated in the literature, questions do exist concerning the extent to which debt-rollover can be used to finance or match maturity. Other problems, too, lie in the fact that in order for these policies to perform freely, other things previously mentioned would have to be put into place—such as accounting harmonization (for the smooth running of the capital market). Since these systems are not fully up and running in the Kuwaiti market, then this might explain the apprehension that some of the respondents have concerning the maturity matching issue (IOSCO, 2004). 5. 2. 3. Personnel Competence, Qualifications and Training The issue surrounding personnel competence and training in the area of Islamic and Shariah institutional banking has been determined to be of high importance by all but one of the respondents—who still considered it to be quite relevant within the Kuwaiti situation. In order to continue its expansion within the local and global markets, the banking system within Kuwait needs to facilitate the training of its personnel in all areas—including the areas concerned with Shariah banking (Iqbal, Ahmad & Khan, 1998). This necessity has been reflected in the responses, as incompetence has no doubt been the issue within the banks they represent—judging from the fact that most consider it to be of high priority. The problem arises because (among other things) customers are generally more accustomed to the conventional style of banking. Where, as in Kuwait, the majority of banks are westernized and traditional, it becomes absolutely imperative that the personnel be thoroughly familiar not just with the practices pertaining to Islamic banking but also with the Shariah doctrines that govern them. Without this knowledge, it is likely that employees do not possess the expertise necessary to explain to customers the meanings and Islamic implications of certain banking or investment practices. The respondents to the questionnaire, being banking personnel themselves, have first-hand knowledge of the problems that may arise when personnel are untrained or unqualified. Their response also points toward the need for more scholars who specialize in both finance and Shariah, as well as the need for focussed development of courses in Shariah designed specifically for the economist (IOSCO, 2004). 5. 2. 4. Financial Products and Innovation Innovation and the development of financial products appear to rank highly in the estimation of Kuwaiti bankers and investors, as is indicated by the responses to the questionnaire regarding this issue. The idea behind this wide-spread adoption of the innovative process by these Kuwaiti respondents stems from the theory that the viability of these Islamic institutions as an alternative to conventional banking rests on the ability of the bankers to provide a wide variety of new methods of investment for potential investors. The respondents, being high-level investment personnel working in Kuwait, are at least aware of the plethora of ways that Islamic and Shariah banking methods differ from the conventional methods of banking. These differences offer a variety of ways in which innovation might be brought to bear upon the Kuwaiti financial market and be made to attract newer investors. Such ideas as Mudarabah and Musharakah are likely to draw prospective investors previously deterred by the prospect of bearing the entire losses of their ventures. Furthermore, such persons as the respondents represent are in touch with the needs that customers have, and this knowledge allows them to realise the necessity of developing financial products that cater to these needs (Al-Suweilem, 2006; Bacha, 1999). As a result, supply will work toward creating an equilibrium with the demand that exists. Concerns may arise from the fact that these persons are also aware of the need for an in-depth understanding of the array financial instruments in order to put into effect many of the innovations necessary within Kuwait’s Islamic financial institutions (1999). 5. 2. 5. Products and Services’ Marketing The imperative nature of the marketing of products and services is reflected to some extent within the responses to the questionnaire. Though most consider this to be of importance, one person did offer a dissenting voice. Those who did agree were also divided as to the extent to which product marketing is necessary. It is likely that the dissenting person places the innovative development of products in a more prominent place, arguing that until products are developed no marketing will be necessary. This is certainly true. However, the fact that so many of the respondents acknowledge the necessity of marketing makes it clear that they understand one of the major issues facing Islamic financial institutions: customers are largely unaware of the services that are offered and the ways that these services could be of benefit to them. Clearly this is as much the case in Kuwait as anywhere else since so many respondents in the affirmative concerning the issue. 5. 2. 6. Size of Institutions Institution size is an issue on which most respondents again agreed. These Kuwaiti investment professionals appear also to face challenges which are similar to those faced by all banks—that of garnering a sufficiently wide investment base in order to ensure security and to maximize their competitive strength within the market. Since the questionnaire specifically asked whether size posed a challenge, the answers indicate that even in Kuwait, smaller banks tend to suffer from a higher level of risk on the financial market. What is also probable is that these smaller banks are represented mainly by the Islamic and Shariah compliant banks within the country. The earlier replies concerning the need for marketing and innovation therefore apply to this question of size, as development of strategies along these lines would enable growth and deepening of the institution as well as the market. It is likely, therefore, that (regarding the question of the challenging nature of institution size) the concurring responses demonstrate the need for expansion of Kuwaiti Islamic financial institutions. 5. 2. 7. Institution Rating and Instruments Theory, literature, and this survey concur on the question of the importance of institution rating. Though the matter is brought up as a subject of relevance within the Islamic banking community, it has not been treated as a major issue. This is seen especially in the fact that it remains a question whether or not such ratings should be made obligatory for financial institutions. The respondents to this question gauged the importance of ratings to be of low or medium range, indicating that in the Kuwaiti Islamic banking system, though ratings are also relevant, it is not the question of utmost importance to anyone concerned. The importance of ratings has however been established by the respondents within the Kuwaiti market. Despite the fact that they consider it of low importance, they do indicate that it is considered a pertinent issue. One reason for this would be that the IIRA does exist as a body to assess (among other things) the Shariah compliance of Kuwaiti financial institutions. This may have a bearing on the consumer loyalty that might be considered important to the continued operation or wellbeing of many of these institutions, especially in light of the fact that many Kuwaitis choose Islamic banks (over the competition) precisely for reasons having to do with Shariah compliance. 5. 2. 8. Inadequate Sensitivity to Customer Satisfaction While almost all respondents identified inadequate sensitivity to customer satisfaction as a challenge, of some concern is the fact that only a few Kuwaiti banking personnel identified it as a highly important one. It is evident that Kuwaiti bankers understand the situation of competition that exists within that nation’s financial market, especially since in Kuwait only three of its 15 banks are Islamic. It becomes imperative that consumers are satisfied within such a market where (with 76 other investment companies) alternative banking institutions about. What the Kuwaitis may be counting on is the fact that consumers who use Islamic financial institutions already have their primary needs met in a bank that is Shariah compliant. Still, as represented earlier, Kuwaiti’s banking personnel recognize the need for creating innovative banking products that cater to the desires of the consumer. They also recognise that in order to cater to these needs, sensitivity to customer satisfaction is indispensable. 5. 2. 9. Inability to Communicate Uniqueness The challenge faced in identifying the unique attributes of Islamic financial institutions is admitted by the majority of banking professionals surveyed. However, the importance of this issue seems to be only minimally appreciated in Kuwait—according to the data collected. This idea goes back to the question of marketing, and in which it was also evident that Kuwait felt no major compulsion toward pushing the Islamic banking product to consumers. Concerns about the future of Kuwaiti Islamic banking might here be expressed as it has been shown through the theory and literature reviewed that the ability of these institutions to become strong, viable, and known alternatives to traditional banking depends on its differentiation within the market (Khan & Ahmed, 2001). 5. 3. Critical Engagement with Areas of Convergence 5. 3. 1. Convergence on Shariah Compliance Issues In some very critical areas, it was found that the responses made by these Kuwaiti financial professionals strongly support the theories found in the literature. The strength of this support points in many cases toward not only the importance of the question but also the extent to which changes are necessary within the Kuwaiti finance environment. The unanimity with which the respondents answered the question of uniform regulation challenges leaves no doubt that the lack or inadequacy of regulation dealing specifically with Shariah compliance has a crippling effect on the Kuwaiti banking system. Since the Shariah’s restrictions and requirements may often be intricate, the lack of uniformity within the Kuwaiti market (as has been predicted by literature) has led to problems. Such problems have the potential of ranging from simply an inability to properly execute in the Shariah-compliant areas of banking, or the inability to detect and prevent the inappropriate actions of institutions that claim Shariah compliance. What the Kuwaiti banks have demonstrated is a convergence between theory and practice in that without a proper regulation system, the Shariah support mechanism for the institutions has also proven to be substandard (Dudley, 1998). Islamic institutions in Kuwait, while trying to conduct Shariah compliant business, have the added problem of working within the sometimes contradictory framework of conventional Western banking. Furthermore, the problem proves more crippling in the Kuwaiti finance environment as the Islamic banks are many, yet are lost in a world of regulations that prove more hospitable to the competition. The fact that problems still exist despite the 2005/06 attempts at regulation by the Kuwait’s central bank (CBK) only points to the magnitude of the problem as represented by Shariah regulation and the necessity of uniformity within these regulations/. It also demonstrates the inadequacy of simply tacking on a Shariah amendment to existing law. What this research has shown to be truly necessary is a thorough review of current regulations that culminates in the full integration of Shariah. This will facilitate the continued running of Islamic (as well as conventional) banking institutions within the financial environment. 5. 3. 2. Convergence on Competence and Training in Shariah The importance of personnel competence and training in Shariah banking is also an area that demonstrates convergence of practice in Kuwait with the theory. It highlights the immense need for scholarship and training in both Shariah and banking (IOSCO, 2004; Iqbal, Ahmad & Khan, 1998). The lack of thorough understanding of the key Shariah concepts (as introduced earlier on in this research) is shown to be a deterrent to optimal practice in the Kuwaiti financial environment. Since consumers are more used to conventional banking, this makes it all the more necessary for banking personnel to be fully equipped with knowledge and expertise in Shariah financial management so that all consumer queries might be dealt with thoroughly and professionally. 5. 4. Critical Engagement with Areas of Divergence 5. 4. 1. Divergence on Marketing and Innovation Issues Despite the concurrence of the responses with the theories presented in the literature, there were also some areas where responses disagreed with theory or amongst themselves. The areas represented are product/service marketing, inadequate sensitivity to customer satisfaction, and inability to communicate uniqueness. As regards the imperative nature of product and service marketing, the disagreement was occasioned in the area of the extent to which product and service marketing is necessary within the Kuwaiti Islamic banking environment. The connection that this question of product marketing has with innovation is undeniable, and it is likely that disagreement stems from the fact that persons place a higher priority on innovation. Products must be created before they can be marketed after all. However, it appears to be problematic that even some institutions within the Kuwaiti Islamic banking sector do not place importance upon marketing, as this strategy is precisely the method through which customers become aware of the services that any bank has to offer. Those who consider marketing to be of high importance understand that customer ignorance can have a damaging effect on the viability of a financial institution. Lack of knowledge prompts potential consumers to ignore the services available, and business that might otherwise be gained is lost. Marketing allows customers to become aware of these services, and it is consumer centred as it promotes the benefits that might accrue to the customer as a result of using that service. 5. 4. 2. Divergence on the Question of Sensitivity to Customer Satisfaction The other area of divergence deals with inadequate sensitivity to customer satisfaction. While the theory explored highlights this as an important area, it was surprising to note that some of the respondents considered the challenge to be of high importance. Evidently, the Kuwaiti banking personnel do comprehend the gravity of the competition that exists between Shariah and non-Shariah financial institutions. The fact that non-Shariah banks are set up so that losses to the institution are minimized at the expense of the customer leaves such banks in a relatively more secure position. The necessity of being sensitive to the satisfaction of clients becomes that more important, as the relationship with the customer is possibly the area that offers an Islamic bank the greatest amount of competitive advantage. In order that consumers who may not be completely loyal to Shariah be induced to work with the institution (or to continue as a customer), the satisfaction of these persons (on whom the institution rests) must be ascertained and guaranteed. Marketing plays a big role in this, but before marketing can take place banking professionals must become aware of the areas that would most satisfy these consumers. It must also be aware of areas in which satisfaction is not being granted (whether within Islamic banks or the alternative banking system) and changes made promptly to improve these conditions. 5. 4. 3. Divergence on the Issue of Communicating Uniqueness By far, the divergence of opinions between theory and practice as it regards the inability to communicate uniqueness is most surprising. The reason for this is that it is precisely the uniqueness of the Islamic bank that defines the necessity for all other areas of this research. Its compliance with Shariah principles is what sets it apart from the competition, and it is this that also contributes to the difficulties as well as the advantages of the Islamic bank. Though challenges of identifying the Islamic banks’ uniqueness is acknowledged by the majority of banking professionals surveyed, the minimal appreciation of its importance within Kuwait is of great concern for aforementioned reasons. The idea of uniqueness also reverts to the question of marketing. Though it does make sense that institutions that disregard marketing somewhat would also disregard the importance of product differentiation, this lack of interest on the part of so many managers gives cause for alarm. It gives cause for the expression of concerns about the future of Islamic financial institutions in Kuwait if no effort is made at demonstrating how their services differ from the traditional services of the competition (Khan & Ahmed, 2001). 5. 5. Reflection on personal learning As a student who is relatively new at empirical research, I found the experience of collecting and ordering data very intriguing. It was very interesting to find that the research carried out during the literature review demonstrated that though different researchers had essentially been studying the same phenomenon in different countries, the ideas extracted were able to come together to form a cohesive body of knowledge. This became even more evident when the empirical data collected within this research began finding support in the literature and theoretical concepts identified within the literature review. As it regards Islamic and Kuwaiti banking, I learned that the Shariah system of banking in many ways embodied ideas that exist for the improvement of the financial condition of the country which it serves. It caters to the needs of the institution, yet appears to be much more client centred than traditional banking. It also seems to favour the growth of the economy in its determination that financial transactions be done expressly in conjunction with the creation of real and tangible wealth. Finance is therefore not divorced from real work and real investment or enterprise. I also learned that Islamic banking does face many challenges, however.