This is a research on Islamic financial institutions. Concentrating upon ethical and socio
economic policies based upon Islamic banking and occupied Palestinian territories development.
Firstly an Islamic bank is a financial institution that complies with the principles of sharia
in all activities concerning finance, investments not forgetting banking and not forgetting the fact
that because it’s a financial institution then it has be subjected to control and monitoring by the
central bank in the given nation. (Institute of Islamic banking and insurance 1990). Also an
Islamic bank is one which is compliant with sharia in all the packages it offers to its clients and
also all the transactions they participate in. The services they offer cut across from investment
certificates, savings accounts, and current accounts.
Islamic banks also do cater for their customers different financial needs by offering
packages such as the cost-plus which they refer to as Murabaha, also there is joint Venture which
they refer to as musharakah, they also offer leasing services they are referred to as ijarah.(Abu
Dhabi Islamic bank 2016). Letter of guarantee as an Islamic alternative is offered too not
forgetting covered cards and letters of credit. Incase new transactions options arise in the market
because it’s a constantly changing world the banks have a committee of Islamic jurists that have
been accorded the work of making sure before the bank incorporates it, it is carefully scrutinized
to make sure first that it is sharia compliant.(Investopedia 2016).
Current accounts is a deposit call made by a person. It allows deposits and also
withdrawals of cash, one can also send and receive money during office hours. In many Islamic
banks these accounts can be accessed all day through the vast banking channels that are present.
The concept of Islamic finance its benefits and effects 3
These include online banking services, sms banking, ATM services and not forgetting mobile
banking. (Qatar-bank 2016). It is also a means of provision of safety facility for a person’s cash.
Not forgetting that all this is sharia compliant. This money will only be invested in ventures that
are considered to be sharia compliant as opposed to the ones in conventional banks which invest
even in non-sharia compliant areas. Also Islamic banks do not charge their clients for not
maintaining the required minimal funds in the accounts.
Also no charges funds are normally deducted at the time of closing the account as
opposed to the conventional banks counter parts which normally do recover charges funds.(
Allied Bank 2017). When it comes to savings accounts offered by Islamic banks, the relationship
between the banks and account holders is Mudarabah based. Here the depositor also known as
Rab ul Maal provides the Islamic with the finance needed the bank then invests the money in
certified sharia compliant ventures. Also the profits here are neither pre-determined nor fixed.
But the bank and the client agree on a profit sharing ratio of splitting the profits that come to
them. The loss is also borne by both parties involved. In Palestine the amount needed to open a
sharia compliant account is more like the same like the one needed do a conventional savings
account. Therefore they eliminate the theory of interests earned from the entire process even in
fixed deposits because they do not pre determine the profits to be earned because it is equally not
allowed in Islam. Therefore the performance of the bank in the various investments the bank
New born risks in Islamic banks are lesser and also less likely to affect the Islamic banks
in Palestine as compared to their conventional counterparts. Islamic bank also have high
resilience in terms of mobilising capital than their conventional counterparts. The biggest
opportunity that was presented to Islamic banks and Islamic finance in general came during the
The concept of Islamic finance its benefits and effects 4
2008 financial crises. During the same year 2008-2009 the industry had a growth estimate of
nearly 32% as compared to the conventional counter parts who stood at 12%. This clearly shows
that the financial crisis had a negligible effect on the Islamic finance sector.
The Islamic finance industry provides a very solid, reliable and efficient alternative to
investors and consumers because of its high current liquidity. (The conservation 2016). The
entire industry was estimated at $2.1 trillion and is expected to hit $3.4trillion by the year 2018.
This shows just how efficient the industry is and how strong it is such that it was able ro register
a steady growth even during the period of financial crisis.
However Islamic banks have fewer ways of distribution of risks simply because they are
limited from trading in transactions with uncertainty hence curbing the room for newborn risks
effect since most of them normally appear from events that have a certain level of uncertainty
which is considered as non-sharia compliant risk by the bank and hence it is not allowed to get
involved in these transactions. There Islamic financial institution in Palestine also has limited
exposure to most of the financial assets that causes significant losses to their conventional
counterparts. Sharia compliant money markets have also been developed in various parts of the
world. Normally in lesser developed countries, securities and such and issues concerning the
money market are centrally controlled by central banks. (E-elgar 2016) .
The current issue that arises is what is the level of effect that capital has on bank risks
and is there a possibility of this risk evolving over time. And also generally is Islamic banking
become more risky by the day in Palestine and in the whole world in general in terms of capital.
Overall is that bank capital overall increases the liquidity risks in especially conventional banks
over the Islamic counter parts. (Arabnews 2017) .One simple reason may be because
The concept of Islamic finance its benefits and effects 5
conventional banks ignore the liquidity risk of capital. In Islamic banks it’s not the case sharia
compliant facilities still ensure that sharia acceptable packages are offered. Islamic banks do not
show traces of appreciable risk, liquidity risk in respect to bank capital. Islamic banks are less
concerned with capital that is why there risk exposure to new born risks is relatively low. This
might be because in Islamic banks, investors and depositors conflicts are less simply because
their lending and financing doesn’t revolve around capital mostly.
Solely when it comes to the efficiency and effectiveness of Islamic banks in Palestine,
they are not very effective from the year 2010-2015. In Gaza city the share of the market that is
exhibited by Islamic banks is relatively low, by the year 2015 it was not more than 11%. The city
houses approximately only four Islamic banks and they offer limited services. Out of the four of
them only two are fully certified and registered by the Palestinian monetary authority which is
the body that currently acts as the central bank in Palestinian. The other two Islamic banks in the
Gaza strip are yet to be licensed. However the Palestinians have been putting together efforts in
the Gaza strip to have the first licensed Islamic bank in the region.
The bank is known as Al Safa bank and it was licensed at the end of 2015 to join the
Arab Islamic bank and the Palestinian Islamic Bank as the only licensed Islamic banks operating
in Palestine. The general market share is also very low attributing to mainly the in efficiency of
the products they offer. Currently the market share is at $1billion only 11% of the entire banking
sector in Palestine. On the other hand the unlicensed banks in Palestine also are experiencing a
very tough time in terms of transactions in and outside of Palestine hence contributing to the
inefficiency of the products they offer since citizens are not willing to take them up and invest in
them. The services of such banks are limited to only carrying out operations such as disbarment
of salaries of the government employed personnel that reside in Gazza and also executing a few
The concept of Islamic finance its benefits and effects 6
transactions for the same personnel. Research has it that if more Palestinian Islamic banks are
opened it will help to stabilize the Islamic economy in the region and also it will increase the
efficiency and effectiveness of the packages that are offered by Islamic financial institutions
whose objectives are different from the capitalists that have dominated the entire Palestine
banking sector. This is because the government came to realize that 95% of the financial crisis in
the world are caused by dealing in usury transactions.(Researchgate 2016). The Islamic banks in
Palestinia do not have efficient packages also because the banks currently rely mainly upon
trade-based Murabaha contracts. Also the opening of more Islamic banks in the region will
increase the competition in the islamic bank sector will increase the efficiency of the packages
offered by the sector. The islamic finance has provided a glimmer of hope for the Palestinian
people hope of increased investments away from the capitalists exploitation that has dominated
the nation for a very long time.
Most of the people attribute the Islamic finance sector to Muslims as an Islamic thing and
therefore normally shy off from taking up the investment packages offered by the Islamic banks.
This is normally one of the factors that attribute at times to the low turnover in terms of people
who are taking up the investment packages. (Whyislam 2017). Not only that but even the
Muslims are in dispute in terms of scholarly opinion concerning the fact that are Islamic banks
really interest free and are the principals they have efficient enough. This has also made most
Muslims to shy away from taking up investment packages from the Islamic banks in Palestine
and the whole world in general.
In a Nutshell is that the Palestinian economy has both the Islamic n conventional banking
sectors with the conventional capitalists having a greater share of the market economy compared
to Islamic banking. The packages offered by Islamic banks are efficient but in Palestine they are
The concept of Islamic finance its benefits and effects 7
less effective simply because, the sector is still under developed. There are few Islamic banks
only two are licensed in the whole country. Therefore the packages offered are minimal hence
reducing the effectiveness of the Islamic banks packages. But we cannot attribute all this to the
overall effectiveness of the Islamic banking sector but will be attributed to the in efficiency of
the Islamic banking sector from within Palestine. The industry is also exposed to some risks
others namely to be new born risks however, the risks however are normally evaded due to the
fact that most of the uncertain business ventures are declared illegal and hence the banks do not
involve themselves therefore reducing risks.
Therefore in order to increase the efficiency of the Islamic banking sector public awareness in
order to clear up the misconceptions made by both the Muslims and non-Muslims about the
Islamic finance, non-Muslims have to be educated that Islamic finance is not only for Muslims
and the investment packages can be taken up by everyone in the society as this will provide an
alternative investment for them. As for the Muslims they should be cleared of any doubts that the
Islamic finance sector is interest free so that they can equal increase their participation in the
The increase in participation of the parties stated above will increase both the efficiency
and effectiveness of the sector due increase in competition. That will lead to the Islamic banks to
better their facilities due to trying to outsmart the other competitors and remain relevant.
The concept of Islamic finance its benefits and effects 8
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www.arabnews.com/node/1069986/business-economy Accessed 2017.
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_and_prospects Accessed 2017.