Essays on The Implementation of Islamic Finance and Portfolio Theory in National Commercial Bank Case Study

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The paper 'The Implementation of Islamic Finance and Portfolio Theory in National Commercial Bank " is a great example of a finance and accounting case study.   To understand the best way to implement Islamic finance in the National Commercial Bank (NCB, we first explored the history of Islamic finance. From, the research we found that Islamic finance dates back to 1975 when Bank of Faisal was established in Egypt as noted by Hassan & Lewis (2007).   In addition, we learned that just like NCB other financial institutions are interested in the introduction of Islamic finance in their institution.

Due to this demand, I learnt that the Islamic finance industry has been developing very strongly since its first establishment. As at the time we were making this research on the history of Islamic finance, I found out that the Islamic finance market has an estimated growth rate of between 15% and 20% per annum (El-Gamal, 2006). I also learned that Islamic assets account for approximately 1% of global banking assets (Kettell, 2010). From the analysis that we made we found that the demand for Islamic products is expected to increase substantially.

From the statistics that we accessed, it is estimated that over 300 Islamic financial institutions operate worldwide in some 75 countries (Usmani, 2002). I also found out that the leading Islamic finance centers in the world are Bahrain, Dubai, Kuala Lumpur and London. One thing that motivated us is that Islamic banks are not confined to Muslim countries but are instead spread over Europe, United States, the Far East and the Middle East as established by El-Gamal (2006). Having established the history of Islamic finance, we sought to establish the principles of Islamic economics.

We found out that these principles are guided by the Quran as a primary source in addition to other secondary sources. From our studies, we found out that there are four main principles which guide Islamic finance. According to Visser & Visser (2009), the first principle that we found out was the prohibition of RIBA (interest). This principle requires that no person ought to charge or receive interest. The second principle that we found out was the prohibition of activities with elements of GHARAR (uncertainty).

According to Hassan & Lewis (2007), this principle prohibits financial institutions or individuals from excessive speculation, gambling and derivatives. The third principle that we found out was the one that prohibits individuals or financial institutions from investing in certain sectors or “ haram” items such as alcohol/drugs, weapons/defence, adult entertainment, pig-related industry or conventional financial services offered by banks or insurance companies. The fourth principle that we found out was the one that requires all transactions to be backed by a tangible asset (Visser & Visser, 2009).

Thus we learned that in order for NCB to implement Islamic finance, the products that they intend to offer need to uphold these principles in their development and application. Introduction of Islamic system at NCB will of the institution various advantages. From our discussion, we realized that the profit-sharing principles will ensure that investible funds are channeled to the projects with the highest expected profitability as opposed to the interest-based system where funds go to the most creditworthy borrowers whose projects may not necessarily be the most profitable ones (Visser & Visser, 2009).

Another advantage that NCB will incur by introducing Islamic financial system is that profit sharing will be more conducive to economic growth as this would increase the supply of risk capital for investment and greater incentives for undertaking such risks due to expected profitability as mentioned by El-Gamal (2006). Our discussion also found out that Islamic financial system will promote an integrated economic development at NCB since it encourages the use of money for facilitating trade in goods and investment in productive capacity instead of money creation for the sake of money as supported by Hassan & Lewis (2007).

Thus, we concluded that the introduction of Islamic financial system at NCB would likely be more stable and less vulnerable to the financial crisis that can be caused by speculative activities as suggested by Kettell (2010).


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