Can Islamic Finance Ever Become A Mainstream Product In UK Essay

Can Islamic Finance Ever Become A Mainstream Product In UK - Essay Example Introduction: The emergence of the capitalist system that focuses on the acquisition of individual profits has been long supported as the best economic policy for most countries to follow, because market forces tend to balance out economies in the long run. The banking system in the UK also functions under the capitalist model, wherein acquisition of profits is an integral part of the system and â€Å"greed† or the â€Å"unbridled pursuit of wealth† has become the popular slogan for individuals and corporations (Ayub,2007, p. 31). The motivation towards profit is the cornerstone of the UK banking system. The recent financial crisis and corporate scandals such as Enron have however, dispelled the deregulation which existed previously and given rise to stricter financial regulation of money markets (Von Hagen and Ho, 2007). Deregulation of the banking system has been blamed for the speculative activities of the stock markets and the unrestricted use and issue of credit, w hich led to the financial crisis (Money morning, 2009). In the current financial environment, the Islamic banking model offers a completely different approach to banking and lending, because it is not based upon the profit motivation that characterizes UK banks. The Islamic banking system is based upon sharia law, wherein the charging of interest on loans to gain profit is forbidden and is considered to be contravene the religious tenets of Islam. The question that arises in this context therefore, is: Can the Islamic banking system offer a viable financial choice in the U.K.? Since Islamic banks do not charge interest and thereby provide an opportunity for consumers to borrow loans without large additional amounts being charged as interest, would this be a more ethical and equitable form of banking? The research question that is to be examined in this work is: Can Islamic Finance ever become a mainstream product in the U.K.? Banking system in the U.K. In the U.K., the banking syste m is dominated by four large banking conglomerates, Royal Bank of Scotland, HBOS, Barclays, and HSBC. The financial crisis of 2007 also affected the regulatory system in the UK, producing a tightening up of banking operations (Gola and Roselli, 2009). In March of 2009, the Financial Services Authority in the UK put forward proposals which were geared towards the overhaul of the banking system and its governing rules, especially in regulating lending criteria and clamping down on the unrestricted use of credit, in order to prevent a recurrence of the financial crisis (BBC News, 2009). For many consumers, the high interest rates on bank loans and credit cards are a significant drawback leading to losses, which are especially difficult in the current recessionary environment. The application of Islamic law could therefore potentially lead to the evolution of a â€Å"balanced, sustainable and equitable economic order†, because it can help to provide a balance between social and e conomic principles, as the Islamic system is based upon principles of morality, i.e, Islamic law does not allow collection of interest in banking, for example (Ayub, 49). Islamic banking The shariah or Islamic law is the dominant underlying principle in all Islamic financial transactions, because Shariah compliance is the raison d’etre of the Islamic financial system.(Ayub, 43). Three salient Shariah principles influence the banking industry, i.e, riba, gharar and gambling.This risk sharing model is the