Shariah Model

Each study is carried out grounded on a certain theory/theories or on the specific/several models. On the other hand IB is diverse from that in the sense that it is based on the Shariah Principle (Islamic laws).

Hassan and Lewis (2007) describe Shariah as ‘‘the way to the source of life’’ and are used to denominate a legal system which support a certain code of behaviour described by the Holy Quran and the Hadithe (the authentic tradition).

The Islamic Development Bank states that ‘‘Shariah is the set of rules of derived from both the Holy Quran and the authentic traditions (Sunnah ) of the Prophet (peace be upon him) and the scholarly opinions (Ijtihad ) based on the Sunnah.’’

Abd-Allah Bin Masood stated in a Hadith that Prophet Muhammad

He did not bother about them and cursed them directly. As it is, in the Quran, Allah had clearly stated that He permits trade but strictly prohibits interest.

According to Eagle (2009), the principle of the IB follows the laws of Shariah (also known as fiqh al Muamalat that is Islamic rules of transaction). The Shariah value sets importance on some features such as it forbids the payment and collection of interest on funds, prohibits the engagement in any investments that is haram, such as dealing in products that is not in line with Islamic law and values like alcohol, gossip, pock or pornography. These principles apply not only to bank but also to individuals, governments and companies.

Moreover, from the banks which comply with Islamic law, it is expected that they do not charge any interest or late payment fees as this is considered to be Riba. Therefore, to be able reduce risk, bank frequently entail large amount of down payment on goods and property or claim large deposit. Since banks are not allowable to charge interest, the question that arises is how the bank is going to make profits? Well, IB has provided a lawful way for the banks to make profits. They can solely charge higher price for a good if payments are delayed or collected as on later date as this will be considered as trade of goods instead of collecting

The conclusion was that investment banks were the least competent while IB were the most cost and profit capable.

The study made by Majid et al (2003) in Malaysia using stochastic cost frontier approach revealed that in terms of efficiency even though there was a more obstructive business environment IB’s achieved better than their CB counterpart. Molineux and Iqbal (2005) determined their result, that is, on whole discoveries IBs was more competent than conventional bank even using ratio analysis. With the same technology, cost and profit efficient system of banking organisation made IB an actual competitor for CB.

Bashir (2001) performs regression analysis to determine the determinant of IB performance in the Middle East. The results indicate that adequate capital ratios and loan portfolios play an important role in explaining the performance of IB. Further, the results also indicate that the performance is mostly generated from customers and short-term funding, non-interest earning assets and