islamic banking services and community welfare
TRANSCRIPT
ISLAMIC BANKING SERVICES AND COMMUNITY WELFARE
IMPROVEMENT IN HARGEISA SOMALILAND
BY
BASHIR MOHAMED AHMED
MBA/36719/151/DF
A RESEARCH REPORT SUBMITTED TO THE COLLEGE OF
ECONOMICS AND MANAGEMENT IN PARTIAL FULFILMENT
FOR THE AWARD OF MASTERS DEGREE OF BUSINESS
ADMINISTRATION OF KAMPALA INTERNATIONAL
UNIVERSITY
November, 2016
DECLARATION
I Bashir Mohamed Ahmed declare that this thesis is my original work and
has not been presented to any University or tertiary institution of higher
learning for a Master Degree or any other Academic Award"
Name and Signature of Candidate
\\- \\ ~ ~b\£ Date
APPROVAL
"I confirm that the work reported in this thesis was carried out by the
candidate under my supervision".
. ~~l.~l( S1gned .................... .................. . 14 lll ( ~0 \ (o ' Date ............. ............. ............ .
Dr. ELIAB BYAMUKAMA
ii
DEDICATION
This thesis is dedicated to my brother Mohamoud and dear mother Osob
Nuur as well as my loving brothers and sisters. Thank you so much for
your love and support emotionally and morally throughout this academic
journey. rv1ay God bless you all abundantly.
iii
ACKNOWLEDGEMENT
I wish to extend my profound gratitude to all the people who have
contributed to the successful and completion of this thesis. Without their
assistance and cooperation this report would not have seen the light of
day.
First and foremost, I would like to thank the Head of Department (H.O.D)
Secondly, I extend my sincere thanks to my supervisor, Dr. Byamukama
E.P. for his personal commitment, assistance and guidance rendered to
me throughout this study. I would also like to extend my thanks to the
Academic staff of Kampala International University for their professional
guidance, hospitality and cooperation. My gratitude also goes to the
colleagues and non-teaching staff, as well as staffs of the selected banks
that I visited to gather information and answers all my questionnaires,
without which this report would not have come to a successful end. Finally
but not the least, I wish to extend my sincere appreciation to my family
for all the support they have rendered to me. Without their
encouragement, assistance as well as moral support I couldn't have made
it this far.
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TABLE OF CONTENTS
DECLARATION ....................................................................... ................ i
APPROVAL .. ... ....................................... .. ............. ................................ ii
DEDICATION ................. .............. ....... ......... ........ ............ .. ....... ........ ... iii
ACKNOWLEDGEMENT ....... .. ... ... ......................... ...... ..... ....................... iv
TABLE OF CONTENTS ........................................................................... v
ABSTRACT ......... ........... .. .............. .. ....... ... ..... ...... .... .......... ......... ........ ix
CHAPTERONE ................................................................................ l
INTRODUCTION ............................................................................. 1
1.0 Introduction ....... .............. ....... ... ........ .. ............... .... ........................ 1
1.1 Background of the Study ..... .. .......... .. .... ........ ............ ..... .... ... ...... .... 1
1.1.1 Historical Perspective ............................ ................... ......... ............ 1
1.1.2 Theoretical Perspective ................................................................. 6
1.1.3 Conceptual Perspective ........ ......... ....... ........ .. ..................... .... ...... 7
1.1.4 Contextual Perspective ... .. .. ......... .. ....... ....... ..... ............................ 8
1.2 Statement of the Problem .............................................................. 11
1.3 Purpose of the Study ............ ... ..... .. ............. ............ .. ... ......... ........ 12
1.4 The objectives of the Study ........................................................... 12
1.5 Research Questions ............. ............... ........................................... 12
1.6 Hypothesis .......... ... ................ ... ............... .... ...... ..... ........ ........... .. 13
1. 7 The Scope of the Study ............... ... ........................................ ....... 13
1.7.1 Geographical Scope .................................................................... 13
1.7.2 Content Scope ....... .................................. ... ............................... 14
1.7.3 Theoretical Scope .................... ......... ...... ... ....... ..... ........ .. ........... 14
1.7.4 Time Scope ................................................................................ 15
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1.8 Significance of the Study ... .. ..... .. ... ... .. ... ...... .. .. ..... .... ............ ...... . 15
1.9 Definition of Operational Terms .. .. ........ .... .. .. .... ...... .. ............ .. ...... . 16
CHAPTER TWO ••••••.•••.••••••••..•• •••••••••••• •• •• •.••••••..•• •••.••••••••••••••••••••.• 18
LITERATURE REVIEW .. .. ..................... ......................................... 18
2.0 Introduction ... ... ...... ...... ... .................... ...... .. ................ .... ........ ..... 18
2.1Theoretical Review .................. ..... ... ... ..................... .... ......... .... .. .... 18
2.2 The Conceptual Framework .............. ...... .. ...... ............ .............. .... . 20
2.3 Review of related literature ...... .. .. .... ........ .. .......... .. ...................... .. 23
2.3.1. Relationship between Islamic banking and quality of Life ...... ...... . 23
2.3.2. Relationship between Islamic banking services and poverty
alleviation ......... .. ....... ..... ...... .. ... ...... ... ........ ...... .......... .. .. ..... ..... ......... . 24
2.4 The relationship between Islamic banking services and improvement
of infrastructure .. ... ........ ... .... ...... .... ..... ..... ... .......... ...... ... ...... .... ...... ... . 25
2.5 Related studies ... ........ ....... .. ................ .......... .... .... ....................... 26
2.6 Research gaps .. .. ... ... .............. ........ ... .. ... ..... ..... ............................ 31
CHAPTER THREE ...... .................................................................... 32
METHODOLOGY ........................................................................... 32
3.0 Introduction ............ ............. ...... ..... ........ ... ......... ... .. .. ....... .. .......... 32
3.1 Research design ...... ... .. ..... ..... .................. ... ....... ...... ........ ......... .... 32
3.2 Study Population .. .. ....... .... ...... .. .... ......... ........ .. ......... ............. ....... 32
3.3 Sample size .. ....... .... ... ... ............ .. ........ ........ .. ... .. .. ... ...... .. .... ......... 33
3.4 Sampling procedure .... .. .. .... .... .. ...................... .. .. .... ............ .......... 33
3.5 Data sources ............... .. ............ .. ....... .................. ............. ....... ... . 34
3.5.1 Primary data sources ................................ .. .... .... .... .. .................. 34
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3.6 Data collection instruments ............................................................ 34
3. 7 Validity and Reliability of the Instruments ........ .. ............................. 35
3.7.1 Validity of the instrument.. .......................................................... 35
3.7.2 Reliability of the instruments ............ .... ....................................... 36
3.8 Data Gathering Procedure ............................................................. 36
3.8.1.Before the administration of the questionnaires ........................... 36
3.8.2. During the administration of the questionnaires .......................... 37
3.8.3 after the administration of the questionnaires .............................. 38
3. 9 Data Analysis .... .......... ........ ............ ................. .. ....... .................... 38
3.10 Ethical Considerations ................................................................. 39
CHAPTER FOUR ............................................................................ 40
DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF
RESULTS ...................................................................................... 40
4.0 Introduction ... ....... ... .................... .. ......... ........ ... ....... .................... 40
4.1 Profile of respondents ............ ...... .... .... ..... ......... ..... ...... ...... ... ..... .. 40
4.2 Islamic banking services ................. .......... ... .. ................................ 42
4.4 Objective one; relationship between Islamic banking services and
quality of life ...... .... ......................... .. ................................................. 48
4.5 Objective two; effect of Islamic banking services on poverty alleviation
............................................ .. .............. ........... ........................... ... .... 49
4.6 Objective three; relationship between Islamic banking services and
improvement of infrastructure .... ..... .......... ... .. ..... ... ........................... .. 50
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CHAPTER FIVE ............................................................................. 51
DISCUSSIONS, CONLUSIONS AND RECOMMENDATIONS .......... 51
5.0 Introduction .... ....... .... .... ....... ......... ............. ... ............. ................. . 51
5.1 Discussions ................................................................................... 51
5.2 Conclusions ..................... ..... ...... ... .......................... ...... ... ........ .. .. 56
5.3 Recommendation .......................................................................... 58
5.4 New knowledge acquired .......... ... ...... .. ............................ .. .......... .. 59
5.5 Areas for further research .............. ................................................ 59
REFERENCES ................................................................................ 60
APPENDIX IV .. ............ ....................... .................. ........... ....... .... ......... 66
RESEARCH INSTRUMENT ........ .... ........................................................ 66
vii i
ABSTRACT
This study was aimed at establishing the relationship between Islamic banking services and welfare improvement to the community in Hargeisa Somaliland, three specific objectives guided this study and these were To establish the relationship between Islamic banking services and improvement of quality of life among community members in Hargeisa Somaliland.To examine the relationship between Islamic banking services and poverty alleviation among community members in Hargeisa Somaliland. To determine the relationship between Islamic banking services and improvement of infrastructure in Hargeisa Somaliland.Using a descriptive correlational design, the researcher administered a questionnaire to 114 respondents; Slovene's formula· was used to arrive at sample size. Data analysis using means revealed that; the Islamic banking services in Hargeisa Somaliland was rated satisfactory (mean=2.86), confirming that the Islamic banking services has provided effective financial services through not charging interest on loan services, having favourable deposits and withdraw services and effective financing and investment services to the community members in Hargeisa Somaliland, whereas the community welfare improvement in Hargeisa Somaliland was found to be satisfactory (overall mean=3.01), hence confirming that the Islamic banking services system has contributed to the community welfare through improving on the quality of life, poverty alleviation and infrastructural improvement in Hargeisa Somaliland. The researcher concluded that: effective Islamic banking services highly contribute to the improvement in quality of life among community members in Hargeisa Somaliland, unfavourable Islamic banking services increase on the poverty levels and unfavourable Islamic banking services increase it; and Islamic banking services significantly affect the community welfare improvement in Hargeisa Somaliland. The researcher recommended that these Islamic banks to consider past payment history of client as a means of avoiding occurrence of risk, these Islamic banks should make sure that during loan payment clients can't take more money on the same loan (refinance) but a client can take a new loan, these selected Banks in Hargeisa Somaliland should make sure that they introduce electronic accounts which can used by clients for payment of the variety of Shari'a compliant finance services, the Islamic banks should also provide education services to even the disadvantaged populations in Hargeisa Somaliland as a way of improving the community welfare, and they should always support research and product design experiments to encourage poor people to adopt and actively use digital financial services.
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1.0 Introduction
CHAPTER ONE
INTRODUCTION
This chapter presents the background of the study that will be explored in
terms of historical, theoretical, conceptual and contextual background, the
problem statement, the purpose of the study, objectives of the study,
research questions, research hypothesis, scope of the study and
significance of the study.
1.1 Background of the study
The background of this study is presented in historical, theoretical,
conceptual, and contextual perspectives in a bid to bring to light what is
at hand. It also exposes the research gaps that were filled in later on.
1.1.1 Historical perspective
Commercial banks were first introduced into Muslim countries at a time
when they were politically and economically at low ebb, in the late 19th
century. Main banks in the home countries of imperial powers established
local branches in the capitals of subject countries. These banks catered
mainly for the import export requirements of foreign businesses and were
generally confined to the capital cities. As a result, the local population
remained largely untouched by the evolving banking system at the time.
However, as time went on it became difficult to engage in trade and other
activities without making use of the commercial banks. Even then many
devout Muslims confined their involvement to transaction activities such as
current accounts and money transfers. Borrowing from the banks and
1
depositing their savings with them were strictly avoided in order to keep
away from dealing in interest which is prohibited by Islam. As time passed
by, governments, businesses and individuals began to freely transact
business with the banks, with or without liking it. This state of affairs drew
the attention and concern of Muslim intellectuals who felt there was great
need to maintain Muslim laws and principles even in the sphere of
financial transacting (Siddiqi, 2009).
The first modern experiment with Islamic banking was undertaken in
Egypt under cover, without projecting an Islamic image, for fear of being
seen as a manifestation of Islamic fundamentalism which was anathema
to the political regime. The pioneering effort, led by Ahmad El Najjar, took
the form of a savings bank based on profit-sharing in the Egyptian town of
Mit-Ghamr in 1963. The bank was very popular and prospered. The
experiment lasted until 1967, by which time there were nine such banks in
the country. These banks, which neither charged nor paid interest,
invested mostly by engaging in trade and industry, directly or in
partne_rship with others, and shared the profits with their depositors
(Siddiqi, 2009). During the 1970s, a number of full-fledged Islamic banks
came into existence in North Africa and the Middle East. Dubai Islamic
Bank was established in 1975; Faisal Islamic Bank of Sudan was
established in 1977; Faisal Islamic Bank of Egypt was established in 1977;
and Bahrain Islamic Bank was established in 1979.
In Pakistan, partly because of political interests and the emergence of
young Muslim economists, a gradual Islamization of the banking process
began in 1979. In the first phase, which ended on 1 January 1985,
2
domestic banks operated both interest-free and interest-based 'windows'.
In the second phase of the transformation process, the banking system
was geared to operate all transactions on the basis of no interest, the only
exceptions being foreign currency deposits, foreign loans and government
debts. The gradual pace of transition made it easier for the Pakistani
banks to adapt the new system (Uhomoibhi and Alio, 2012).
Islamic banking made its debut in Malaysia in 2010, but not without
antecedents. The first Islamic financial institution in Malaysia was the
Muslim Pilgrims Savings Corporation set up in 1963 to help people save
for performing hajj pilgrimage to Mecca and Medina. In 1969, this body
evolved into the Pilgrims Management and Fund Board or the Tabung Haji
as it is now popularly known. The Tabung Haji has been acting as a
finance company that invests the savings of would-be pilgrims in
accordance with Shariah, but its role is rather limited, as it is a non-bank
financial institution. The success of the Tabung Haji, however, provided
the main impetus for establishing Bank Islam Malaysia Berhad BIMB, a
full-fledged Islamic commercial bank, in Malaysia. The Tabung Haji also
contributed 12.5 per cent of BIMB's initial capital of $80 million. Today,
Malaysia is the biggest issuer of Sukuk Islamic bonds worldwide (Steward,
2008).
Iran currently holding the highest amount of Shariah compliant assets in
the world switched to Islamic banking in August 2010 with a three-year
transition period. The Iranian system allows banks to accept current and
savings deposits without having to pay any return, but it permits the
banks to offer incentives such as variable prizes or bonuses in cash or kind
3
on these deposits. Term deposits both short-term and long-term earn a
rate of return based on the bank's profits and on the deposit maturity. In
the past twelve months, major new Islamic financial institutions have
been set up within the Middle East region. They include the Global
Banking Corporation in Bahrain, AI Inma Bank in Saudi Arabia, and the
Noor Islamic Bank in the United Arab Emirates UAE, which aims to
become the largest Shariah lender within 5 years (Steward, 2008).
In Africa, Kenya was the first country to introduce Islamic banking in the
Eastern and Central African region a decade ago, and while the business
is still in transition, it has been growing steadily and shows big potential
for future growth. The uptake of Islamic banking is projected to grow
exponentially in sub-Saharan Africa. The Kenyan banking system is
supervised by the Central Bank of Kenya· (CBK). All banks, including those
that follow Islamic banking principles, have to operate under the same
framework as conventional banks. Two Islamic banks, namely Gulf African
Bank and First Community Bank, were licensed by CBK in 2007 and had a
total of KES 15.4 billion in loans and advances at the end of February
2013, as well as KES 19.5 billion in total deposits. This clearly indicates
the rise and future exponential growth of Islamic banking in Kenya.
Today, Islamic banks operate mainly in Muslim countries such as Albania,
Algeria, Bahamas, Bahrain, Bangladesh, Brunei, Djibouti, Egypt, Guinea,
Indonesia, Iran, Iraq, Ivory Coast, Jordan, Kazakhstan, Kuwait, Lebanon,
Malaysia, Mauritania, Morocco, Niger, North Cyprus, Oman, Pakistan,
Palestine, Qatar, Senegal, Saudi Arabia, Sri Lanka, Sudan,
Trinidad& Tobago, Tunisia, Turkey, UAE Abu Dhabi, Dubai, Sharja and
4
Yemen, Somaliland. The whole banking system has been Islamized in both
Iran and Pakistan (Usmani, T.S., 2011).
In Somaliland, the banking industry is dynamic. For example, strategic
foreign investors, eyeing stakes in Somaliland's financial sector, recently
requested from the National Bank of Somaliland, details of regulations
governing operations of Islamic banking in the country. Muslim economic
bigwigs in Somaliland are also attempting to promote Jaiz Bank
Somaliland, a full-fledged Islamic bank (Mohammed D.A. (2016).
To begin with, Somaliland has more opportunities to establish Islamic
Banking for many reasons: Firstly, Somaliland inhabitants are 100%
Muslim, Sunni, Shafie sect. And in Islam Banking, free-from-interest
manner is used, as interest is forbidden in Islam. Secondly, there are no
other banks operating with the system. In addition, in the last decade,
economy of Somaliland has been growing gradually. As we know, the
Banks play great role about economic growth, whereby, investment or
transferring money all over the world, many Businessman need to deal
with their suppliers through Banks in order to globalize their business
(Mustafe, 2015).
Besides that, Somalilanders are low income level, so that, they need more
investment and more opportunity to create a small business. Fortunately,
Islam Banking has a product called Qardul hassan (good loan/benevolent
loanl that allows to loan a money from the Bank and invests in your
business, then you return without any extra money; there is no service
charge or interest rate. Another considerable reason is that, Muslim nation
hate conventional Banks, when introduce the Islamic Banking in
5
Somaliland, not faced any challenges, because there is no Banks work
here, another chance was the existed many remittances transfers money
all over the world. Also, based in Islamic Finance model (not interest
rate), holding capital estimated millions of dollars, possibly, that
remittances easily converts to Islam Banking, according dealing with
foreign countries, having good reputation on their customers in all over
the world (Mustafe, 2015).
One problem is that people they did not deal with Banking system in the
last two decades. Alarmingly, we could mention or indicate few
weaknesses might face on Islamic Banking in Somaliland in this moment,
such as: At first, lack of knowledge about Islamic Banking, most people
they do not know what is the Islamic Banking? Unless its free from
interest, Further, they do not able to classify between Muharaba and the
interest loan, senior managers of the Islamic financial institutions failed to
give full orientation to people. To abridge, as we illustrated above, Islamic
Banking contains many products to satisfy their customers; unfortunately,
Islamic financial institution in Somaliland they didn't use or did not give
many optional products to customers. For instance, one of these products
was very important to the low-income nations; and it is Qard hassan/
Qardul hassan (good loan/benevolent loan).
1.1.2 Theoretical perspective
This study will be guided by "Islam and the theory of Interest",
propounded by Dr. Anwar Iqbar Qureish, in 1946 as cited from
Mohammad, Lahore (1996). The proponent of this theory presents his
ideas on "place of banking in an Islamic system" and suggests that like
6
public health and education, the government should sponsor banking as a
social service in which the bank should never pay any interest to account
holders nor charge any interest on loans advanced. The author also
suggested that the banks should become partners with businessmen,
sharing any loss that might be incurred.
1.1.3 Conceptual perspective
Islamic banking refers to a system of banking or banking activity that is
consistent with the principles of the Shari'ah (Islamic rulings) and its
practical application through the development of Islamic economics (SBP
(2010). According to Warde (2010), Islamic banking is a banking system
that is based on the principles of Islamic law (also known Shariah) and
guided by Islamic economics. Islamic banking is banking or banking
activity that is consistent with the principles of sharia (Islamic law) and its
practical application through the development of Islamic economics
(Michael, I.M.E.S.O.N. 2007).
A community is a social unit of any size that shares common values, or
that is situated in a given geographical area (e.g. a village or town)
(Barzilai, 2013). It is a group of people who are connected by durable
relations that extend beyond immediate genealogical ties, and who usually
define that relationship as important to their social identity and practice
(Nadarajah, Haive and Stead, 2012). Although communities are usually
small, "community" may also refer to large groups, such as national
communities, international communities, and virtual communities.
7
Welfare is defined by Huseyin and Ioannidis (2015) as the good fortune,
health, happiness, prosperity, etc., of a person, group, or organization;
well-being: e.g. to look after a child's welfare; the physical or moral
welfare of society. Welfare can also mean availability of resources and
presence of conditions required for reasonably comfortable, healthy, and
secure living or it could mean government support for the poor and
otherwise disadvantaged members of the society, usually through
provision of free and/or subsidized goods and services (Kevin, 2013).
1.1.4 Contextual Perspective
Poor welfare services are frequent problems affecting bank customers in
somaliland, globally in Saud-Arabia, millions of Saudis live in poverty,
struggling on the fringes of one of the world's most powerful economies,
where job-growth and welfare programs have failed to keep pace with a
booming population that has soared from 6 million in to 28 million today
(Dar, Presley 2010). Under King Abdullah, the government has spent
billions to help the growing numbers of poor people, estimated to be as
much as a quarter of the native Saudi population. But critics complain that
those programs are inadequate, and that some royals seem more
concerned with their wealth and the country's image than with helping the
needy (Fahmy, 2011). Last year, for example, three young Saudi video
bloggers were arrested and jailed for two weeks after they produced an
online video about poverty in Saudi Arabia. Much of the welfare spending
comes from the Islamic system of zakat, a religious requirement that
individuals and corporations donate to charity 2.5 percent of their wealth
the money is paid to the government and distributed to the needy. Living
in Saudi Arabia is like living in a charitable foundation, it is part and parcel
8
of the way they are made up, and Prince Sultan said, "if you are not
charitable, you are not a Muslim." Despite those efforts, poverty and
anger over corruption continue to grow, whereby vast sums of money end
up in the pockets of the royal family through a web of nepotism,
corruption and cozy government contracts (SBP 2010).
In Africa specifically South Africa, the community social welfare services
are delivered as a concurrent function by provincial governments, the
ability of provinces to redirect welfare funds to other services and
priorities means that developmental welfare services continue to be
underfunded (Haran, Sudin 2014). Lack of capacity in provincial
governments to plan, implement, monitor and evaluate service delivery
outcomes also hampered service delivery. Power struggles between
government officials and non-profit organisation (NPO) partners also held
back the potential benefits that might have been realised by the
partnership model. In addition, services delivered by NPOs reached a
limited number of people and were not extended to rural and
underserviced areas. Many NPOs are concentrated in urban areas. Lack of
institutional capacity, including loss of staff by NPOs to government,
inadequate numbers of social workers, community development workers,
child and youth care workers and paraprofessionals has been a serious
impediment (Haron, Shanmugan, 2009).
Overview of Islamic Banking Service in Somali land
Having survived a civil war and living in international isolation, Somaliland,
a de facto independent state in the territory of Somaliland, is gradually
developing its financial sector. The banking services are interest-free in
this entirely Muslim republic. But does it mean they are Shari'ah-
9
compliant. In 1991, the unified country of Somaliland de facto ceased to
exist. The civil war, which had broken out three years earlier, had led to
the breakup of the state into three separate areas: Somaliland and
Puntland. At the time one could hardly call the former British colony and
then province of Somaliland as a country. It was virtually a bare territory
with its infrastructure completely destroyed by the war. The world
community did not rush to recognize the new state and hardly anyone
would have predicted that the country would survive. But 25 years on,
Somaliland continues to exist as a state despite international political
isolation and weak central government.
The main source of welfare for Somaliland's citizens is not international
aid, but money sent by their relatives from abroad. Because of the
underdevelopment of the financial sector, money transfer operators have
practically taken on the role of banks. The situation within the country's
banking sector presents a paradox. Officially, there are three banks in
Somaliland; Bank of Somaliland, Dahabshil international Bank and Salama
Bank. The paradox is that the first bank, which is nominally a central
bank, plays the role of a commercial financial institution, while the latter is
more of a state treasury than a fully-fledged commercial bank. The main
task of the Bank of Somaliland is to support the national currency and
fight inflation. In order to do so, the bank carries out currency
interventions, buying considerable sums in local currency (shillings) for US
dollars.
10
1.2 Statement of the Problem
Despite the many financial institutions in Somaliland springing up, there is
concern of the low representation of Islamic Banks in the country which
has hampered community welfare improvement (Central Bank report
2014). There are low levels of community welfare improvement in
Hargeisa Somaliland (Mohammed 2016). Most of the community members
are characterized by having minimum level of income for food and
clothing, adequate housing, education and poor health care, (Mustafe,
2015). All these are indicators of low levels of community welfare
improvement.
The worsening condition of welfare improvement in the country will affect
the standard of living of the community which will affect the mortality rate
of the people in the country (Haren, 2014). The low levels of community
welfare improvement in Hargeisa Somaliland may be caused by factors
such as lack of government support, the level of the political system in the
country as politically unstable atmosphere, limited number of banks to
practice according to Islamic banking principles, the unemployment rate
among others, (Siddiqi, 2009). This study is intended to establish the
relationship between Islamic banking and welfare improvement in the
community in Hargeisa Somaliland. The researcher chose Islamic banking
because with its principles of encouraging the community to borrow
money with no interest will enable the community to borrow loans and put
it in various investments so as to have welfare improvement. There has
never been a study conducted about Islamic banking and welfare
improvement in Hargeisa Somaliland, therefore, this study is intended to
close the contextual gap that was existing previously.
11
1.3 Purpose of the study
The purpose of this study was to establish the relationship between
Islamic banking services and community welfare improvement in Hargeisa
Somaliland.
1.4 The objectives of the study
i) To establish the relationship between Islamic banking services and
improvement of quality of life among community members in
Hargeisa Somaliland.
ii) To examine the relationship between Islamic banking services and
poverty alleviation among community members in Hargeisa
Somaliland.
iii) To determine the relationship between Islamic banking services
and improvement of infrastructure in Hargeisa Somaliland.
1.5 Research Questions
i) What is the relationship between Islamic banking services on
improvement of quality of life among community members in
Hargeisa Somaliland?
ii) What is the relationship between Islamic banking services and
poverty alleviation among community members in Hargeisa
Somaliland?
iii) What is the relationship between Islamic banking services and
improvement of infrastructure in Hargeisa Somaliland?
12
1.6 Hypothesis
Ho There is no significant relationship between Islamic banking services
and community welfare improvement in Hargeisa Somaliland.
1.7 The Scope of the study
1.7 .1 Geographical scope
The study was carried out among the selected Islamic Banking institutions
in Hargeisa Somaliland, whereby it concentrated on loan services, deposits
and withdrawals services, financing and investment service's customers,
employees, managers and other experts who are knowledgeable about
banking services. Hargeisa is the most populous city in the state of
Somaliland, a self-declared state that is internationally recognized as an
autonomous region of Somalia, situated in the Woqooyi Galbeed region in
Northwestern Somalia. Dahabshiil is the 'rags to riches' story of an African
entrepreneur specifically whose business was interrupted after the Somali
civil war. With limited resources and a strong network of contacts they set
about rebuilding the company, which two decades later is now the largest
international money transfer businesses in the Horn of Africa including the
Islamic banking system in Hargeisa Somaliland. Premier Bank Limited is
found in Hargeisa and it transacts its business using major international
currencies, is a fully fledged Islamic Bank providing several financial
services. It has partnered with MasterCard and SWIFT to deliver global
online financial services including Automated Teller Machines. Dar- Salaam
bank is a fully sharia compliant institution, DSB was instituted as a fully
fledged bank under Somaliland bank Act 55/2012. The address of the
bank is Salaam building, Khairie road (Opposite aero plane Monument
13
Park), this Bank offers retail, corporate micro finance and other related
services to spearhead the economic development of Somaliland and entire
region (Mohammed, 2016).
1.7 .2 Content scope
The study intended to examine the role of Islamic banking services on
community welfare improvement in Hargeisa Somaliland, and to correlate
if there is a significant relationship. This study examined Islamic banking
services in terms of loan services, deposit and withdraw services and
Financing and investment services. The study also examined community
welfare improvement in terms of quality of life, poverty alleviation and
improvement in infrastructure.
1.7.3 Theoretical scope
The study was anchored on Islam and Interest theory which indicated that
the government should sponsor banking as a social service in which the
bank should never pay any loan services to account holders nor charge
any loan services on loans advanced (Jankowicz, 2010) . The theory still
shows that the banks should become partners with businessmen, sharing
any loss that might be incurred (Shahin, 2009), Banking institutions act as
financial intermediaries between savers and investors, Banks are of
significant help in assisting the process of capital formation and
development. With the progress of trade and industry and increased
financing requirements of productive enterprises, direct finance proved an
inadequate mechanism for such transference and banks emerged on the
scene to undertake financial intermediation between savers and investors.
The attitude of Islam to all known innovations is that nothing should stand
14
in the way of their adoption if they are useful for human society and do
not conflict with the fundamental teachings of the Qur'an and the Sunnah
(Khan, 2010).
1.7.4 Time scope
The study covered the data on Islamic banking from 2010 to date, this
being the period in which poor community welfare was reported most in
Hargeisa Somaliland. Still this period was considered appropriate as it
gave enough duration to study the cause of low community welfare
improvement in Hargeisa Somaliland.
1.8 Significance of the Study
The study would be useful in the following ways:
It is expected that the findings of this study will be useful to Hargeisa
Somaliland on how to engage in Islamic banking services for better
community welfare improvement.
The findings of this study will be useful to managers of Islamic banks on
how to emphasize on Islamic banking services for welfare improvement of
communities.
The study findings will also benefit the other members of Hargeisa
Somaliland such as employees and other support staff on how to attain
welfare improvement.
15
- - . ---__;____~ ___ _:__-~----•
The researcher expects that this study will yield data and information that
will be useful for understanding the effects of Islamic banking services on
community welfare improvement.
The future researchers will utilize the findings of this study to embark on
Islamic banking services and community welfare improvement in Hargeisa
Somaliland.
1.9 Definition of operational terms
A community is a social unit of any size that shares common values, or
that is situated in a given geographical area (e.g. a village or town)
(Barzilai, 2013). It is a group of people who are connected by durable
relations that extend beyond immediate genealogical ties, and who usually
define that relationship as important to their social identity and practice
(Nadarajah, Haive and Stead, 2012) . Although communities are usually
small, "community" may also refer to large groups, such as national
communities, international communities, and virtual communities.
Welfare is defined by Huseyin and Ioannidis (2015) as the good fortune,
health, happiness, prosperity, etc., of a person, group, or organization;
well-being: e.g. to look after a child's welfare; the physical or moral
welfare of society. Welfare can also mean availability of resources and
presence of conditions required for reasonably comfortable, healthy, and
secure living or it could mean government support for the poor and
otherwise disadvantaged members of the society, usually through
provision of free and/or subsidized goods and services (Kevin, 2013).
16
The operational definition of community improvement welfare in this study
will mean that a social unit of any size that shares common values or that
is situated in a given geographical area benefits from government support
intended to improve their healthcare, quality of life or Physical and
psychological health.
Infrastructure refers to roads, bridges, railways, water-ways, airways,
and other forms of transportation and communications as well as water
supplies, electricity and telephone. It also includes financial institutions
and such public services as health and education. More generally it
includes all institutional prerequisites of efficient working of competitive
markets and expansion in production.
17
CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
This chapter shows theoretical review, the conceptual framework, and
additional literature review.
2.1 Theoretical Review . . l •
This study based on the theory of Islamic banking of Iqbar (1946)
expanded by Mohammad (2014). The theory of Islamic banking is based
essentially on the premise that interest, which is strictly forbidden in
Islam, is neither a necessary nor a desirable basis for the conduct of
banking operations, and that Islamic teachings provide a better
foundation for organizing the working of banks. Muslim economists have
pointed out that it is a historical accident that interest has become the
kingpin of modern banking.
In the period of colonial domination of Muslim countries by Western
powers, the interest based system became solidly entrenched. It is this
string of historical circumstances, Muslim scholars argue, which has led to
the present-day dominance of interest in financial transactions all over the
globe. Had the societies developed in a different fashion and paid greater
heed to the injunctions of religion, the development of the financial
system would have surely taken a different course, and we could have
had in actual operation an alternative system free of interest but fully
meeting the needs of modern society.
18
Muslim scholars recognize the important role banks play in the economy
of a country in modern times (Uhomoibhi and Alia, 2012; Ghafoor, 2014).
Banking institutions act as financial intermediaries between savers and
investors. They can be of significant help in assisting the process of capital
formation and development. There was no prototype of modern banks in
the early history of Islam. Even in Western countries, banking in the form
in which it exists today is of comparatively recent origin. Before the
advent of modern banking, direct finance, where the owner of capital
deals directly with the user of capital, was the customary mode of
transference of funds from savers to investors. Since banks perform a
useful service of financial intermediation, they are wholly acceptable in a
Muslim society. What is not acceptable, however, from the shari'ah point
of view, is the use of interest rate mechanism in the process of financial
intermediation (Uhomoibhi and Alia, 2012).
For long Muslims the world over were beset with a dilemma. Islam
prohibits the giving and taking of interest while it looked almost
impossible to steer clear of interest in the modern world where interest
played a key role in most of the financial transactions. The contemporary
Islamic resurgence has begun to provide an answer to this dilemma.
Theoretical work by Muslim scholars has sought to demonstrate that it is
possible to run an economy without interest even in modern times.
Replacement of interest based banking by interest-free banking has
received the greatest attention in this endeavor (Khan and Bhatti, 2011).
The basic postulate that has guided all theoretical work on Islamic
banking is that while interest is forbidden in Islam, trade and profit is
19
... ..-..-~"- .. ~ -:"""~~'" - . -- --------------
permissible. Conventional banking uses the interest rate mechanism to
perform its task of financial intermediation. Muslim scholars have
developed a radically different model of banking which does not make use
of interest. It relies instead on profit/loss sharing for purposes of financial
intermediation (Hijazi, T.S., Hanif, M., (2010)).
The implication of this theory is that Islamic banking is that, Islamic can
provide the people of Somaliland with funds at no interest which will -:- i.' ·r· enable the borrow and invest and investment will improve the earning
ability and hence get funds for consumption and this is a way to improve
the welfare of the community through enabling borrowing by the
community which enhances investment and hence improves the welfare of
the community through improved standard of living.
The government therefore, should look for ways of emphasizing Islamic
banking so as enable the community borrow loans with no interests to
enhance the investment levels and improve the welfare of the community.
2.2 The Conceptual Framework
Islamic banking services Community welfare improvement
../ Loan services ../ Quality of life
../ Deposit and withdraw ../ Poverty alleviation services ../ Improvement in infrastructure
../ Financing and investment services
Source: Adopted from (Uhomoibhi and Alio, 2012) and modified by the researcher, (2016)
20
The conceptual framework indicates the independent and dependent
variables in the topic under investigation and their relationship on one
another. The independent variable is Islamic banking while the dependent
variable is community welfare improvement. Islamic banking affects
community welfare improvement in terms loan services, deposit and
withdraw services and financing and investment. The study also examined
community welfare improvement in relation to quality of life, poverty
alleviation and improvement in infrastructure. The functions of Islamic
banks are: to collect deposits from the people on profit-and-loss sharing
basis; to provide all necessary banking services to its customers; to
finance those projects which generates employment; to allocate financial
resources (financing) in a way that it ensures equitable distribution of
income; to act as a development institution; to promote entrepreneurship
by providing finance on profit and loss basis; to transform saving into
investment in such a way that it benefits to the majority; to provide
expertise and technical advice to the finance-taker in order to improve the
process of production and profitability; to disperse financing and
discourage its concentration (Ghafoor, 2014).
An Islamic bank is a deposit-taking banking institution whose scope of
activities includes all currently known banking activities, excluding
borrowing and lending on the basis of interest (Iqbal, 2011). On the
liabilities side, it mobilizes funds on the basis of a mudarabah or wakalah
(agent) contract. It can also accept demand deposits which are treated as
interest-free loans from the clients to the bank. On the assets side, it
advances funds on a profit-and-loss sharing or a debt-creating basis, in
21
accordance with the principles of the Sharlah. It plays the role of an
investment manager for the owners of time deposits, usually called
investment deposits. In addition, equity holding as well as commodity and
asset trading constitute an integral part of Islamic banking operations. An
Islamic bank shares its net earnings with its depositors in a way that
depends on the size and date-to-maturity of each deposit. Depositors
must be informed beforehand of the formula used for sharing the net
earnings with-fhe bank (Khan and Bhatti, 2011).
Even though both types of institutions (Islamic banking and Conventional
banking) are providing financing to productive channels for reward. The
difference lies in financing agreement. Conventional banks are offering
loan for a fixed reward whil~ IFis cannot do that because they cannot
charge interest. IFis can charge profit on investments but not interest on
loans. In conventional banking three types of loans are issued to clients
including short term loans, overdrafts and long-term loans. Islamic banks
cannot issue loans except interest free loans (Qarz e Hasna) for any
requirement however they can do business by providing the required
asset to client (Hanif, 2010).
The most essential feature of Islamic banking is that it is interest-free.
Islamic banks neither charge nor pay interest. Islam prohibits Muslims
from taking or giving interest riba regardless of the purpose for which
such loans are made and regardless of the rates at which interest is
charged (Uhomoibhi and Alia, 2012). The prohibition of riba is mentioned
in four different revelations in the Qur'an. The first revelation emphasizes
22
-:-.-·: r:;
that interest deprives wealth of God's blessings. The second revelation
condemns it, placing interest in juxtaposition with wrongful appropriation
of property belonging to others. The third revelation enjoins Muslims to
stay clear of interest for the sake of their own welfare. The fourth
revelation establishes a clear distinction between interest and trade,
urging Muslims to take only the principal sum and to forgo even this sum
if the borrower is unable to repay.
r·. - . 2.3 Review of related literature
This section reviewed literature regarding the Islamic banking and the
relationship with community welfare improvement basing on study
objectives.
2.3.1. Relationship between Islamic banking and quality of Life
There is a growing interest among Muslim economist about the potential
of microfinance scheme in alleviating poverty (Iqbal & Molyneux, 2005).
Indeed microfinance is widely acclaimed as a new innovative approach to
alleviate poverty (Robinson, 2001). Microfinance institutions receive
money by way of deposits and interests which is lent or used to finance
business in form of loans or facilities to micro-small enterprises and low
income households, deposit taking and also non-deposit taking
(Microfinance institutions Act, 2006). Microfinance industry in Kenya has
grown over the past two decades in response to lack of access to formal
financial services for most of Kenya's poor people .The World Bank has
recognized microfinance programme as an approach to address income
inequalities and poverty (Microcredit Summit, 2004).
23
Panich (2007) noted that welfare is thus mainly connected to individuals
perception and utility of the use of income. This also makes it very difficult
to measure welfare at the macro level as individuals" evaluation of the
utility gained from income will differ, but often the consumers" choice as
reflected by the market has been used as a proxy and this explains why
GDP per capita is seen as a good indicator. The approach of using
individual utility can also be part of the explanation of why it so far has
not been possible to establish a single and clear type of societal welfare
function. Individual welfare involves how utility can be maximized by
choices made by the individual (Walker, 2005).
2.3.2. Relationship between Islamic banking services and
poverty alleviation
Estes (2004) indicated that Islamic banks provide small loans to people
who need capital to start a small business and become self-employed to
help them build a sustainable future and Welfare refers to a set of
specialized programs and services designed to meet the income security,
social services and related needs of persons who are unable to provide for
their own basic needs. The assumption mostly made of all islamic banks
loans is that the intervention will change household welfare with regards
to access to more income in a way that lead to achievement of higher
household consumption of goods and services and overall socio-economic
well-being. In order to assess improvement of household welfare as a
result of Islamic banks loan acquisition, there are various variables such
as; household income, Women empowerment (Gender), improved
24
--;; t.~J:-
_.r '"• _:;..• ~-.::-.. .:;.,..Z~'••~'";:'",-- " - •
--~~~--
education, healthcare, Poverty reduction, number of Small business and
consumption according to the Human Development Report (2005).
Sinclair (2001) noted that with Islamic banks, poor people are given an
opportunity to change their lives with capital. One of the major reasons
for social and economic inequality is financial exclusion. Poor and
disadvantaged people have no access to capital and financial services,
especially affordable credit (Whyley and Brooker, 2004). Islamic banking
is concerned with much more than refraining interest; it is a system that
aims at making positive contribution to the fulfillment of the socio
economic objectives. Islamic banks may emulate the existing model of
Islamic banks practices, the activities must be carried out in ways which
do not conflict with the principles of Islam. Islamic banking has the same
purpose as conventional banking except that it operates in accordance
Islamic rules on transaction (Kempson & Whyley, 2000).
2.4 The relationship between Islamic banking services and
improvement of infrastructure
Malik (2007) noted that concentrating investment in infrastructure by
Islamic banks is extremely important for the attainment of the main
development targets, namely industrialization, urbanization, and trade
promotion to get over the shortage of development capital in countries.
To decide the priorities of investment in infrastructure sectors is also
important. Good infrastructure helps to raise productivity and lower costs
in the directly productive activities of the economy. Shahin (2009)
asserted that insufficient capital for infrastructure development could be
supplemented with foreign capital such as foreign aid, loan, and foreign
25
direct investment, hence confirming that Islamic banking services are
important in this case (Meezan Bank, 2011).
Steward, M. (2008) noted that it is obviously important that Islamic
banking services include aid go not only to the poorest countries but also
to the poorest people within recipient countries. And the greater part of
the aid budget that is devoted to rural development and the social
infrastructure, rather than to industrial development, fundamental
research, railways, urban hossing, etc., the greater proportion of Islamic
banking services such as aid which goes directly to the poor. Kocher
Lakota and Yi (2006) presented evidence supporting endogenous growth
models using time series data for the Saudi Arabia, together with various
policy variables including the infrastructure to show that there is no policy
variable that permanently raises the economic growth rate other than aid
from Islamic banking (Amato, 2012).
Bellalah (2009) emphasized that balanced investment to all industry is
efficient for infrastructural development in developing countries. Bokhari
(2007) insisted that balanced investment policy is impossible because
developing countries are always suffering from the shortage of capital.
Therefore, it is important to decide the priorities of investment in
industries and sectors, and to concentrate investment on infrastructural
development in the early stage of development (EIIouz, 2009).
2.5 Related studies
Siddiqi (2010) found out that Islamic banks do not charge interest rates
and consumer loans are unattractive since there is no profit to be derived
in the form of interests on the loans. Hence, Islamic banks deliberately
26
avoid consumer lending. Islamic researchers e.g. have tried to excuse the
Islamic banks. While recognizing the need for such interest-free loans I benevolent loans qard hasan, especially for meeting basic needs, they
seem to think it is the duty of the community and the State through its
treasury baitul mal to cater for these basic needs. Downplaying the role of
Islamic banks in providing consumer loans, they suggest that Islamic
banks give limited overdraft facilities without interest instead. They also
7~ ':r::. consider a portion of bank loanable funds being set aside for consumer
loans, provided repayment will be guaranteed by the State. This, they
reckon, will minimize the risks involved in consumer lending (Nasib, 2012).
Rahman (2012) carried out a study to establish attitudes of Muslims
towards~ Islamic Banking and Finance in the North West of England. The , ., presence and ever growing considerable segment of Muslim population in
the UK and their social, cultural and religious identity require a faith based
banking system which is compatible with their beliefs and values. The
demographics of the Muslim population and the ideological differences
supported the argument that the Islamic banks can produce significant
socio-economic impact. The social aspect of banking institutions is a new
development in the discipline.
Adi (2010) noted that businesses do not function in isolation from the
society around them. In fact, their ability to compete depends heavily on
the circumstances of the locations where they operate. Improving
education, for example, is generally seen as a social issue, but the
educational level of the local workforce substantially affects a company's
27
potential competitiveness. Well-established Islamic publishing companies
like Iqra International/s Books for Schools in USA and donation of books
for building community libraries by the Islamic Foundation in UK are such
examples. The more social improvement relates to a compants business/
more it leads to economic benefits as well. In establishing a Networking
Academy, for example, Islamic Bank Ltd has focused not on the
educational system overall, but on the training needed to produce young
competent persons a particular·-kind of education that made the most
difference to competitive context of Islamic Bank Bangladesh Ltd.
Furthermore, it has established Islamic Bank Foundation which established
a number of schools of International standard in the different places in
Bangladesh. The Ibn Sinha Group of the Islamic Bank Ltd established
specialized as well as general hospitals which are providing healthcare
service to the poor with nominal fees. In 2014, bank has initiated rural
poverty elevation programme under its Rural Development Scheme (RDS).
To handle this scheme, Islamic Bank Ltd has introduced Islamic
microfinance programme through its rural branches to bring all the
villages of the needful countries under the coverage of this scheme (IBBL;
Annual Report, 2014).
Ariff (2012) found out that Islamic banks lend money without interest but
cover the expenses by levying a service charge not exceeding the
proportionate cost of the operation, excluding the cost of funds and
provisions for bad and doubtful debts. Prospective borrowers are always
required to pay this charge on each application, regardless of the amount
28
required, the term of the loan or whether the application is granted or
rejected (Meezan Bank, 2011).
Some scholars have put forward economic reasons to explain why interest
is banned in Islam. It has been argued, for instance, that interest, being a
pre-determined cost of production, tends to prevent full employment
(Khan, 2011); and Ahmad (2013). In the same vein, it has been
contended that international monetary crises are largely due to the ~r~ ~ ~
institution of interest (Khan, 2013) and that trade cycles are in no small
measure attributable to the phenomenon of interest. Others have argued
that interest is not very effective as a monetary policy instrument even in
capitalist economies and have questioned the efficacy of the rate of
interest as a <;Jeterminant of saving and investment (Ariff, 2012).
Hassan, M.K. (2010) noted that the applicants to whom a loan is granted
may be required to pay an additional prescribed fee for all the entries
made in the bank's registers. This total charge is usually less than the
interest charged by conventional banks a bonus for borrowers, and may
be subject to a maximum set by the banking authorities as is the practice
in Pakistan. The usual benchmark for the service charge is the actual
expenditure which the bank incurs in scrutinizing the application and
making its decision, and in maintaining the account until the loan is
repaid . The bank sets aside a part of its funds to grant no-cost loans to
needy persons such as small farmers, entrepreneurs, producers, etc. and
to needy consumers. In Pakistan, these are qa1 d-e-hasana loans given on
compassionate grounds free of any interest or service charge and
repayable if and when the borrower is able to pay. Overdrafts: here
29
Islamic banks usually provide overdrafts, subject to a certain maximum,
free of charge (Nooraslinda, 2013).
Duan (2012) found out that Islamic banks act as a mudarib which
manages their funds to generate profits. Since they are not entitled to
interest income from the productive utilization of their deposits, the profits
generated are then shared with them. Profit-sharing ratios and the modes
of payment vary from place to place, from bank to bank and from time to .
time, depending on supply and demand conditions. Profits are
provisionally declared on a monthly basis in Malaysia, on a quarterly basis
in Egypt, on a half-yearly basis in Bangladesh and Pakistan, and on an
annual basis in Sudan (Weber, 2012).
Alio (2012) found out that deposits in Islamic banks are collected from
savers under both type of institutions for reward irrespective a bank is
operating under conventional system or Islamic system. The difference
lies in agreement of reward. Under conventional system reward is fixed
and predetermined while under Islamic deposits are accepted through
Musharaka and Mudaraba where reward is variable. Under conventional
banking return is higher on long-term deposits and lower for short-term
deposits. Same is the practice in Islamic banking to share profit with
depositors. Higher weight for profit sharing is assigned to long-term
deposits being available to bank for investing in longer term projects
yielding superior returns and lower weight for short-term deposits which
cannot be invested in long term projects (Hijazi, 2010).
Ali (2013) observed that deposits in Islamic banks are treated as shares
and accordingly their nominal values are not guaranteed. In the same
30
vein, both shareholders and depositors are residual claimants to Islamic
banks' profits (AAOIFI, 2009). The current or demand deposit account, as
in the case of conventional banks, gives no return to the depositors. It is
essentially a safe-keeping alwadiah or wadiah arrangement between the
depositors and the bank, which allows the depositors to withdraw their
money at any time and permits the bank to use the depositors' money. As
in the case of conventional banks, cheque books are issued to the current
account deposit holders (Warde, 2010). .:'"''' ~r
2.6 Research gaps
The researcher identified the following gaps in the previous researcher's
literature which needs attention. The findings in the previous study,
conducted by Moh~tmed Omar (2011), about Islamic banking and success
of elected banks in Mogadishu Somalia, indicate that in reviewing
literature, the study looked at only Islamic banks aspects without looking
at the aspects of the success of the banks, therefore, there is a content
gap identified in the previous researcher's literature. In the previous
study, conducted by Mohamed Omar (2011), about Islamic banking and
success of elected banks in Mogadishu Somalia, the researcher failed to
come up with a good theory that could guide the study, therefore, a
theoretical gap has been identified in the previous researcher's work
which also needs serious attention. There has never been a study about
Islamic banking and community welfare improvement in Hargeisa
Somaliland. There is also contextual gap which the current researcher
needs to put more attention. This study therefore, is intended to bridge
the theoretical, content and contextual gaps in the previous researcher's
literature.
31
CHAPTER THREE
METHODOLOGY
3.0 Introduction
This chapter provides the overview of research methodology adopted,
design, target population, sample size, sampling techniques, data sources,
research instruments, validity and reliability of the instrument, data
gathering procedure, data analysis, etliical -considerations, and limitations
of the study.
3.1 Research design
Research design provides an overall guidance for the collection
and analysis of data of a study (Churchill1979).
The study used quantitative approach. The study used descriptive co
relational design; this design enabled the researcher to determine the
degree of the relationship between Islamic banking and community
welfare improvement in Hargeisa Somaliland. It dealt with the relationship
between variables, testing of hypothesis and development of
generalizations and use of theories that have universal validity. It also
involved events that had already taken place and were related to present
conditions (Kothari, 2009).
3.2 Study Population
The target population of this study comprised of 160 respondents who
consisted of community from selected villages in Hargeisa Somaliland.
These respondents comprised of members of the customer of Dahabshil
32
Bank in Gan Libah village with a total of 77 members, 66 of the customer
members of Salama Bank in Ibrahim Kodbur village and 17 customer
members of Preimer bank from Mohamoud Haybe village.
3.3 Sample size
The sample size for this study comprised of 114 respondents who is
selected from the target population of 160in Hargeisa Somaliland. The
Sloven's formula and Purposive sampling technique was used to select - ,. respondents from the customer member. At using Sloven's formula of
sample size computation which states that; n=N/1 +N ( e2) Where, n is the
sample size, N is the target population, e is the error, which is
0.05N=160/1+160(0.05)2 n=114
Table 3.3 indicating the population and sample size
Islamic banks Population Sample Dahabshil bank 77 Dara Salaama bank 66 Premier bank 17 Total 160
3.4 Sampling procedure
To select the sample of 114 respondents out of 160 target population,
Purposive sampling technique was used to select respondents from the
community members. In this technique the respondents was selected
depending on the purpose or interest of the researcher. The researcher
was used an inclusion or exclusion criteria in that the respondents to be
considered should only be those who reside in Hargeisa, therefore, the
33
55 47 12
114
J -
.Jr.. .. r:.
inclusion criteria here was residence and customers of these selected
banks.
3.5 Data sources
The research used primary.
3.5.1 Primary data sources
The researcher obtained primary data by use of questionnaires.
3.6 Data collection instruments
The data collection instrument in this study was basically questionnaires.
Questionnaires by definition mean a set of printed questions addressed by
the researcher to the respondent for him or her to answer and after
answering return the questionnaires to the researcher. The questionnaires
were administered personally by the researcher to the respondents and
collected after time interval. The questionnaires comprised of both open
ended and closed ended questions that required the respondents to
answer all the questions to the best of their knowledge. The
questionnaires were used because they are cheap, quicker, they cover
many respondents, and they are free from interview bias and give
accurate information since respondents take their time to answer the
questions. However, they have a disadvantage of non-despondence.
34
3.7 Validity and Reliability of the Instruments
3.7.1 Validity of the instrument
Validity is the degree to which results obtained from the analysis of the
data actually represents the phenomenon under study. This study look at
three kinds of validity: face validity, content validity and construct validity.
Face validity was ensured by giving the questionnaires to two experts to
check whether the questions are relevant to the contents. Content validity
was ensured by subjecting the researcher devised questionnaires on
Islamic banking and community welfare improvement in Hargeisa
Somaliland that consisted of all the elements of the concept of Islamic
banking and community welfare improvement. To determine the content
validity, content validity index was determined first where the instrument
was redesigned with questions about the content such as very relevant,
relevant, somewhat relevant and not relevant. The instrument was given
to two experts to tick against these questions and give their answers
according to their perception on the relevance of the content. Then the
content validity index (CVI), was calculated as follows;
CVI= Number of questions very relevant, relevant and somewhat
relevant/total number of questions. The CVI should be 0. 7 and above for
the instrument to be proved as having the real content validity.
No of questions declared valid CVI = Total no of Questions in the Questionnaire
24 CVI = 29 CVI= D....82
35
. :
A CVI of 0.82 was used to declare that the research instrument was valid
since it was above 0.7 which is the minimum CVI index required to declare
a research instrument valid (Amin, 2005)
3.7.2 Reliability of the instruments
Reliability is a measure of the degree to which research instruments yield
consistent results or data after repeated trials. The test-retest technique
was used to assess the reliability (accuracy) of the instruments. The
researcher devised the instruments to twelve qualified respondents, five
from the customers of Dahabshil bank from community members of
Ganalibah village and four Dara Salaam in Ibrahim Kodbur village
community members and two from Mohamoud Habye village in Hargeisa
Somaliland. These respondents were not included in the actual study. In
this test- retest technique, the questionnaires were administered twice to
the same subjects after the appropriate groups of the subject are
selected, then the initial conditions were kept constant, the scores were
then correlated from both testing periods to get the coefficient of
reliability or stability. The tests and the trait measured if they were stable,
indicated consistent and essentially the same results in both times (Treece
and Treece, 1973).
3.8 Data Gathering Procedure
3.8.1. Before the administration of the questionnaires
• An introduction letter was obtained from the college on higher
degrees and Research for the researcher to solicit approval to
36
conduct the study from respective Community leaders in Hargeisa
Somaliland.
• When approved, the researcher visited the different villages in
Hargeisa and then Purposive sampling technique was used to select
the respondents from the customers of the banks from the
community members to arrive at the minimum sample size.
• The respondents were explained about the study and were
requested to sign the Informed Consent Form.
• Reproduced more than enough questionnaires for distribution.
• Select research assistants assisted in the data collection; brief and
orient them in order to' be consistent in administering the
questiohnaires.
3.8.2. During the administration of the questionnaires
• The respondents were requested to answer completely and not to
leave any part of the questionnaires unanswered.
• The researcher and assistants emphasized retrieval of the
questionnaires within five days from the date of distribution.
• On retrieval, all returned questionnaires were checked if all
questions are answered.
37
3.8.3 after the administration of the questionnaires
The data gathered was edited, encoded into the computer and
statistically treated using the Statistical Package for Social Sciences
(SPSS).
3.9 Data Analysis
The study used simple tables and frequency counts (frequencies and
percentages) to analyze the profile of respondents. Similarly, mean was
used to analyze the extent Islamic banking and community welfare
improvement in Hargeisa Somaliland, Correlation analysis using Pearson's
coefficient values was used to analyze the relationships between the
independent and dependent variables.
The following mean range was used to arrive at the mean of the individual
indicators and interpretation:
The frequency and percentage distribution was used to determine the
demographic characteristics of the respondents.
The mean was applied for the extent of Islamic banking service and the
level of community welfare improvement. An item analysis illustrated the
strengths and weaknesses based on the indicators in terms of mean and
rank. From these strengths and weaknesses, the recommendations will be
derived.
The following mean ranges were used to arrive at the mean of the
individual indicators and interpretation as cited from Amin, (2012):
38
Table 3.9 The Likert-scale for interpretation of means on Islamic
banking
Mean Range Response Mode Interpretation 3.26-4.00 Strongly agree Very satisfactory 2.51-3.25 Agree Satisfactory_ 1.76-2.50 Disagree unsatisfactory 1.00-1.75 Strongly. disagree very unsatisfactory The Pearson's linear correlation coefficient (PLCC) was used to determine
the relationship between Islamic banking service and community welfare - I
improvement at 0.05 level of significance and to test the last hypothesis.
3.10 Ethical Considerations
To ensure confidentiality of the information provided by the respondents
and to ascertain the practice of ethics in this study, the following activities
were implemented by the researcher:
• Seek permission to adopt the standardized questionnaire on
community participation in a written communication to the author.
• The respondents and Hargeisa Somaliland were coded instead of
reflecting the names.
• Requested the respondents to sign in the Informed Consent Form
• Acknowledged the authors cited in this study and the author of the
standardized instrument through citations and referencing.
• Presented the findings in a generalized manner.
39
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF
RESULTS
4.0 Introduction
This chapter presents the demographic characteristics of respondents,
Islamic banking services, community welfare improvement, relationship
between Islamic banking services and quality of life, relationship between
Islamic banking services and poverty alleviation and the relationship
between Islamic banking services and improvement in infrastructure in
Hargeisa Somaliland.
4.1 Profile of respondents
Respondents were asked to present information regarding their age,
gender, highest level of education and work experience, results are
presented in tablel below;
40
T bl 1 P fil f d ts a e . ro 1 eo respon en . Age groups Frequency
18-30 years 46
31-40 years 34
41-50 years 23
51 years and above 11
Total 114
Gender
Male 68
Female = 46
Total 114
Highest education level
Secondary 22
Diploma 27
Bachelors degree 36
Masters degree .
23
PhD 6
Total 114
Years worked
Below 2 years 30
3-5 years 41
6-8 years 26
9 years and above 17
Total 114
The results in table 4.1 showed that majority ( 40.4%) of the respondents
in this study's sample were aged between 18-30 years. This implied that
majority of respondents in this sample were in their early adulthood age.
These were followed by those between 31-40 years of age constituting
29.8%, 20.2% were between 41-50 years and 9.6% were aging between
51 years and above. Concerning gender; the results indicated that most of
41
Percent
40.4
29.8
20.2
9.6
100
59.6
40.4
100
19.3
23.7
31.6
20.2
5.3
100
26.3
36
22.8
14.9
100
the respondents in this sample were male (59.6% ), where as 40.4% were
female, hence implying a gender gap in selected customers of Islamic
banking services in Hargeisa Somaliland. The results in table 1 indicated
that Bachelors degree holders (31.6%) dominated the study, followed by
diploma holders (23.7%), 20.2% had master's degree, 19.3% had
secondary as their highest academic qualifications and only 5.3% were
PhD holders. With respect to working experience, the results in table 1
denoted that majority of respondents had an experience of 3-5 years
(36%), these were followed by 26.3% who had dealt with Islamic banking
services for not more than two years and only 14.9% had an experience
for 9 years and above, implying that majority of these bank clients and
staff in Hargeisa Somaliland are highly experienced with Islamic banking
services.
4.2 Islamic banking services
The independent variable in this study was Islamic banking services, this
variable was broken into three constructs and these are; loan services
(with four items/questions), deposit and withdraw services (with four
questions) and financing and investment services (with four questions).
Each of these questions was based on a four point Likert scale where
respondents were asked to rate the extent to which Islamic banking
services is carried out in Hargeisa Somaliland by indicating the extent to
which they agree or disagree with each question, and their responses
were analyzed L'sing SPSS and summarized using means and ranks as
indicated in tables 4.2 below;
42
Table 2: Islamic banking services
Items on Islamic banking services Mean Interpretation
Loan services Islamic banks charge administrative fees instead of loan services
3.48 Very satisfactory
which is favourable to customers
Islamic banks charge transactions fees instead of loan services 3.15 Satisfactory
The cost of capital in Islamic banking services is always favourable 2.82
Satisfactory to clients
During loan payment you can take more money on the same loan 2.24 Unsatisfactory (refinance)
Average mean ... :, '.l[ 2.92 Satisfactory
Deposit and withdraw services
In Islamic banking there is sharing profits with depositors 3.28 Satisfactory
Investment saving account in Islamic banks enables you set aside a Satisfactory portion of liquid assets that can be used to make purchases while 2.85 earning a monetary return.
You have a current account that allows you to distribute money 2.69
Satisfactory directly to others
You ran an electronic account which you use for payment of the 1.74
Unsatisfactory variety of Shari'a compliant finance services
Average mean 2.64 Satisfactory
Financing and investment services Your bank carries out transactions according to principles of Very satisfactory goodness and piety 3.39
Your bank has always aimed at eliminating exploitation by applying Very satisfactory Shari'ah or Islamic rulings during the operations 3.27
This bank has never knowingly invested in companies involved in Satisfactory gambling, alcoholic beverages, or porcine food products 2.79
Financing and investment services in this Bank is viewed as a form Satisfactory of ethical investing, or ethical lending, except that no loans are possible unless they are loan services-free 2.62
Average mean 3.02 Satisfactory
Overall mean 2.86 Satisfactory
Results in table 2 indicated that the extent of Islamic banking services is
generally satisfactory and this was indicated by the overall mean of 2.86,
43
Rank
1
2 3
4
1
2
3
4
1
2
3
4
implying that the Islamic banking services has provided effective financial
services through not charging loan services, having favorable deposit and
withdraw services and effective Financing and investment services system
to the community members in Hargeisa Somaliland.
Regarding loan services; results indicated that this construct was rated as
satisfactory and this was indicated by the average mean (mean=2.92),
hen~e implying that the Islamic banks charge administrative fees instead of
loan services which is favorable to their customers.
With respect to deposit and withdraw services; results in table 4.2
indicated that four items were used to measure this construct and it was
also rated satisfactory on average and this was indicated by the average
mean of 2.64, hence indicating that Islamic banks have different type
accounts which such as investment saving account which enables the
customers set aside a portion of liquid assets that can be used to make
purchases while earning a monetary return. Concerning Financing and
investment services; this construct was measured using four aspects in
the questionnaire and it was also rated satisfactory on average
(mean=3.07), hence indicating that the Islamic banks always carry out
transactions according to principles of goodness and piety which aims at
eliminating exploitation and to establish a just society by the application of the
Shari'ah or Islamic rulings to the operations of banks and other financial
institutions.
2.3 Community welfare improvement
The independent variable in this study was community welfare
improvement, which was broken into three constructs and these are;
44
quality of life (with four questions), poverty alleviation (with four
questions) and improvement in infrastructure (with four items). Each of
these questions was based on a four point Likert scale where respondents
were asked to rate the community welfare improvement by indicating the
extent to which they agree or disagree with each question; Their
responses were analyzed using SPSS and summarized using means and
ranks as indicated in table 4.3;
45
Table 4.3: Community welfare improvement Items on community welfare improvement Mea lnterpretati Ran
n on k Quality of life The Islamic banks have tried always to improve sanitation and 3.69 Very 1 environmental health in your community satisfactory The Islamic banks have set up charity houses collect donations 3.33 Very 2 to qive the poor in a community satisfactory The Islamic banks have set up health projects to improve on 2.92 Satisfactory 3 the quality of life among community members The Islamic banks have provided education services to 2.48 U nsatisfactor .~ 4 disadvantaged populations in ypur communitt y_ Average mean 3.12 Satisfactory Poverty alleviation The Islamic banking services in your community has always 3.37 Very 1 provided employment opportunities to local people satisfactory Islamic banking services has always provided simple and 2.83 Satisfactory 2 convenient access to small, short term, and repeat loans, with " the use of substitute collateral and informal appraisal of investments and borrowers Islamic banking services has always provided voluntary savings 2.62 Satisfactory 3 services that facilitate small deposits, with convenient :ollections and easy fund access to community members [slamic banking services has always supported research and 2.55 Satisfactory 4 Jroduct design experiments to encourage poor people to adopt md actively use diqital financial services. ~verage mean 2.84 Satisfactory [nfrastructural improvement slamic banks have always contributed funds to construct 3.37 Very 1 >ridges and railways in your community satisfactory Jew Islamic banks branches have been set up and new 3.23 Satisfactory 2 1uildings have been constructed in your community slamic banks have always contributed funds for setting up both 2.92 Satisfactory 3 ducation and health facilities in your community ;Iamie banks have always co11tributed funds to construct roads 2.75 Satisfactory 4 l your community .verage mean 3.07 Satisfactory tverall mean 3.01 Satisfactory
Source: Primary Data, 2016
46
Results in table 4.3 indicated that the community welfare improvement in
Hargeisa Somaliland is generally high and this was indicated by the overall
mean of 3.01, this implies that the Islamic banking services has
contributed to the community welfare through improving on the quality of
life, poverty alleviation and infrastructural improvement in Hargeisa
Somaliland.
Regarding quality of life, results indicated that this construct was rated as
high on average and this was indicated by the average mean
(mean=3.12), hence implying that the Islamic banks have tried always to
improve sanitation and environmental health, plus setting up charity
houses to collect donations to give the poor in Hargeisa Somaliland.
Regarding poverty alleviation, results in table 4.3 indicated that poverty
alleviation as the second construct on the dependent variable was rated
satisfactory (mean=2.84), implying that the Islamic banks have tried to
reduce poverty among community members through provision of simple
and convenient access to small, short term, and repeat loans, with the use
of substitute collateral and informal appraisal of investments and
borrowers, plus providing employment opportunities to local people.
Concerning improvement in infrastructure, this construct was also rated
satisfactory (mean=3.07), hence indicating that Islamic banks have
always contributed funds to construct bridges and railways, plus setting
up other branches inform of new buildings in Hargeisa Somaliland.
47
4.4 Objective one; relationship between Islamic banking services
and quality of life
The first objective in this study was to establish the relationship between
Islamic banking services and quality of life in Hargeisa Somaliland, to
achieve this objective, the researcher used the Pearson's Linear
Correlation Coefficient as indicated in table 4.4;
Table 4.4: Significant relationship between Islamic banking services and quality of life Variables correlated r-value Sig Interpretation Decision
on Ho Islamic banking services .753 .000 Significant Rejected
Vs correlation Quality of life
Source: Primary Data, 2016
Results in table 4.4 indicated a positive significant relationship between
Islamic banking services and quality of life, since the sig. value (0.000)
was less than 0.05 and which is the maximum level of significance
required to declare a significant relationship. This implies that effective
Islamic banking services are significantly related to the improvement in
quality of life among community members in Hargeisa Somaliland.
48
4.5 Objective two; relationship between Islamic banking services
and poverty alleviation
The second objective in this study was to examine the relationship
between Islamic banking services and poverty alleviation among
community members in Hargeisa Somaliland, the researcher correlated
the mean indices on Islamic banking services and those on Poverty
alleviation using the Pearson's Linear correlation Coefficient (PLCC) and
results are indicated in table 4.5 below;
Table 4.5: Significant relationship between Islamic banking services and poverty alleviation
Variables correlated r- Sig Interpretation Decision value on Ho
Islamic banking services Vs .824 .000 Significant Rejected
Poverty alleviation correlation
Source: Primary Data, 2016 The Pearson's Linear correlation Coefficient (PLCC) results in table 4.5
indicated a positive significant relationship between Islamic banking
services and poverty alleviation, since the sig. value (0.000) was far less
than 0.05, which is the maximum level of significance required to declare
a significant relationship in social sciences, therefore this implies that
favorable Islamic banking services can reduce on the poverty alleviation
and unfavorable Islamic banking services increase it. Basing on these
results the stated null hypothesis was rejected and a conclusion made that
satisfying Islamic banking services enhance the poverty alleviation in
Hargeisa Somaliland.
49
4.6 Objective three; relationship between Islamic banking
services and improvement of infrastructure
The last objective in this study was to determine the relationship between
Islamic banking services and improvement of infrastructure in Hargeisa
Somaliland. To achieve this last objective, the researcher correlated the
average means on Islamic banking services and that on improvement of
infrastructure using the Pearson's Linear Correlation Coefficient, as
indicated in table 4.6;
Table 4.6: Significant relationship between Islamic banking . d" t". f t t serv1ces an 1mprovemen m m ras rue ure
Variables r- Sig Interpretation Decision on correlated value Ho Islamic banking services .613 .000 Significant Rejected
Vs correlation
Improvement of infrastructure
Source: Primary Data, 2016
Results in table 4.6 indicated a positive significant relationship between
Islamic banking services and improvement in infrastructure in Hargeisa
Somaliland, since the sig. value (.000) was far less than 0.05, which is the
maximum level of significance required to declare a significant relationship
in social sciences. Therefore this implies that effective Islamic banking
services improve on the level of in infrastructure in Hargeisa Somaliland
and ineffective Islamic banking services reduce it.
so
CHAPTER FIVE
DISCUSSIONS, CONLUSIONS AND RECOMMENDATIONS
5.0 Introduction
This chapter focuses on the findings, conclusions; recommendations
based on the conclusions of this study and suggested areas that need
further research following the study objectives and study hypothesis.
5.1 Discussions
This study was set to establish the relationship between Islamic banking
services and welfare improvement to the community in Hargeisa
Somaliland, three specific objectives guided this study and these were i)
establishing the relationship between Islamic banking services on
improvement of quality of life among community members in Hargeisa
Somaliland; ii) examine the relationship Islamic banking services on
poverty alleviation among community members in Hargeisa Somaliland;
and (iii) determining the relationship Islamic banking services on
improvement of infrastructure in Hargeisa Somaliland.
Objective one; relationship between Islamic banking services
and quality of life among community members in Hargeisa
Somaliland
The findings indicated that there exists a positive and significant
relationship between Islamic banking services and improvement of quality
of life among community members in Hargeisa Somaliland, this
relationship therefore implies that effective Islamic banking services highly
51
contribute to the improvement in quality of life among community
members in Hargeisa Somaliland. This finding is in line with Iqbal (2011)
who noted that Islamic banks mobilize funds on the basis of a mudarabah
or wakalah (agent) contract. It can also accept demand deposits which
are treated as interest-free loans from the clients to the bank. On the
assets side, it advances funds on a profit-and-loss sharing or a debt
creating basis, in accordance with the principles of the Shari[ah. It plays
the role of an investment manager for the owners of time deposits,
usually called investment deposits. In addition, equity holding as well as
commodity and asset trading constitute an integral part of Islamic banking
operations. An Islamic bank shares its net earnings with its depositors in a
way that depends on the size and date-to-maturity of each deposit.
Depositors must be informed beforehand of the formula used for sharing
the net earnings with the bank (Khan and Bhatti, 2011).
Objective two; relationship between Islamic banking services
and poverty alleviation
The findings indicated a significant relationship between Islamic banking
.services and poverty alleviation. However this study revealed that there is
a significant relationship between Islamic banking services and poverty
alleviation, this also led to an implication that favourable Islamic banking
services reduce on the poverty levels and unfavourable Islamic banking
services increase it. This finding is line with Sinclair (2001) who noted that
with Islamic banks, poor people are given an opportunity to change their
lives with capital. Whyley and Brooker (2004) connoted that poor and
disadvantaged people have no access to capital and financial services,
52
especially affordable credit. Islamic banks may emulate the existing model
of Islamic banks practices, the activities must be carried out in ways which
do not conflict with the principles of Islam, Islamic banking has the same
purpose as conventional banking except that it operates in accordance
Islamic rules on transaction. Islamic banking is concerned with much more
than refraining interest, it is a system that aims at making positive
contribution to the fulfillment of the socio economic objectives. Estes
=-· •• :r- ·· (2004) noted that Islamic banks provide small loans to people who need
capital to start a small business and become self-employed to help them
build a sustainable future. In order to assess improvement of household
welfare as a result of islamic banks loan acquisition, there are various
variables such as; household income, Women empowerment (Gender),
improved education, healthcare, Poverty reduction, number of Small ·!':.
business and consumption according to the Human Development Report.
Objective three; relationship between Islamic banking services
and improvement of infrastructure
The findings of this study proved a positive significant relationship
between Islamic banking services and improvement in infrastructure in
Hargeisa Somaliland, this therefore implied that effective Islamic banking
services improve on the level of in infrastructure in Hargeisa Somaliland
and ineffective Financing and investment service reduces it. The study
further revealed that Islamic banking services significantly affect the
community welfare improvement in Hargeisa Somaliland, this was also
evidenced by the adjusted r squared (0. 773) which denoted that Islamic
banking services contributed 77.3% on community welfare improvement
53
in Hargeisa Somaliland, the coefficients section also revealed that of all
the aspects on Islamic banking services, the loan services accounted for
the biggest influence on community welfare improvement in Hargeisa
Somaliland.
This is also in line with Rahman (2012) who carried out a study to
establish attitudes of Muslims towards Islamic banking services and
Finance in the North West:: of c<England. The presence and ever growing
considerable segment of Muslim population in the UK and their social,
cultural and religious identity require a faith based banking system which
is compatible with their beliefs and values. The demographics of the
Muslim population and the ideological differences supported the argument
that the Islamic banks can produce significant socio-economic impact. The
social aspect of banking institutions is a new development in the
discipline.
Data analysis using means indicated that the Islamic banking services in
Hargeisa Somaliland was rated satisfactory (mean=2.86), confirming that
the Islamic banking services has provided effective financial services
through not charging loan services, having favourable poverty alleviation
and effective Financing & investment services system to the community
members in Hargeisa Somaliland. Regarding loan services; findings
indicated that this was rated as satisfactory (mean=2.92), hence
confirming that the Islamic banks charge administrative fees instead of
loan services which is favourable to their customers. With respect to
Poverty alleviation; findings indicated that this was also rated satisfactory
and this was indicated by the average mean of 2.64, hence indicating that
54
Islamic banks have different type accounts which such as investment
saving account which enables the customers set aside a portion of liquid
assets that can be used to make purchases while earning a monetary
return. With respect to Financing and investment services; this was also
rated satisfactory (mean=3.07), hence implying that the Islamic banks
always carry out transactions according to principles of goodness and
piety which aims at eliminating exploitation and to establish a just society
-=-· Z1by the application of the Shari'ah or Islamic rulings to the operations of
banks and other financial institutions.
The study findings are in line with Ghafoor (2014) who noted that the
functions of Islamic banks are: to collect deposits from the people on
profit-and-Joss sharing basis; to provide all necessary banking services to
its customers; to finance those projects which generates employment; to
allocate financial resources (financing) in a way that it ensures equitable
distribution of income; to act as a development institution; to promote
entrepreneurship by providing finance on profit and loss basis; to
transform saving into investment in such a way that it benefits to the
majority; to provide expertise and technical advice to the finance-taker in
order to improve the process of production and profitability; to disperse
financing and discourage its concentration.
The community welfare improvement in Hargeisa Somaliland was found to
be satisfactory, hence confirming that the Islamic banking services have
contributed to the community welfare through improving on the quality of
life, poverty alleviation and infrastructural improvement in Hargeisa
Somaliland. Regarding quality of life, findings indicated that this was rated
55
satisfactory, hence implying that the Islamic banks have tried always to
improve sanitation and environmental health, plus setting up charity
houses to collect donations to give the poor in Hargeisa Somaliland.
Regarding poverty alleviation, this was rated satisfactory, hence indicating
that the Islamic banks have tried to reduce poverty among community
members through provision of simple and convenient access to small,
short term, and repeat loans, with the use of substitute collateral and
informal appraisal of investments ~ ... - and borrowers, plus providing
employment opportunities to local people. Concerning improvement in
infrastructure, this was rated satisfactory, hence implying that Islamic
banks have always contributed funds to construct bridges and railways,
plus setting up other branches inform of new buildings in Hargeisa
Somaliland.
5.2 Conclusions
Objective one; relationship between Islamic banking services
and improvement of quality of life among community members in
Hargeisa Somaliland
There is a positive and significant relationship between Islamic banking
services and quality of life in Hargeisa Somaliland, hence concluding that
that effective Islamic banking service highly contribute to the
improvement in quality of life among community members in Hargeisa
Somaliland.
56
Objective two; relationship between Islamic banking services
and poverty alleviation among community members in Hargeisa
Somali land
There is a positive and significant relationship between Islamic banking
services and poverty alleviation in Hargeisa Somaliland, hence concluding
that favourable Islamic banking services reduce on the poverty levels and
unfavourable Islamic banking services increase it.
Objective three; relationship between Islamic banking services
and improvement of infrastructure
There is a positive and significant relationship between Islamic banking
services and improvement in infrastructure in Hargeisa Somaliland,
hence concluding that effective Islamic banking services improve on the
level of in infrastructure in Hargeisa Somaliland and ineffective Islamic
banking services reduce it, also the researcher concluded that Islamic
banking services significantly affect the community welfare improvement
in Hargeisa Somaliland, and the Islamic banking services contributed
77.3% on community welfare improvement in Hargeisa Somaliland, and
the loan services aspect accounted for the biggest influence on
community welfare improvement in Hargeisa Somaliland.
The Islamic banking services in Hargeisa Somaliland was rated satisfactory
concluding that the Islamic banking services has provided effective
financia l services through not charging interest on loan services, having
favourable poverty alleviation and effective financing and investment
services system to the community members in Hargeisa Somali land. The
community welfare improvement in Hargeisa Somaliland was found to be
57
satisfactory, hence concluding that the Islamic banking services have
contributed to the community welfare through improving on the quality of
life, poverty alleviation and infrastructural improvement in Hargeisa
Somaliland.
5.3 Recommendation
i. The researcher recommends to the management of these Islamic
banks to consider past paym~_nt history of client as a means of
avoiding occurrence of risk.
ii. The researcher recommends to the management of these Islamic
banks to make sure that during loan payment clients can't take
more money on the same loan (refinance) but a client can take a
new loan.
iii. The researcher recommends to the management of these selected
Islamic Banks in Hargeisa Somaliland to make sure that the six C's
of credit such as character, capacity, loan services, conditions,
control and capital of applicant arelOO% evaluated.
iv. The researcher recommends to the management of these Islamic
banks to make sure that they introduce electronic accounts which
can used by clients for payment of the variety of Shari'a compliant
finance services.
v. The Islamic banks should provide education services to even the
disadvantaged populations in Hargeisa Somaliland as a way of
improving the community welfare.
58
vi. The Islamic banks should always support research and product
design experiments to encourage poor people to adopt and actively
use digital financial services.
5.4 New knowledge acquired
The study was able to bridge the gaps that were not covered by the
previous studies on Islamic banking services and welfare improvement. - ~ -
The study brought up new frontiers of knowledge on how Islamic banking
institutions should provide banking services and the weaknesses that were
found out in their current operations hindering welfare improvement.
5.5 Areas for further research
Prospective students are encouraged to research on the following areas;
1. Financing & investment services of Islamic banks and community
welfare improvement of in Hargeisa Somaliland.
2. Islamic banking and profitability of commercial Banks in Hargeisa
Somaliland.
3. Islamic banking system and liquidity performance of commercial Banks
in Hargeisa Somaliland.
59
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APPENDIX IV
RESEARCH INSTRUMENT
Section A: Demographic characteristics of Respondents
1. Age
a) _ _ 18-30 years, b) __ 31-40 years, C) __ 41-50 years and
d)_ Sl years and above
2. Gender
a) Male __ _
b) Female. __
3. Level of education qualification
a) Secondary ___ __ _
b) Diploma. ______ _
c) Bachelors Degree __ _
d) Masters degree ___ _
e) PhD ______ __
4. Number of years experience
a) Below 2 years. _ __ _
b) 3-5 years. _____ _
c) 6-8 years ____ _ _
9 years and above __ _
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QUESTIONNAIRE TO DETERMINE THE EXTENT OF ISLAMIC
BANKINGSYSTEM
Direction 1: Please write your rating on the space before each option
which corresponds to your best choice. Kindly use the scoring system
below:
Response Mode Rating
Strongly Agree (SA) 4
Agree (A) 3
Disagree (D) 2
Strongly Disagree (SD) 1
lslamic banking services .oan services
-he cost of capital in Islamic banking loan services is always favourable to clients
slamic banks charge administrative fees instead of loan services which is favourable to :ustomers
>uring loan payment you can take more money on the same loan (refinance)
:;Iamie banks charge transactions fees instead of loan services
teposit and withdraw services
1 Islamic banking there is sharing profits with depositors
westment saving account in Islamic banks enables you set aside a portion of liquid ;sets that can be used to make purchases while earning a monetary return.
JU have a current account that allows you to distribute money directly to others
)U ran an electronic account which you use for payment of the variety of Shari'a >mpliant finance services
nancing and investment services
1ancing and investment services in this Bank is viewed as a form of ethical investing, ethical lending, except that no loans are possible unless they are loan services-free
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14 3 2 1
:slamic banking services .oan services ·he cost of capital in Islamic banking loan services is always favourable to clients
slamic banks charge administrative fees instead of loan services which is favourable to ustomers
turing loan payment you can take more money on the same loan (refinance)
;Iamie banks charge transactions fees instead of loan services
his bank has never knowingly invested in companies involved in gambling, alcoholic everages, or porcine food products
o~r bank carries out transactions according to principles of goodness• and piety
our bank has always aimed at eliminating exploitation by applying Shari'ah or ;Iamie rulings during the operations
QUESTIONNAIRE TO DETERMINE COMMUNITY WELFARE
IMPROVEMENT
Response Mode Rating
Strongly Agree (SA) 4
Agree (A) 3
Disagree (D) 2
Strongly Disagree (SD) 1
terns on community welfare improvement 4 3 ·uality of life he Islamic banks have provided education services to sadvantaged populations in your community 1e Islamic banks have set up charity houses collect donations to ve the poor in a community 1e Islamic banks have set up health projects to improve on the Jality of life among community members 1e Islamic banks have tried always to improve sanitation and
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2 1
14 3 2 1
environmental health in your community Poverty alleviation Islamic banking has always provided simple and convenient access to small, short term, and repeat loans, with the use of substitute collateral and informal appraisal of investments and borrowers Islamic banking has always provided voluntary savings services that facilitate small deposits, with convenient collections and easy fund access to community members Islamic banking has always supported research and product design experiments to encourage poor .P.eople to adopt and actively use diqital financial services. The Islamic bank in your community has always provided employment opportunities to local people Infrastructural improvement Islamic banks have always contributed funds for setting up both education and health facilities in your community Islamic banks have always contributed funds to construct bridges and railways in your community Islamic banks have always contributed funds to construct roads in your community New Islamic banks branches have been set up and new buildings have been constructed in your community
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