Academic journal article Academy of Accounting and Financial Studies Journal

Factors of Influence in the Establishment of Islamic Banking and Finance in Algeria

Academic journal article Academy of Accounting and Financial Studies Journal

Factors of Influence in the Establishment of Islamic Banking and Finance in Algeria

Article excerpt

INTRODUCTION

In the economy of any country, financial system plays an important role, which consists of credit facilities and provision of loans for the production process. Most of the banks which are operating in many countries of the world rely on the system of interest. In Islam, interest is called Riba which drives against the principle of Sharia (Maqsaid al-shariah) and a termed as a haram (forbidden) as explained by (Abidin, Bakar & Haseeb, 2014 & 2015; Kameel & Larbani, 2009).

In many Muslim countries, the Islamic banking system has been established to serve the needs of the Muslim communities where the practice of usury or Riba' is prohibited. This Sharia compliance Islamic banking system operates in parallel with the conventional banking which was in existence before the establishment of Islamic banks. Despite many challenges, Islamic banking system is proven to be viable and able to withstand the impacts of the economic and financial crisis. In addition, Islamic banking system is also very well accepted by the conventional banking system with the introduction of sharia compliance banking products and services by the significant conventional banks in the non-Islamic countries (Abidin & Haseeb, 2015; Bittman, Davies, Russell & Goussakova, 2017).

Today, Islamic banking has become a substantial segment of the global financial market in Islamic and non-Islamic countries that offers a wide range of financial products and services (Dusuki, 2008). The establishment of this Sharia compliance Islamic banking and finance is concentrated mainly in the Middle East and Southeast Asia countries. Besides these regions also serve as a Centre for promoting the sharia base Islamic banking and finance to western businesses and financial markets (Tarman, 2010).

In Algeria, despite being a Muslim country, the share of Islamic bank and finance is small which accounts for not more than 1% of banking activity (Abidin, Haseeb, Azam & Islam, 2015; Elhachemi, 2012). In 1991, Banque Al Baraka d'Alge'rie - a private bank, became the first Islamic bank to operate in Algeria which offers a limited financial product to its customers (Benamraoui, 2008). However, there are no Islamic banking products in all public banks in Algeria. The introduction of the Islamic banking system in Algeria will undoubtedly help in elevating the level of technical performance of the Islamic banking system.

The motivation of this paper is to identify the obstacles that become a hindrance to the success of promotion and the establishment of the Islamic banking in Algeria as an alternative to the conventional banks. Besides, this paper focuses on social, technical and legal issues about the establishment of Islamic banking in Algeria. The study includes the Islamic banking and financial products in all public-sector commercial banks operate in Algeria. However, due to the large size of the community in Algeria, the study includes only all the branches of commercial public banks in the selected city of Boumerdes.

OVERVIEW OF ISLAMIC BANKING AND FINANCE

The foundation of Islamic banking and finance is the prohibition of interest or Riba in it practices which distinguishes it from its counterpart; the conventional bank (Iqbal, 1997). According to Muslim scholars Riba' is like interest or usury and therefore always be condemned (Haron & Shanmugam, 1997).The practices of Islamic banking and finance require the application of the provisions of Islamic law in all transactions and investments. Accordingly, all profit and loss transactions must be done according to the Islamic banking operations which include the method of financial intermediation. In general, the Islamic banking business must adhere to the Islamic values and ethics in the banking business (Abidin, Haseeb & Islam, 2016; Abidina, Haseeb & Jantan, 2016).

In addition, financing is a primary function of Islamic banking like conventional banks. …

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