Real estate finance in Kuwait – evaluation of the approaches of Islamic and conventional banks
Al-Barak, Mohammad Jasem
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Just as shelter is one of the basic needs for human beings, it can also be said that having the necessary finances in place to be able to live in and own a house represents an equally critical need. Since most people are not in a financial position to pay for their house in one transaction, the availability of a mortgage or some form of finance has over time become an essential element in promoting and safeguarding homeownership. Islamic finance began to emerge and received growing recognition as a new reality in the world of international finance, particularly when the global financial crisis occurred in 2008 providing a severe shock to the financial system and markets the world over. While conventional and traditional banks were seriously affected, Islamic banks, perhaps surprisingly to some within the sector, remained relatively unscathed and less prone to the crises that followed in the aftermath. The performance of Islamic banks through a number of key ratios has produced satisfactory results. In terms of the market in Kuwait, Islamic banks have a history of conducting business activities within a somewhat niche market which seeks to attract and offer products and services based on a profit and loss sharing concept governed by the Islamic principles of Shariah. The growth of Islamic banking during recent years in Kuwait and their superior performance compared to the conventional system has helped to increase the relative competitiveness of both banking systems. This thesis seeks to provide a comparative study of conventional banks and Islamic banks in Kuwait in terms of the challenges they face and the benefits they provide for housing financing. It also identifies the similarities and differences between Islamic and conventional banks. The Islamic mortgage, which is the housing finance tool of Islamic banking and finance, offers those who desire it a home ownership alternative that is in harmony with Islamic Shariah principles and therefore free of interest, with engaging in interest being forbidden for Muslims. This study also aims to explore and critically analyse the supply and demand side related to Islamic home financing by focusing on the different propositions being offered by both Islamic and conventional banks in Kuwait. In particular, this study explores the risks and benefits related to Islamic banking by investigating the obstacles that effect the availability of Islamic home finance. In order to achieve its principal aim, this study has employed a mixed method approach whereby data and information was obtained from questionnaire surveys, interviews and case studies. The interviews and case study findings have revealed several challenges such as cancellation of mortgage products, default on payments, remaining interest, lack of products within the traditional banks and a lack of supply. All of these factors are collectively believed to be hindering the growth and potential of housing finance in Kuwait. The study has also noted the problems that arose for the bank, such as central bank decision and government rules. The findings of the questionnaire survey have revealed that customer awareness of Islamic mortgage products is still somewhat low vis-à-vis products offered by their conventional counterparts. This was particularly the case for Islamic home finance. In addition, it has been noted that clients opted for Islamic finance mainly due to religious reasons; and the reason for non-take-up was mainly due to financial costs. However, it is interesting to note that the majority of the respondents expected the Islamic mortgage to be capable of safeguarding their interests. Many of the respondents believed that the Islamic mortgage could achieve the inherent advantages linked to it, which provides the capability of assisting not only the individual, but also wider societal interests. This factor is crucial to Islamic banks, as this situation was broadly agreed upon and expected by a number of respondents. Going forward, based on the study’s findings, a road map has been developed to promote a greater understanding of Islamic home finance. It consists of five parts comprising regulation and policies, challenges and risks, benefits, availability and obstacles, and comparative criteria. A great deal of modern processing and analysis techniques have been used to determine the differences between Islamic and conventional banks. This study asserts that these techniques can help revive the soul of Islamic Shariah, which will ultimately help to highlight the efficiency and effectiveness of Islamic finance, particularly home financing, which can benefit all key stakeholders.