The proposed single currency, Gulf Dinar, within the Gulf Cooperation Council consisting of Kuwait, Qatar, Bahrain, Saudi Arabia, Oman, and United Arab Emirates has met with mixed reactions due to the complexity of its implementation and competing interests among the member states. There is a need to establish the impact of the Gulf Dinar on the Sharia-based Islamic banking model that is currently operating within the member states. The foundation of the single currency regime within the GCC bloc was meant to integrate the member states into an economic unit from a process that began more than three decades ago (Beaver 2011). The initial intention of the committee was to ensure that all the GCC member states used a single currency by the beginning of 2010. However, Oman and Kuwait requested an extension due to internal inflation pressure. This proposed research aims at analysis issues surrounding the introduction of the Gulf Dinar on the Islamic banking model that is currently being used by the member states.
Besides this, the paper reviews the potential impacts of the single currency on the Sharia-based accounting model, which banks within the six member states use, and its potentiality in promoting integration of a sustainable financial system for the GCC bloc (Blank 2011). Economic integration has become a fundamental instrument for the creation of a strategic financial market such as the Islamic banking model in the case of the GCC. Islamic banking follows the Sharia laws. The integration of the GCC through the single currency regime is likely to make the Islamic banking more attractive and flexible to the needs of each economy operating within the bloc. For instance, the single currency regime will result in reduced capital cost due to low and standardized interest rates across the member states and will eventually result in a stimulated financial sector since there will be an increase in the direct investments. The other benefits of a single currency regime within the Islamic banking system will result in an expanded financial market, increased flow of capital, and creation of an environment that is ideal for stability and consistent trade.
Research problem statement
The introduction of the Gulf Dinar within the GCC economic bloc is currently facing the challenge of competing interests since the financial markets within each member state territory are overshadowing the realization of a single currency regime as is the case within Europe. For instance, Oman and Kuwait had to request more time to prepare their economies and financial markets to operate within the single currency proposed. In addition, although all the member states have banking systems that function within the Islamic Sharia laws, there are institutional challenges in terms of accounting regulations in each state. For instance, in the UAE, the accounting institutions are focused on market forces and government mechanism to create financial agreements. In Kuwait, the government plays a more proactive role in regulating the functioning of the Islamic banking sector (Callen et al. 2016). This means that it is very difficult for these two economies to effectively merge due to differences in the current currencies and their value (Filip & Raffournier 2010). Therefore, this paper will attempt to explore the ideal strategy that the GCC bloc can use to ensure that the proposed single currency regime will address the above challenges and lead to proper integration of the Islamic banking system within the six states making up the GCC.
Purpose of the research
The purpose of this research proposal is to review the impact of the proposed single currency regime on the Islamic banking systems that are in place in order guarantee proactive integration of the GCC into a viable economic bloc. The focus on Islamic banking is based on the assumption that the interest rates and financial regulations within each market are not uniform. Therefore, the single currency will balance the market swings and government regulations since each state will have to adhere to uniform banking regulations. Therefore, exploration of the fluctuating interest rates within the GCC will be reviewed independently to establish the potential impact of a single currency. The focus of the paper will be on the banking sector within the four states that have not requested a suspension of the process of single currency regime: Saudi Arabia, UAE, Qatar, and Bahrain. In order to establish the potential impacts of a single currency regime, the paper will concentrate on the Islamic banking regulations and interest rates in each state for a period of seven years, from 2007 to 2014. The analysis will be based on the interest rates through co-integration analysis to establish the possible impact of a similar currency regime.
The research objectives are:
- To establish the impact of the single currency regime on the Islamic banking sectors within the four member states of the GCC before the adoption of the Gulf Dinar.
- To establish the impact of a single currency regime within the GCC banking industry after the adoption of the single currency regime.
- To establish the impacts of the post single currency Islamic banking model on the integration of the GCC member states into a single economic bloc.
- Null hypothesis: The adoption of a single currency has an impact on the Islamic banking industry within the integrated GCC bloc.
- Alternative hypothesis: The adoption of a single currency does not have an impact on the Islamic banking industry within the integrated GCC bloc.
There is no research that has been done on the potential impact of the Gulf Dinar currency regime on the Islamic banking system as part of the GCC bloc integration. This paper will attempt to address this gap by associating the single currency regime with Islamic banking success within the GCC bloc.
The literature review will be divided into theoretical and empirical to relate the theories and past case studies on single currency banking systems. The literature review will be based on past case study researches, financial journals, academic books, and online capital market websites. These sources are authentic and provide a preview of the past researches that will help in developing the current case study.
The research will adopt a qualitative approach to analyse secondary data from different currency and single currency regimes within the Islamic banking industry of the GCC bloc (Creswell 2009). The interest rates will be calculated as follows:
Rit = ln(Pit/ Pit-1)
Rit: Rate of return of country i’s interest rates at t
Pit: Price of country i’s interest rate at t
(Source: Ball & Brown 2006)
The use of Ordinary Least Squares was chosen since it is ideal in revealing long-term interest rate trends within the GCC states.
Ball, R & Brown, P 2006, “An empirical evaluation of accounting income numbers,” Journal of Accounting Research, vol. 6, no. 3, pp. 159-178.
Beaver L 2011, “Perspectives on recent capital market research,” Accounting Review, vol. 77, no. 5, pp. 453-474.
Blank, K 2011, Business statistics: For contemporary decision making, John Wiley & Sons, New Jersey.
Callen, T, Cherif, R, Hasanov, F & Hegazy, A 2016, Economic Diversification in the GCC: Past, present, and future. 2014. Web.
Creswell, J. W 2009, Research design: Qualitative, quantitative, and mixed methods approaches, Sage Publications, Thousand Oaks, CA.
Filip, A & Raffournier, B 2010, “The value relevance of earnings in a transition economy: The case of Romania,” The International Journal of Accounting vol. 45, no. 6, pp. 77-103.