A comparative study between Islamic and Conventional Banking Systems. A study based on an Institutional-network theoretical framework.

By Dr. Mohammed N Alam, PhD (Sweden), B.com (Hons) M.Com. Acct. (BD)

Note:

The Islamic Banking System is a progressive and pioneering financing system, working effectively in modern days in many parts of the world. In many developed and developing nations this unique financing system works side by side with other conventional banks in both market and non-market economy. How the Islamic Banking System differs from other conventional financing system?' is a commonly asked question. The article is designed to answer this question. Based on a developed theoretical framework, the author differentiates the activities of the Islamic banking system from the conventional banking system. In order to study this particular phenomenon, the Institutional-Network' theoretical framework (Alam, 2003) is used, developed to study the lender-borrower network relationships between different lending organizations and small and cottage industry in particular country context.

CONTENTS
Introduction
I. Theoretical Framework and the methodological approach used in the study
Components of Major Financing Systems (MFS)
§ The Nature of the organization of Whitley's business system
§ Concept of Networks
§ Characterizing the organizational fields as Major Financing Systems
§ The Market-Based Financing Systems (MBFS)
§ The Islamic financing systems (IFS)
§ Characteristics of the components of financing systems
Methodological Approach
II. An Islamic bank: A bank without interest
§ Equity based-investment and elimination of interest
§ Islamic banks as observed by International bodies
§ Practice of Islamic banking systems by Western bankers
§ Modes or techniques followed by Islamic banks
III. A comparative view of Islamic Bank and conventional Banks
The nature of the MFS
§ Size and ownership
§ Degree of managerial discretion from owners
§ Business specialization and managerial homogeneity
§ Integration of different activities
§ Growth focus
§ Risk management
Market organization in different MFS
§ Information process
§ Duration of lender-borrower relationship
§ Commitment to particular exchange partner
§ Scope of exchange relations
Employment procedures and staff relationships in the MFS
§ Recruitment procedures
§ Boss subordinate relationship
§ Job training
§ Seniority based rewards
§ Incentives to employees
Authority and control system of the MFS
§ Centralization of decision-making
§ Delegation of authority
§ Reliance on formal coordination and control procedures
§ Managerial involvement
Configuration of hierarchy-market relation of the MFS and conclusions
List of references
Appendixes
Introduction

The Islamic Banking System is a progressive and pioneering financing system, working effectively in modern days in many parts of the world. In many developed and developing nations this unique financing system works side by side with other conventional banks in both market and non-market economy. How the Islamic Banking System differs from other conventional financing system?' is a commonly asked question. The article is designed to answer this question. Based on a developed theoretical framework, I differentiated the activities of the Islamic banking system from the Conventional banking system. In order to study this particular phenomenon, I used the Institutional-Network' theoretical framework (Alam, 2003), developed to study the lender-borrower network relationships between different lending organizations and small and cottage industry in particular country context.

The Institutional-Network' theoretical is developed based on Whitley's (1992a 1992b) Business Systems' concept used to study different business systems in Asian countries and Jansson's (2000) Network Institution model used in studying differences in different Multi National Corporations (MNCs) in India. It is used to carry out the comparative study in the context of the financial market in Bangladesh, focusing on the financing of rural-based small and cottage industries by Islamic banks and other conventional banks in the country.

The article consists of three different sections. The first section includes a brief description of the theoretical and methodological aspects of the study. The second section discusses various aspects of the Islamic banking system and different financing modes or techniques used by Islamic banks. The last section includes a detailed analysis of the comparative views between the activities of Islamic banks and other conventional banks.

From the view point of an institutional and network perspective the result of the study shows how in a particular country like Bangladesh, the Islamic banking system differ form the conventional banking while rendering financial services and establishing the exchange relationships between the rural-based small and cottage industry owners and the financing organizations.

I. Theoretical Framework and the methodological approach used in the
study

An Institutional-Network theoretical framework is developed in the study to study the lender-borrower network relationships between rural-based small and cottage industries and Islamic banks and other conventional financing organizations in a particular country context. As mentioned in the above section, while developing the theoretical concepts, I used Whitley's (1992b) Business System' approach and Jnasson's (2002) Network-Institutional concept. A general view of the term institution' defined by different authors and a brief description of Whitley and Jansson's theoretical models based on which the Institutional Network Framework developed, is given in the following sections.

General concepts of the term Institution'

Institution is viewed by the International Encyclopedia of the Social Sciences as norms and rules of conduct that are usually regarded as the basic focus of socio-economic organizations.International Encyclopaedia of the Social Science, Social Institution, Vol. 14: 409-429. Hughes (1939, P.283) in his discussion observed that anything socially established can be called an institution. The author further suggests that the term institution is applied to those features of social life, which outlast biological generations or survive drastic social changes that might have been expected to bring them to an end. While highlighting the institution theory, Oliver (1990) argues that institutional environments impose pressure on organizations to justify their activities or outputs. These pressures motivate the organization to increase their legitimacy in order to appear in agreement with the prevailing norms, rules, beliefs or expectation of external constituents. Institutions greatly influence human activities as well as the behavior of markets, various organizations and individuals within a society. According to Jansson (2002) institutions also concern different types of habitual or recognized behavior, such as habits, rules, and procedures, implying that institutions are characterized by a rule-like or governing nature, an ability to facilitate and constrain inter-human and inter-social relations, and by predictive behavior. Veblen (1919, p.239) observed that, institutions themselves are comprised of settled habits of thought common to generality of men. Man is socialized by societal agents and forces, thus habits are an outcome of social behavior, customs, traditions and law.

The Nature of the organization of Whitley's business system

The Business Systems Approach is an institutional approach used by Whitley (1992b) to study business organizations, inter alia in Asian countries. Whitley (1992b) in his comparative study of business systems in East Asian countries, e.g. Chinese family business units (CFB) in Taiwan and Hong Kong, Japanese Kaisha and Korean chaebol, the author tried to find how firms' are constituted as relatively distinct economic actors in different market societies and how they organize economic activities in the form of dominant hierarchy-market configurations. The comparative analysis of business systems as Whitley (1992b) observed is the study of these configurations. In this regard, the author argued that, a key task concerning the comparative study of business systems is to analyze how distinctive patterns of economic organizations become established and effective in different societies and how they change in relation to their institutional context. Whitley (1992a) in his study also observed that these patterns concern the nature of economic activities that are coordinated through managerial hierarchies and how these hierarchies organize their cooperative and competitive relations through markets. The author summarized this idea as configurations of hierarchy-market relations that become institutionalized in different market economies in different ways as the result of variations in dominant institutions.

One reason for which I used Whitley's (1992a,b) idea of business systems in carrying out the comparative study is that, the Islamic Financing System' can be seen as a business system of its own, with a foundation based on religion, having its own rules governed by the Islamic laws. These rules differ from those of other financial systems. Different financial systems are viewed as particular arrangements of hierarchy-market relations that become institutionalized and relatively successful in a particular context. Like Whitley (1992a) Business Systems' differences between different financing systems in Bangladesh are seen, as alternative responses to three fundamental issues in the market economy such as i) how are financing activities and resources coordinated and controlled? ii) how are exchange relationships between authoritatively coordinated economic activities in financing organizations organized? and iii) how are market activities and skills within financing organizations organized and directed through authority relations?. Whitley (1992b p.22) argued that these different social contexts have encouraged and constrained the development of distinctive and effective ways of organizing economic activities in the form of dominant hierarchy-market configuration in Japan, South Korea, Taiwan and Hong Kong. In present study, the idea of Whitley (1992b) is used to understand and analyze different financing systems as hierarchy-market configurations influenced by their societal context.

Concept of Networks

Apart from Whitley's (1992a, 1992b) institutional concept in the Institutional-Network theoretical framework, I also used the network concepts of Jansson's (2002) Networks Institutions' model, where the author integrated network with institutions and viewed the network from an institutional perspective. In order to study the relationships between Multi National Corporations (MNCs), MNCs and their commercial partners, the author used a network approach and developed a theory to analyze such linkages. In order to study the network relationships between and within organizations belonging to the two focused institutions, for example, SCIS and MFS and their relationships with other economic actors in the organizational fields, I used the concept of Jansson's (2002) Trans-organizational Network theory while developing my analytical framework.

Network in the present study is looked upon and defined here at the organizational level rather than the level of the person and individual. Organizational network may be prescribed or emergent in nature. Prescribed or formal organizational processes take place between departments and organizations, while emergent indicates informal processes, such as coalitions and cliques. Jansson (2002) viewed these networks as Trans-organizational Networks'. The author (ibid p.4) viewed trans-organizational networks as “clusters of people joined by a variety of links which exchange goods and services, communicate by exchanging information and socializing by exchanging sentiments, which together could create influence”. Jansson (2002) also observed that the concept of trans-organizational linkage is utilized to denote both intra and inter organizational relations.

Networks form within hierarchies and between them as market relationships. So network relationships are not only found within the authority and control systems of organizations but also as linkages between financing organizations within a particular financing system. In their respective study on networks within the context of entrepreneurs Johannisson et al. 1992; Easton & Araujo, 1991; Birley, 1985; and Aldrich & Zimer, 1986, affirm that the network metaphor has become increasingly utilized within social science in general and in entrepreneurship research in particular since the mid 80`s. Jansson (2002, p.15) in his network theory developed the concepts of both external and internal network relationships. An external or inter-organizational relation emerges when actors form relationships with other organizations. In this regard Aldrich (1979, p.281) observed that an inter-organizational network consists of all organizations linked by a specified type of relation and is constructed by finding the ties between all organizations in a population. An internal or intra-organizational network is characterized by building up relationships between individual actors within the organization.

Characterizing the organizational fields as Major Financing Systems (MFS)

The organizational fields in the Institutional-Network' theoretical framework is consists of two institutions such as the Major Financing Systems (MFS) and Small and Cottage Industry Systems (SCIS). The major financing systems (MFS), which is the subject matter of the discussion in this article is again consists of two different financing systems. These are for example, the Islamic Financing System (IFS) and the Market-Based Financing System (MBFS). The financing organizations of similar nature are grouped within these two financing systems. In order to study differences between Islamic banks and other conventional banks from the viewpoint of the Institutional-Network theoretical framework, in the present study the IFS (Islamic Financing System) and MBFS (Market-Based Financing System) are regarded as distinct market-hierarchy institutions in the financial market of Bangladesh and the organizations within these systems (e.g. different Islamic banks and conventional banks) are regarded as economic actors within these institutions.

The Market-Based Financing Systems (MBFS)

The market-based financing system includes various financing organizations, which are organized, controlled and owned either by the government or by the private individuals. Government and privately owned financing organizations follow various rules and regulations which in many respects are inspired by the Western financing organizations. These organizations extend credit facilities to large as well as medium size industries and also maintain financial relationships with various market-based financing organizations abroad. From that viewpoint, these sorts of organizations are identified and included in the market-based financing system. Financing organizations relates to the MBFS includes both the government and the privately owned commercial banks. Various conventional banks interviewed during the field study are; Rupali Bank Limited, Janata Bank Limited, Arab Bangladesh Bank Limited (see appendix)

The Islamic financing systems (IFS)

The Islamic Financing System (IFS) includes different financing organizations that are guided by shariah (Islamic law) based financing principles. These organizations use different financing techniques and lending procedures than those in the other financing systems. The IFS is a mix of market-based and non market-based financing systems. Although many exchange functions in organizations within the IFS are similar to those of western inspired commercial banks, they are also based on non-market rules and regulations, which are purely based on religious ethics. The organizations in the IFS function beyond the market-based economy, since the exchange relations of this system, are mainly ethics based originating from religious beliefs, trust and faith. Religious norms/values and beliefs regulated human behavior in society long before modern market began. In the past, people found religion as a means of worship or approach to God, simply a personal matter. Thus, by taking fundamentals of religion as the instruments, the organizations in this financing system bridge the gap between a market economy and a traditional system. Different Islamic banks interviewed during the filed study are; Islami Bank Bangladesh Limited, Al-Baraka Bangladesh Bank Limited and Social Investment Bank Limited (see appendix I)

Characteristics of the Components of Major Financing Systems (MFS)

It is mentioned in the above section that like Whitley's (1992b) Business Systems' different financing systems (e.g. the Islamic and the conventional financing system) are outlined as distinct ways of organizing economic activities in a market society and identified the major characteristics, according to which financing systems vary between institutional contexts. The characteristics of the components of Whitley's (1992b) Business System' are developed while structuring Institutional-Network framework with a view to studying differences in the economic activities between Islamic banks and other conventional banks. The components or major characteristics of these financing systems are: the nature of dominant economic activities and resources, the structure of market relations, the nature of authoritative coordination and control systems and employment systems. These components of the financing systems are again analyzed in terms of a number of sub characteristics, which forms the basis for comparison across institutional contexts. These are mentioned below:

The Nature of the organization of the financing system
§ Managerial discretion from owners
§ Managerial homogeneity
§ Growth focus
§ Risk management
§ Ownership

Market Organization
§ Information process
§ Interdependence of lender-borrower
§ Commitment to particular exchange partner
§ Incentives to employees

Employment systems
§ Recruitment procedures
§ Boss subordinate relationship
§ Job training
§ Seniority based rewards

Authority and control systems
§ Centralization of decision-making
§ Delegation of authority
§ Reliance on formal coordination and control
§ Managerial involvement in work group

A brief description of the above characteristics is given in section IV where an analysis of differences between organizations in the Islamic Financing System and Market-Based Financing System is done.

Methodological Approach

The methodological approach used in the study is combination of both deductive and inductive (Glaser 1978, Strauss & Corbin 1990, Jansson et.al. 1995). In the deductive approach, one tests the hypothesis or the validity of a theory. It is a method by which one may study an individual case using a general law that is, a logical analysis of what the general theory says about a specific event. Initially, the research design was based mainly on Whitley's institutional theory (1987, 1990, 1992a, 1992b), and the network institutional theory of (2002), and network theories of Kuklinski & Knoke (1988), Johannisson et al (1992), and Håkansson (1993). The inductive approach principle means a journey made by a researcher from the empirical point to the stage of a theory development. At one point in the work, based on the data collected from the field. I interviewed various financing organizations as mentioned in the above section and modified the originally defined theories and developed a theoretical frame of references based on which data collected from the field are analyzed. The research methodology applied in the study is of a qualitative nature (Jick 1979, Merriam 1998, Sherman and Webb1988, Patton 1985). A qualitative type of research is characterized by collection of data directly from respondents in the field. This is because the entire research program is based on facts acquired from the material world, that is, the practical field of study. In-depth' interviews with senior officials of different Islamic banks and conventional banks (See appendix I) owners were conducted during the field work A case study (Yin 1994) method was adopted as a research strategy in order to focus on contemporary phenomenon within the real life context of different Islamic banks and other their conventional banks and their relationships with their customers in Bangladesh.

II. An Islamic bank: A bank without interest

An Islamic bank may be defined as a financial intermediary whose objectives and operations as well as principles and practices must conform to the principles of Islamic Law (Shariah); and, consequently, is conditioned to operate all its activities without interest (Alam, 2001). The aim of Islamic economics, as observed by Molla et.al. (1988), is not only the elimination of interest-based transactions but also the establishment of a just and balanced social order free from all kinds of exploitation. An Islamic bank is not only a financier but also a partner in business. The system essentially involves sharing of risk between the owner of capital and the entrepreneurs, as well as sharing the result of the collective efforts. Thus, it differs from an interest-based system in which the risk is mainly borne by the entrepreneur or by the user of capital. In other way we can call Islamic banking as participatory banking.

The introduction of Islamic Banking in modern world is based on the principles of Islamic economics. Molla et.al. (1988), observes that the aim of is not only the elimination of interest based transactions and the introduction of zakah (Contribution to poor) system but also the establishment of just and balanced social order free from all kinds of exploitation. Islamic bank plays a vital role in achieving this balanced social order and establishing ideal Islamic societies in Muslim countries.

Equity based-investment and elimination of interest

Considering interest in Islamic economics Ahmad (1994), argues that elimination of interest does not mean zero-return on capital rather Islam forbids a fixed predetermined return for a certain factor of production i.e. one party having assured return and the whole risk of an entrepreneurship to be shared by others. The author also observed that it is the capital entrepreneurship that shares both the real contribution and the real profitability. The Islamic bank follows the principle of equity based-investment. The Islamic banking system also proposes that resources can be contracted on the basis of venture capital and risk sharing deals. The idea of equity-based investment banking is not new to the financial market. If we look into history it may be observed that capital, as loan capital as well as venture capital played a great role in promoting industrial and economic development of various countries of the world. For example, during the 19th and 20th centuries investment banks played a great role in French tradition while in British model of banking equity-based investment was limited. Similarly in Germany equity-based investment was being practiced by commercial banks during that period. Even the banking crisis in the western world during the great depression in the 30's or the 80's proposed two-tire banking i.e. hundred percent deposit banking and the equity-based investment banking.

In his article entitled "elimination of Riba" Ahmad (1994 p.190) while quoting a leading German economist Professor Haus Alba'ch's observation regarding Islamic the author mentioned 'Islamic banks belong to the class of equity participation banks. They supply equity in the form of venture capital to investors whose share is their ingenuity and their labor. Secondly, they supply equity in the form of equity capital as participants in the type of project, which in general has a majority shareholder. They may be ideally suited to meet the need for equity capital in developing countries where the business risk is particularly high as well as in the industrialised countries where the development of new processes and new projects involves high risk and requires large amount of venture capital' (Islamic banking, proceedings of the Baden-Baden seminar, London).

Islamic banks as observed by International bodies

Prof. Wohlers-Scharf (1983), in his study entitled 'Arab and Islamic Bank' conducted by Development centre, Organisation of Economic Co-operation and Development (OECD), reported that Islamic bank can play a vital role in economic growth and development. He has mentioned that the Islamic banking is trying to develop the relationship between finance on one hand and industry and commerce on the other. This new relationship is the basis of the Islamic economic system being set up. In the modern financial market an alternate arrangement for participation of capital and entrepreneurship started with the advent of Islamic Banking in the 70's. In a number of studies such as IMF, World Bank and IFC, the Islamic bank activities were discussed in detail. Highlighting Islamic Bank's principle Khan (1986, p. 19) observes:

"Indeed it is really apparent that the Islamic model of banking based on the principle of equity participation bears a striking resemblance to proposals made in the literature on the reform of banking system in many countries. The Islamic System may well prove to be better suited to adjusting to shocks that result in banking crises and disruption on the payment mechanism of the country. In an equity-based system that exclude predetermined interest rate and does not guarantee the nominal value of deposits, shock to asset position are immediately absorbed by changes in the values of the share deposits held by the public in the banks. Therefore, the real value of assets and liabilities of banks in such a system will be equal at all points in time. In the more traditional banking system since the nominal value of deposits is fixed, such shocks can cause a diversion between real assets and liabilities. It is not clear if this would be correct and how long the process would take."

In a study by OECD of the European countries, Scharf, (1983) reveals the fact that interest-free banking is a novel form of finance and they are not only trying to give interest another name but that legal instruments within the framework of Shari'ah exist which permit profitability on a different, albeit Qoranically acceptable basis. Islamic banks belong to the class of equity-participation bank. In this regard Ahmad (1994, p.190) in his study quoted the idea of Alba'ch as:

"They supply equity in the form of venture capital to investors whose share is their ingenuity and their labour. Secondly, they supply equity in the form of equity capitals participants in the type of project, which in general has majority shareholders. They may be ideally suited to meet the need for equity capital in developing countries where the business risk is particularly high as well as in the industrialised countries where the development of new processes and new projects involves high risk and requires large amount of venture capital"

About the possibility of introducing an interest-free financing system through Islamic banking principle Scharf (1983) also argues that the establishment of Islamic financial system based on the principle of Shari'ah is not only feasible but also profitable.

Western countries today realize the truth that interest is an unbearable burden for the developing countries. In this regard Ahmad (1994, p.188) observes: 'Canada has already waived of all the interest. Australia has made a similar move. President Mitterrand of France has officially suggested in the Group-7 meeting that at least 30-35 percent of the present interest element of the debt should be waived off'.

Practice of Islamic banking systems by Western bankers

Nassief (1989), Ahsan (1989), and Kazarian (1991) observed that more than 70 Islamic banks and Insurance houses are rendering interest-free services in Asia, the Middle East, the Far East, Africa and Europe and North American countries. The Islamic Society of North America Canada (ISNA, 2000) has initiated Islamic banking activities in recent years and started lending interest-free funds to their customers especially for housing and other projects. The interest-free housing loans are given through the ISNA controlled organization called “Islamic Co-operative Housing Corporation Limited (ICHC). A few Western banks such as, the Kleinworte Benson, Citibank and ANZ Grindlays also started to adopt the pattern of Islamic banking in cost-plus financing, leasing and equity financing for their clients in the Middle East, Southeast Asia and a few international corporations in Europe and Latin America (Gathura; 1996, Roula; 1995, Ken; 1994, Parker; 1993, Heffernan, 1999). Roula (1995, p.1), in his article highlighted about activities of the Citibank in the Middle East. He observed: “Citibank will soon become the first Western-owned banking company to open an Islamic bank in the Middle East. Like other Islamic banks, the Citibank venture in Bahrain will follow the Koran, which forbids interest but allows profit”.

In USA also Islamic banking system are functioning well and several groups of bankers are practicing this system with a better result. Concerning the application of Islamic banking principles in America Ken (1994 p.1), argues: “Islamic banking is making inroads in America as several groups of bankers and Muslim scholars attempt to create an interest-free banking system that uses lease agreements, mutual funds, and other methods to avoid interest payments. This strategy is necessary because Islamic law prohibits Muslims from paying or earning interest”.

The introduction of Islamic banking principles by various western bankers have shown a positive results which indicates that Islamic banking systems can work effectively in both developed as well as developing nations regardless of religious boundary. Regarding the positive result of the application of Islamic banking principles by western banks Parker (1993, p 28(i) n227), observes: “Morabaha or cost-plus financing transactions have earned Kleinwort Benson $ 4 billion in 1992, while ANZ Grindlays earned $400 million. The banks arrange for transactions within the limits set by the Islamic banks and get it approved by the Shariah advisors of investors or by banks engaged in the transactions”.

Although the observation of the various international bodies such as, World bank, IMF, IFC OECD advocate the possibility and profitability of the equity-based and participating investment policy of the Islamic banks, yet its practical implementation needs to be observed. It is due to the fact that, the application of theoretical aspects of Islamic banking systems differs from country to country under different economic conditions and social environments. Consequently, the problem of the interest-free & equity-based financing system of the Islamic bank raises questions as to what principle an interest-free and equity based financing system follows in its operations concerning deposits and modes of lending, investment

Modes or techniques followed by Islamic banks

From the viewpoint of Islamic Shariah' (law), in order to be justified as an Islamic way of dealing with financial transactions the banking system has to avoid interest. Consequently, financial intermediation in Islamic banking between the bank and the client takes place as a partner rather than a debtor-creditor. The financial activities of modern conventional banks are based on a creditor-debtor relationship between depositors and bank on the one hand and between the borrower and the bank on the other. Conventional banks regard interest as the price of credit reflecting the opportunity cost of money. As interest is prohibited in Islam, commercial banking in an Islamic framework could not be based on the creditor-debtor relationship. The other aspect of the theoretical basis of Islamic banking is that the interest free bank is not risk free. This principle is applicable to two main factors of production, i.e. labour and capital. According to this principle, as no payment is allowed to labour, unless it is applied to work, no reward for capital should be allowed, unless it is exposed to business risk. From these two principles of the theoretical basis of Islamic banking, it may be said that Islamic financial relationships are of a participatory nature (Ahmad, 1994). Based on the interest-free financing principle, business practices of Islamic banks, especially sources and uses of bank's funds, are characterized by the following modes or techniques. Brief descriptions of these techniques (Alam, 2000) are given in the appendix II

III. A comparative view of Islamic Bank and conventional Banks

This section includes a comparative view of Islamic banks and other conventional banks from the view of point the theoretical perspective mentioned in the earlier section. Characteristics of four different components of financing systems as mentioned in section II are used to understand differences between economic actors within the Islamic Financing System (IFS) and the Market-Based Financing Systems (MBFS). Based on the data collected from the field the analysis in this section represents a detailed picture of comparisons between financing organizations within the Islamic Financing System and organizations within the Market-Based Financing System.

The nature of the MFS

The nature of the organization of the financing systems consists of particular arrangements of hierarchy-market relations, which become institutionalized and relatively successful in a particular context. The financing systems are analyzed from the viewpoint of certain characteristics. These are size, ownership, and managerial discretion from owners, business specialization and managerial homogeneity, integration of different activities, growth focus and risk management, which are discussed in the following sections.

It is known from the study that the nature of organizations in the different financing systems differ from each other while rendering services towards their customers especially various units in different small and cottage industry systems. This happens mainly due to the differences in various characteristics of the nature of the financing organizations. A comparative picture of differences in these characteristics between organizations within the IFS and MBFS is shown in the following table.

Table: I Differences in the nature of the MFS

Characteristics	IFS	MBFS
Size: No. of customers	Medium	Large
Ownership	Local/Foreign	Local shareholders
Degree of managerial discretion from owners	High	Low
Business specialization and managerial homogeneity	High	Medium
Integration of different activities	High	Medium
Growth focus	Short term profit goal	Short/long term profit goal
Risk management	High/internal//Medium external	Low Internal/Low external

Legend. IFS: Islamic financing system; MBFS: market-based financing system;

Size and ownership

The size of a firm can be expressed in different ways since economic actors in an organizational field differ from each other with regard to the size of the business. The size may be determined either on the basis of the investment of capital or the number of employees. Like size of an organization the ownership may also be of different types. For example, organization may either be owned by a single person or more than one owner i.e. a partnership business. The third form of the business is the joint stock company. A joint stock company may either be a public limited or a private limited in nature. Private individuals, who are directors of the organizations and holding the major shares, might own some financing organizations. Some financing organizations are owned and controlled by the government. There are some other financing organizations, which are jointly owned by government and private individuals. Shareholders or owners in these financing organizations might be from within the country or a combination of both local and foreign nationals.

The size of the financing organization in the present study is determined the number of customers. Some of the financing organizations within the MBFS are old and well established system in the country. The organizations in this system thus attract more customers than new start-ups i.e. Islamic banks. For example, compared to the market-based financing system, the financing activities of the organizations within the IFS are quite new. Since the majority of customers in the country are used to the country's conventional financing organizations, they are not familiar with the shariah based financing rules and regulations of the IFS. For this reason, the number of customers in the organizations belonging to this system is less than those in the MBFS. Therefore, the size of the organizations in the IFS is smaller than those in the MBFS and is regarded as medium.

The study also shows that the financing organizations within the IFS are owned by both the local and the foreign shareholders. Although, the foreign investors hold major shares, it was noted that the administration and control of the organizations remain in the hand of the local management board. In the case of the MBFS, the privately owned financing organizations normally raise their share capital by selling shares to the general public. In these organizations the directors mostly own the majority of the shares.

Degree of managerial discretion from owners

Managerial discretion from owners indicates the degree of independence of a manager from the control of owners of a firm. It affects the overall management and control mechanism of an organization. Different financing organizations due to the nature of ownership differ in the managerial discretion from owners. This is influenced by the trust factor. In many financing organizations where owners have strong trust and confidence in the managers' role, management is given more independence to take strategic decisions.

It is known from the study that, in case of the organizations within the IFS, the management and control of the organizations remain in the hands of the local shareholders. In this financing system the management and the ownership are separate from each other. The management body manages various organizational affairs and makes decisions regarding the investment of funds. The religious faith and beliefs inspire owners of these financing organizations to handover responsibilities of managing their capital. Whereas privately owned commercial banks are controlled and managed by board of directors and the activities of financing organizations within the MBFS are controlled and managed by the government appointed personnel. From this viewpoint it is concluded that the degree of managerial discretion from owners in the organizations within the IFS is higher compared to organizations within the market-based financing system.

Business specialization and managerial homogeneity

This characteristic of the nature of the MFS is related to the business specialization. For example, if any organization is specialized in a particular type of business the organization will show a higher degree of homogeneity in the managerial skills and experience than an organization with diversified business activities. It indicates the degree of homogeneity or similarity in the managerial skill in the financing organizations. Regarding the managerial homogeneity, Whitley (1992b, p.68) observes that where senior managers are promoted internally, this is closely related to their homogeneity of experience and skill.

Since the organizations within the IFS use special financing modes managers are found equally skilled and experienced in the system. Moreover, the scope of financial activities in this financing system is limited towards certain specific sectors of the economy. As a result, organizations within the IFS are characterized by high business specialization and managerial homogeneity. In organizations within the MBFS, due to their diversified investment policy different managers become experienced in different projects or businesses. As the activities of different managers within the organizations differ from each other, the financial managerial skills also differ. From that view point it is concluded that, the degree of business specialization and managerial homogeneity in the MBFS is lower compared to those in the IFS, making the degree of the managerial homogeneity in organizations belonging to the MBFS medium.

Integration of different activities

The degree of integration of different activities mainly relates to the authoritative control of particular units within the organizations. The more the financing organizations deal with different projects or units, the harder it becomes to integrate these activities. This is due to the fact that diverse activities are harder to integrate.

It is known from the study that the lending activities of the organizations within the IFS are limited to certain sectors while organizations belonging to the MBFS have a wider range of activities as they lend funds to both private as well as public sectors. The government-controlled organizations in the MBFS are having a wider range of financing activities compared to those privately owned. From the perspective of possibilities of the integration of different activities it is concluded that the degree of the integration of different activities in organization within the MBFS is identified as medium and high in the IFS.

Growth focus

Growth focus relates to various factors like long or short-term investment and profit goals. Some organizations are characterized by long-term investment policies while others follow short-term policies backed by short-term profit goals. Thus, owners of an organization motivated by short-term profit goals concentrate on rapid growth of their organization. It also indicates the degree of the growth of financing activities, which mainly depend on the long or the short-term investment and profit goals.

Since the organizations in the IFS carry out their lending activities without any interest and mostly give loans in kind rather than cash, they invest funds to those sectors where borrowers are trustworthy. It is understood from the study that organizations in the IFS do not invest funds for longer periods of time like the organizations in the MBFS. The lending of funds in the organizations within the IFS is characterized by short-term profit goals. Some of the organizations in the MBFS especially government owned commercial banks normally lend funds to various industrial concerns for a longer period. They also lend funds to the units belonging to different Small business and industries for a short-term period. Thus organizations in the MBFS are characterized by mixed term investments and profit goals.

Risk management

Risk management is closely related to risk sharing, which may be either, internal or external in nature. Externalization of risk by an organization may be done through developing close ties between suppliers, customers, and other interest groups in an organizational field. Whitley (1992a) also indicated that long-term relations of mutual dependence stand as one contributing factor to the risk management in an organization. Internalization of risk means that the financing organizations bear the risk.

It is known from the study that in the case of organizations in the Islamic Financing System, the junior and the senior staff jointly share the responsibilities. The risk is, thus, shared between higher and lower level management. In organizations within the Market-Based Financing System, due to centralization of power and authority, the sharing of internal risk is lower compared to the organizations in the IFS. It is therefore concluded that risk management in the organizations in the IFS is characterized by a higher degree of internal risk sharing compared to those in the other financing systems.

Regarding the externalization of risk it is understood from the study that the lending activities of organizations within the IFS are characterized by close lender-borrower relationships. Apart from lending funds they also act as guides to the borrowers. This results in the increase of the externalization of risks between the exchange partners through efficient network relationships. Therefore, the degree of external risk sharing within the IFS is found high. The organizations within the MBFS are characterized by formal lenders-borrowers relationships. The degree of externalization of risks in these organizations is low compared to organizations in the IFS.

Market organization in different MFS

Market organization is the second broad component of the financing system systems, which reflects certain characteristics of financing organizations as economic actors. This component is concerned with the main characteristics of the market organization includes information process, interdependence of lender-borrower and commitment to particular exchange partners, which are discussed in the following section.

The market organization of the organizations in the MFS is also characterized by certain institutional factors. These are, for example, information processes, interdependence of lender-borrower, commitment to particular exchange partners, scope of exchange, reliance on personal knowledge and reputation and horizontal coordination between financing organization and their customers. The following table summarizes a comparative view of all these factors in organizations within different financing systems.

Table. 2: Differences in the market organization of the MFS

Characteristics	IFS	MBFS
Information process	Formal/Informal	Formal
Duration of lender-borrower relationships	High	Low
Commitment to particular exchange partners	High	Low
Scope of exchange relations	Intense	Less intense

Legend. IFS: Islamic financing system; MBFS: market-based financing system;

Information process

The information process concerns different techniques that exchange partners apply to collect information about their prospective clients. Different financing organizations apply different processes in collecting information, which mostly depend on the nature of customers and the types of business or production activities for which the money is borrowed.

It is understood from the study that since the organizations in the Islamic financing system give credit without interest and also follow different shariah based financing modes, they carry out an extensive inquiry into customers' position (for example, social and financial status) before lending funds. In most cases, they go beyond formal procedures in order to collect information about the potential customers. By doing so, organizations in the IFS establish network relationships with people who have direct as well as indirect links with their customers. Their information collection procedures are comprised of both formal and informal. The organizations in the market-based financing systems normally use formal procedures while collecting information about customers' social or financial positions. Since organizations belonging to this financing system evaluate their customers' status and qualify them according to certain established rules, they usually do not collect information through informal sources.

Duration of lender-borrower relationship

The specialization characteristic of the exchange partners develops the degree of interdependency between them. Long-term inter-firm relationships influence the scope of the exchange relations. The more durable the relationships between exchange partners the more they know each other and the higher is the scope of the exchange relationship. The duration of the lender-borrowers' relationships between exchange partners is determined by the nature of the lending policy used by particular organizations within the MFS. It means that if the financing organizations invest funds towards certain projects for a long-term period, the network relations become more intense. Moreover, due to the longevity of the relationship, lenders become more familiar and known to the borrowers and vice versa. Thus, a long-term investment policy makes the extent of interdependency higher between organizations in the MFS and the borrowers.

It was observed that in respect to organizations in the market-based financing systems, long-term obligation grows on account of organizations' policies of long-term investment. Compared to the other financing systems, organizations within the Islamic financing system follow different techniques of financing the units in the different small business sector. For example as a rule, under the Bai-Muajjal technique, the financing organizations give loans to these units for a short period with a condition that the loan contract may be renewed for a further period provided the customers show good performances in their production activities and maintain regular financial commitments. In almost all cases, it was found that the organizations in the IFS renewed their loan agreements, with the small and cottage industry owners. Therefore, it is concluded that the organizations in the IFS maintain a long-term lender-borrower relationship with firms in different small and cottage industry systems for which the interdependency between the lenders and the borrowers is high.

Commitment to particular exchange partner

Long-term commitments are relatively reciprocal and wide-ranging. While reporting different authors (for example, Gerlach, 1987; Orru et al, 1989), Whitley (1992a) argued that the risk sharing between specialized enterprises implies a high level of inter-firm long-term obligations. The long-term lender-borrower exchange activities usually makes both actors in an exchange function committed to each other and gives opportunity to develop business trust and goodwill between actors. The degree of commitment to particular exchange partners is related to the frequency of financial exchange. The commitment is also related to the reciprocity of the relationship.

It is known from the above discussion that, the long term lending attitude of the organizations in the Islamic financing system seems to give rise to a mutual agreement between the lenders and the borrowers, which in turn makes the exchange relationships more intense. This is demonstrated by the fact that the organizations in the IFS normally give short-term loans (e.g. Bai-Muajjal financing to rural-based small industry owners) but in many cases, prolong the exchange relationships by renewing the old contract or making a new contract for loans. The repeated contractual exchange relationships and close supervisions of the borrowed funds further increase the degree of the commitment between the lenders and the borrowers. The financing organizations are committed to their customers through close supervision and by repeating or renewing the loan contract. For these reasons it is concluded that the commitment to exchange partners is high among the firms in different small and cottage industry systems and organizations in the Islamic financing system. The organizations in the market-based financing system give short-term loans to the small business and industry units and seldom take interest in controlling or supervising customers' activities. Due to this attitude of organizations within this financing system, mutual understanding between these organizations is lower in comparison with those in the IFS. It is also understood from he study that, the shorter duration and less mutuality of the relationship together with less frequent contacts give rise to low commitment to the exchange partners in the market-based financing system.

Scope of exchange relations

The scope of exchange partner's relationships is closely related to specialization in particular exchange activities and degree of formalization of the relationships. The organizations in the Islamic financing system due to their different financing techniques are characterized by higher degree of business specialization compared to those in the market-based and cooperative financing system. Moreover, the informal type of lender-borrower contacts between organizations in the IFS intensifies the exchange partners' relationships. From the above discussion of the factors of the market organization it is concluded that, the organizations in the IFS operate their exchange activities in different ways compared to those in the MBFS. Moreover, through supervising borrowers' activities, organizations within the IFS also develop close lender-borrower relationships. The longevity of the exchange activities results in intensifying the relationships. It is, therefore, concluded that the degree of the lender-borrower relationships between organizations in the IFS, are more interdependent in comparison with those in Market-Based Financing System.

Employment procedures and staff relationships in the MFS

The employment system consists of different features like recruitment procedures, boss-subordinate relationships, job training, seniority-based rewards and incentives to employees. Like other business organizations financing organizations are characterized by permanent or core workforce' and seniority based reward system and promotion. It is understood from the study that the employment system and the staff relationships in various organizations within MFS differ from each other. A summarized comparative view of these differences is shown in the following Table.

Table: 3. Employment procedures in the MFS

Characteristics	IFS	MBFS
Recruitment procedures	Formal	Formal
Boss subordinate relationship	Intense	Less intense
Job training	Often	Sometimes
Seniority based rewards to employees	High	Medium
Incentives to employees	High	Medium

Legend: IFS: Islamic financing system; MBFS: Market Based financing system

Recruitment procedures

Recruitment procedure concerns various rules and regulations that an organization observes while recruiting staff members. Regarding the recruitment procedures in organizations within the MBFS, and the IFS, it is found that they normally follow formal procedures while recruiting staff members for their organizations. This recruitment is done by public examination. Although it is mainly a merit base recruitment system, in many cases, it is found that nepotism and favoritism work in almost all organizations within these financing systems.

Boss subordinate relationship

This characteristic relates to the degree of the delegation of authority to subordinate staff. It also influences by the control over the work of a subordinate by his o her boss. It is found from the previous discussions that the organizations in the IFS (due to influences of the religious based exchange activities and also use of Islamic Sharia (law) based financing modes) are characterized by more informal boss-subordinate relationships than those in other financing systems. During the field study it was observed that almost all organizations belonging to the IFS provide facilities to staff members and clients to perform prayers during the office hours where bosses and subordinates meet together at regular intervals It was noted that in every Islamic bank there is a prayer room for staff and clients. Senior and junior workers and clients together perform prayers during office hours in that room. . Moreover, it is understood from the study that in order to execute different financial policies in any new project, the boss and the subordinate work together in the office and at field levels, for example, pay visits to customers' premises along with other subordinate staff. From that viewpoint the boss-subordinate relationships in the organizations within the Islamic financing system is identified as intense.

The boss-subordinate relationships in the organizations within the market-based financing system are more formal compared to those in the cooperative and the Islamic financing systems. The idea of the proverb that says Boss may not be right but he is a boss' works well among the senior staff members or the bosses in any department in the organizations within the market-based financing system. Senior staff members also show an avoidance tendency in establishing any close senior-junior ties. As a result, there is a great lack of communication gap in the boss-subordinate relationships, since junior staff members do not feel free to establish close contacts with seniors. From that perspective it is concluded that the boss-subordinate relationships in the organizations within the MBFS are less intense than that in the Islamic financing system.

Job training

Job training of the staff may take place in various ways. Job training develops skills and authority relationships. According to Whitley (1992b, p.75) it enhances worker flexibility and ability to implement technological changes quickly and effectively.

In contrast to the organizations within the IFS, staff members of various organizations in the market-based financing system receive fewer opportunities to get training for their jobs. It was found that whenever the organizations in the Islamic financing system appoint new people they often arrange job training for the newly recruited staff members. As the financial activities and financing techniques of these organizations are different from those in other financing systems, there is a greater need for training the newly appointed staff members. In order to train officers, financing organizations in the MBFS sometimes organize job related training for their staff members. They normally train officers before they are promoted to a new position.

Seniority based rewards

Seniority based rewards are an incentive to the employee, which may be in form of cash, special gift or job promotion etc. It depends on certain factors like length of service, age, education etc. It is understood from the study that the organizations in the Islamic financing system have special arrangements to give rewards to their staff members for their good performance in both cash and bonuses. The organizations in the market-based financing system, especially the privately owned, sometimes give rewards to those senior staff members who establish in new customer accounts and show better job performance. In the government owned organizations within market-based financing system, rewards are negligible in comparison to the other two financing systems, meaning that the degree of seniority based rewards in the organizations within the market-based financing system is medium compared to that in the Islamic financing system.

Incentives to employees

Incentives to employees are different means to motivate or encourage staff members to be more efficient and active in an organization. Incentives may be given by increasing salaries, giving prize either in cash or kind, extra training and by providing them with other necessary facilities.

The organizations in the Islamic financing system give incentives to their staff members in the form of increased salaries, bonus and gifts. Since this financing system is a newly developed financing system, organizations in this system encourage their staff members by giving incentives in various forms as a means of generating greater employee satisfaction. Although the privately owned organizations within the market-based financing system give incentives to staff members in the form of bonus and increased salaries, very little attention is given towards this factor by the government owned financing organizations. From that perspective it is concluded that the degree of incentives to employee in this financing system is regarded as high compared to that in the market-based financing system.

Authority and control system of the MFS

The authority and control system concerns the extent of coordination and integration of activities and capabilities within managerial hierarchies (Whitley 1992a, p.13). This component of business system is concerned with the internal control and management of an organization and includes various characteristics like centralization of decision-making, delegation of authority system, reliance on formal coordination and managerial involvement in working group. As observed in the previous discussions different financing systems differ from each other with regard to different characteristics of the authority and control system, which is summarized in the following Table.

Table: 4. Authority and control systems of the MFS

Characteristics	IFS	MBFS
Centralization of decision making	Decentralized	Centralized
Delegation of authority	High	Low
Reliance on formal co-ordination and control	Medium	High
Managerial involvement	High	Low

Legend: IFS: Islamic financing system; MBFS: Market Based financing system.

Centralization of decision-making

The centralization of decision-making denotes the extent of the power and authority of the top manager in a firm. In some organizations the boss may give authority to subordinates to take decisions while in other cases the decision-making lies in the hand of the top executives. Managerial authority may thus be centralized or decentralized; it depends on the nature of a particular organization.

It is known from the study that the top executives of the organizations in the market-based financing systems make major decisions, for which these organizations are characterized by the centralized decision-making. Although different departments in various organizations in the market-based financing system have the right to evaluate financial matters or to select prospective customers or projects to be financed, the senior executives or the board of directors have full authority to sanction loans or to make the final decision. Due to the different financing techniques used within the Islamic financing system, the organizations belonging to this system are characterized by decentralized decision making in comparison with those within the MBFS. The decentralization of decision-making is closely related to the delegation of authority factors.

Delegation of authority

Delegation of authority is closely related to the centralization and decentralization of decision-making. It denotes the delegation of power from top executive to the subordinate level, which normally differs from organization to organization. The more the power of the authority and controlling are delegated to subordinate level staff, it is believed, the more efficient the firms' activities become.

As a consequence of centralization of decision-making (mentioned in the above section), delegation of authority in the organizations within the MBFS is lower in comparison with that in the organizations in the IFS. There are, however, differences between these financing systems along this dimension. Branch as well sectional managers in organizations within the market-based financing system are responsible to the zonal and the regional managers and they are not entitled to sanction any loan without the prior permission of the zonal or the head office, making the delegation of authority low. The main difference between financing organizations within the MBFS, and the IFS is that the organizations within the IFS delegate more authority to their subordinates. To make financing activities quick and smooth, it becomes necessary for the organization to delegate authority to subordinates to operate financing activities in various remote parts of the country. This is facilitated by the good trust of the Islamic financing system seniors to the juniors. A branch manager or senior officer in a branch are thus given limited authority to control and organize business activities, being allowed to sanction loans and deal with various financial matters in a particular area without the prior permission of the top executives. Similarly, the branch managers also delegate authority to their subordinate staff members. The study reveals that the organizations in the IFS delegate authority from the top executive to the field level officials.

Reliance on formal coordination and control procedures

Reliance on formal coordination and control in an organization is related to the formal or informal means of controlling the activities of subordinate staff. Organizations belonging to the MBFS are inspired by the Western banking system, which is characterized by reliance on formal coordination and control procedures. Although the organizations in the Islamic financing system follow almost the same banking rules for coordination and control as those in the market-based financing system, in certain cases they follow some informal procedures. Especially this happens when the organizations within the Islamic financing system render financing services to customers in different rural areas. Due to the special financing techniques used by the organizations in the Islamic financing system, they are bound to go beyond the formal procedures while supervising the activities of the borrowers, making the degree of formal control medium.

Managerial involvement

The managerial involvement in work group denotes the degree of managers' involvement in the activities of their subordinates. In order to coordinate and control the economic activities managerial roles play a predominant part in any business enterprise.

It is observed that the importance of the degree of managerial involvement in the work group is higher in the organizations within the Islamic financing system compared to those in the market-based and cooperative financing systems. Managers of the organizations in the Islamic financing system normally keep close contacts with work groups within and outside the organization. This implies that when the organizations start financing a particular project, manager or senior officers responsible for the project maintain close relations with their subordinate staff within the organizations working for the project making the managerial involvement high. It is noted that the managerial involvement in the organizations within the market-based financing system is low due to their formal and bureaucratic way of organizing financial activities. The managers in the organizations within this financing system allocate particular functions to their subordinates, the performance of which is later reported to the manager. Thus, the managers avoid direct involvement with the subordinates' activities.

Configuration of hierarchy-market relation of the MFS and conclusions

Based on the above description, the configuration of hierarchy-market relations of the Islamic Financing System and the Market-Based Financing System is summarized as under:

Table. 5 Configuration of hierarchy-market relation in the MFS

Characteristics	IFS	MBFS
Nature of Organization
Size: Number of customers	Medium	Large
Ownership	Local/Foreign	Local shareholders
Degree of managerial discretion from owners	High	Low
Business specialization and Managerial homogeneity	High	Medium
Integration of different activities	High	Medium
Growth focus	Short term profit goal	Short/long term profit goal
Risk management	High internal/Medium external	Low Internal/Low external
Market Organization
Information process	Formal/Informal	Formal
Duration of lender-borrower relationships	High	Low
Commitment to particular exchange partners	High	Low
Scope of exchange relations	Intense	Less intense
Employment Systems
Recruitment procedures	Formal	Formal
Boss subordinate relationship	Intense	Less intense
Job training	Often	Sometimes
Seniority based rewards to employees	High	Medium
Authority and Control Systems
Incentives to employees	High	Medium
Centralization of decision making	Decentralized	Centralized
Delegation of authority	High	Low
Reliance on formal co-ordination and control	Medium	High
Managerial involvement	High	Low

Direct contact with borrowers

The lender-borrower relationships determine the extent of success that a financing organization enjoys by giving credit to its customers. It is concluded from the above discussion that, the organizations within the IFS, the MBFS, maintain direct contacts with their customers while dealing with financial activities. However, differences are noted in various financing systems. For example, due to the close monitoring of borrowed funds, the intensity of lender-borrower relationships in organizations within the IFS is much higher compared to those in the market-based financing system.

Developing entrepreneurship mentality among borrowers

It is also concluded from the study that apart from giving credit to customers, organizations within the Islamic financing system normally take active part in educating customers regarding newly developed financing procedures and other important aspects in the exchange activities. The organizations in this financing system also take initiatives to guide customers in different aspects regarding the production activities, which encourage the rural people in investing funds in different projects. Therefore, it is concluded that, the organizations within the Islamic financing system with their teachings to borrowers not only guide them to make proper use of the borrowed funds but also to develop entrepreneurship mentality among them.

Delegation of authority favors lender-borrower relationships

The employer-employee relationships normally depend on certain established rules and regulations of an organization. These are, for example, rules related to delegation of authority, boss-subordinate relationship, group decision, managerial role, employment system and incentives to employee. It is concluded from the above analysis that the employer-employee relations have direct as well as indirect influences on the exchange activities between the lenders and the borrowers. Regarding the delegation of authority it is found that, a limited and moderate level of delegation policy is followed by the organizations belonging to the market-based financing system. Thus, it is concluded that the organizations within these financing systems restrict their subordinate staff members to make any decision of their own, while the subordinate staff members of the organizations in the Islamic financing system in many cases enjoy higher level of authoritative power than those in the other financing systems.

It is also concluded that, the organizations in the IFS attract many customers at rural areas where the firms in different small and cottage industry systems are found satisfied with the financing policy of this financing system. Since, the branch managers of the organizations in this financing system are authorized to sanction loans up to a certain amount to the units in different small and cottage industry systems without any prior permission from the head office, the borrowers find it easy to borrow funds from these organizations.

Development of different network relationships

It is known from the study that in order to be qualified for loans under the Bai-Muajjal modes funding individual customers are required to make groups and save a certain amount of money and deposits the same with the organizations in IFS. The bank staff normally administers the entire group-saving activities. It is thus concluded that this lending procedure intensifies the trustful personal networks. This type of personal networks is constituted by relationships based on trust. In the opinion of Johannison & Gustafsson (1984) and Rasmussen (1988), personal relationships are deeply rooted in the mutual support, inspiration and help to each other. It is also known from the study that, in order to obtain loans from the organizations within IFS, the setting of groups is normally done with owners of the same nature or related to the same units of productions. Sometimes, same religious beliefs or similar cultural standing also characterizes these groupings. As the lending procedures of the IFS develop network relationships between small and cottage industry owners of similar nature and background, they ultimately develop the symbolic network amongst them. In this regard, Rasmussen (1988) opines that this network is deeply rooted in religious, moral, political and ethnic goals that tie the members together.

It is understood from the discussion in the previous sections that the senior-junior relationship in the organizations within the Islamic Financing System is more intense compare to those in the Market-Based Financing System. This sort of close contact develops close ties between workers within an organization and contributes in promoting intra-organizational network relationships. Since the entire saving activity (in case of small industry owners) and the accumulation of required customers' deposits are supervised by the organizations within IFS, their external network relationships are extended to different organizational units in the small and cottage industry sector. Thus, the lender-borrower close ties promote the inter-organizational network relationships. From this perspective it is concluded that compare to the organizations in the MBFS, the lending modes of organizations in the IFS intensify both intra-organizational and inter organizational network relationships.