Comparison between Islamic Banking and Conventional Banking Introduction As far as commercial banking is referred, there are two main differences from the traditional approaches (conventional or Islamic), and these are very significant evolutions. One is that this method believes commercial banks as serving providers, rather of like “money lenders” (conventional) or “investing-collaborators” (Islamic). Interest-free banking is inferred as a sub-model; the conventional banking is considered as an “inflation-free” sub-example of the common model.These differences make possible one to wipe out riba from the method without recurring to radical evaluations, and still have an entirely executable method attuned with the conventional one. Successively, this characteristic creates the new method easy to empathize and to explicate, and hence easy to enforce in all countries. The philosophic re-orientation, technical adaptations, and the re-training of staff needed for the transformation above from the conventional to the anticipated method are also least.
More significantly, the new perspective produces commercial banking translucent, interest-free or not. Discussion Muslims are disallowed by their religion to conduct in interest (riba) in whatsoever means. Contributing and getting as well as observation are all banned. Therefore an Islamic banking method cannot give any interest to its investors; neither can it require or obtain any interest from the receivers.
Nor could the banks observe or hold accounts of these dealings. Simply the lender is permitted to the return of his funds fully. This is a Qur’anic enjoining.The suggested method abides by with these central Islamic essentials. A fundamental dogma of commercial banking is funds assurance. The funds trusted to the bank by an investor must be brought back to him fully. The anticipated method totally follows with this necessity. Islamic banking as exercised today does not supply funds guarantee in all its deposit accounts.
In many countries, this is one of the two most important expostulations to allowing the organization of Islamic banks. There is no opposition to giving zero interest on deposits (Karsten 2002).Consequently, by giving zero interest and guaranteeing funds, the proposed method meets both the riba-forbiddance rule of Islam and the funds guarantee necessity of conventional Banking rules. In Islam, there is an obvious difference between lending and investment — lending can be exercised only on the foundation of zero interest and funds guarantee, and investment only on the basis of mudaraba (profit-and-loss-communion). Conventional banking does not and require not construct this distinction. Simply an Islamic bank has to assume this into contemplation in inventing a method to provide to the Muslims (Abdullah 2006).
Hence such a method has to provide for two sub-methods — one to cater to those who would “lend” and another for those who wish to invest. In conventional banking those who like to get an income employing their savings do and then by framing their funds in savings investments or time (fixed) deposits and get an interest defrayment. Hence the suggested method should appeal no opposition from any banking power, thereby facilitating interest-free (or Islamic) banks to be arrange in all countries of the world.A model is built where the “interest” appointed by the bank is divide into various elements.
So each of these factors is examined to see if it comprised the banned rebate thought is that if any one constituent comprised such riba then to check if it could be detached. If some elements are release of riba, and others comprising riba can be withdrew, and then we have an “interest” which is complimentary of riba. If this can be attained and if the ensuing method is executable, then we have a riba-free method that is also practicable.And, as it was primitively gained from the conventional model it ought to also be attuned with it. It is demonstrated that only the first element falls into the explanation of riba and all others are free of it. Hence this CoB is free of interest, contempt the reality that it resembles the conventional “interest” (Naughton 1999).
The wonder of instituting interest-free banks and hence freeing the Islamic savings from riba had practiced the minds of Muslim philosophers for the better component of this century. We have by now onsidered that this method should confront no objection from banking confidences in non-Muslim countries, and afterwards it is attuned with the conventional method it is comfortable to establish and work such banks with the minimal of hold and difficulties (including staff training). Moreover, dissimilar the conventional method, this method is transparent, leans on a firm theoretical basis, and furnishes management information that is very helpful for effectual supervising and control. The final is a very practical instrument both to the referred bank’s internal management and to the Central Bank authorities.The main concerns of the bank were the protection of its funds and the power of the borrower to give the interest not the final function of the lent money. Whether it was meant for founding a new enterprise, to elaborate a subsisting one, to overpass a cash flow trouble of a functioning concern, or to be employed by a small business, by a sole-owner initiative, or for consumption aims, etc. was not the major concern of the bank.
The borrower must get all the funds and the pre-fixed amount of interest, no issue how he attained that.In the instance of Islamic banks, nevertheless, the last use counted because the return on their “investment funds” (they do not lend) depended upon how the profit/loss was accomplished and how it was calculated (Bruce 2001). Nevertheless, putting in participatory financing into commercial banking is involving it to shoulder additional loads, including particularized staff educating and extra risks. Conventional commercial banks are disallowed from at once investing in businesses, and therefore they will not be capable to offer up participatory financing.Thus introducing this effectual method against inflation is much less complicated than would come along at first.
Moreover, it is a general method and can be enforced evenly well in conventional banking like in interest-free banking. These banks will present all current accounts, savings and loan adeptnesses. Loan facilities will comprise short-term financing, impermanent overdrafts, drafts, treasury bills and credits (Karsten 2002).
Conclusion It has been formulated to address mainly the demands and concerns of Muslims today in all regions of the world.As yet many of its elements are of universal applicability. It averts nearly all the pitfalls met by Islamic banking as exercised today and successfully covers many issues presently being argued. It offers enough flexibleness to be oriented to suit a form of situations. It is attuned with the conventional method, and employs many of the latter’s attempted and proved methods and processes; hence avoiding any encounter with the subsisting methods, and getting away re-inventing the wheel. First and last it is simple to interpret, to explain, and to enforce.As such it merits serious thoughtfulness by the Muslim community as a completely, as well as by others concerned in a transparent method of banking and a responsible for form of financing.
References Abdullah, M. “Contemporary banking transactions and Islam’s views thereon”, Islamic Review, London, 2006, l0-l6. Bruce, N. C. , “Islamic banking moves east”, Euromoney, July: 2001, 142-5. Karsten, I.
, “Islam and financial intermediation”, IMF Staff Papers, March, 29(1): 2002, 108-42. Naughton, S. A.
J. “Islamic banking and financial development”, Journal of Islamic Banking and Finance, 1999, 5 (2).