Islamic Banking vs. Conventional Banking

Becoming an expert in Islamic economics and finance field is one of my long-term goals in life. I started to organize and made a plan towards achieving that dream since senior high school. The concern towards Islamic economics and finance concept, and its application for society and the country began when I was reading a book entitled Islamic banking-theory and practice. After finishing reading the book, my interest in Islamic economic and finance topics rose and strengthen my own determination to become the expert of Islamic economics and finance. The main principle of Islamic economics and finance which offers the just and ethics in economic activity, poverty alleviation through income distribution mechanism, and prevention of economic and

The main difficulties of applying IFRS in Islamic countries are driven by the difference treatments of interest. Under the conventional accounting, the interest is charged commonly as compensation to the lender, while under the Islamic law, Riba, which refers to the interest, is forbidden and considered as a major sin. Prohibition on charging interest gives rise to several different treatments in Shariah-compliant companies. For instance, in Islamic banking, due to the fact that the interest is forbidden with lending or depositing of capital, in order to prevent the default, the bank may ask for strict collateral, which refers to the concept of Murabahah. In general, Shariah-compliant companies conduct on the risk-sharing principle, while the traditional accounting is more rely on risk-transfer. (PwC,

According to ( Umar Chapra, 2003) limited entréé to finance by the poor entrepreneurs brings about lack of broad-based ownership of businesses and industries which in turns, hinders realisation of egalitarian society. This phenomenon is rampant is Muslims countries, thus requires attention from Islamic institution compulsory savings or micro-takaful.

The primary model of Islamic managing an account framework came into picture in 1963 in Egypt. Ahmed al Najjar was the boss originator of this bank and the key peculiarities are

The second type of banking in Saudi Arabia is commercial or conventional banks as any country which is rely on non participation of risk. In fact, conventional banks in Saudi Arabia are more likely to produce products that are acceptable and suitable of Islamic banking or Islamic products because it is attracted the majority of customers (International Business Publication 2011).

The financial sector in some Sub Saharan Africa countries has been growing rapidly in the past two decades. New products have been introduced and financial institutions are playing an tremendous role in financial intermediation, including cross-border financial flows. However, Islamic finance in Sub Saharan Africa remains small, although it has potential given the region’s demographic structure and potential for financial expanding. As of end-2012, about 38 Islamic finance institutions comprising commercial banks, investment banks, and takeful1 (insurance) operators were operating in Africa (Dow Jones, 2012). As estimates based on Bank scope and Zawya, April 18, 2012 out of

The prosperity and peace of a society much or less depends on its economy. While for the smooth running of both, there are several instructions in Islamic Shariah and allows what is right and forbids what is wrong. When we talk about financial issues, Islamic Shariah strictly condemns Riba. The question may arise why Islam prohibits Riba? While it was already in practice before the advent of Islam and still it is a part of different economic systems throughout the world. It is simply because Islam gives respect to human beings and condemns all the attempts that are harmful and disgraceful for humanity. Therefore, Riba is not only forbidden in Islam but economic experts are also in search of its substitute. Since borrowing on interest rate creates several issues including: less efficient allocation of resources, indebtedness, unemployment and economic instability. While in society it causes injustices, inequity, poverty and imbalance etc. In this paper we are discussing how Riba causes imbalance in the society and instead Riba what Islam demands from its followers.

With respect to risk management in Islamic banks, Islamic Financial Services Board (IFSB, 2005), [26], issued guiding principles for risk management in Islamic financial institutions, the board pointed out that these guiding complement the general guiding principles issued by the Basel Committee. to cover specific aspects of the institutions of the Islamic financial services. As follows:

Islamic accounting includes an ethical and moral code of conduct, Sharia. Although Islamic accounting does not have a set form of rules like conventional accounting there are three general principles which should be incorporated: “truthfulness, justice, and honesty” (Badshah). The process focuses on analyzing transactions both economically and socially to ensure no harm is brought to society. Sharia prohibits any sort of riba, more commonly known as interest, in Islamic accounting. This method also introduces profit and risk sharing in which both the bank and investor benefit and lose simultaneously. This idea of both the investor and the bank sharing gains and losses is very distinct and and as Mulcahy said, “This is probably the key distinguisher of Islamic accounting and conventional accounting as we know it. I think this is

Forty years ago, the Islamic banking industry was created, on a modest scale, to fill a gap in a banking system that was not listening to the fervent Muslim believers. Morocco has been following the same development in offering Islamic finance services to its citizens through Islamic windows in conventional banks. In parallel to this development of the Islamic financial industry in Morocco, it seems very crucial to evaluate critically based on Maliki law school the previous experience of Islamic windows in conventional banks. Taking into considerations, the differences between schools in the interpretation and implementation of Islamic law in economy life, the objective of this paper was to critically analysis the practice of Islamic banks in Morocco. This paper aimed at analyzing the characteristics of different schools of Islamic law and how this would affect Islamic banking. The final aim of this paper was to highlight the importance of jurisprudence/ new interpretations in developing Islamic banking. Qualitative methodology based on semi directive interviewees was the main approach for this paper. Three levels of gaps have been found out. These gaps are related respectively to Murabaha, Musharaka and Ijara. Three recommendations have been advised to fill the gaps: Absolute isolation of Fund, Sharia auditing committee And Compliance with AAOIFI Standards

In the Islamic banking system,according to sources and causes of risks, it might be an external risk which due to changes in risk policies and regulations caused by banking supervisory authorities ( regulatory risk ) or macro and external impact of benchmarks such as LIBOR interest rate factors, namely the use of determine the speed mark Islamic Bank ( known as interest rate risk ) ;There are risks to fulfill obligations related to the debtor by Islamic Banking( Credit risk ) , there are a set of risks, operational risks collectively,Islamic banks themselves , the people involved / staff, including errors, negligence and fraud, the system and the use of technology in the Islamic Banking , the proceedings and / or processes and procedures

Many people are sceptical about Islamic banks performances into the niche as newcomers to the market according to Samad, (2004). As previously mentioned, Islamic finance operates in accordance with the Qur’an. Islamic banks are non-conventional financial institutions which completely prohibit the action of ‘Riba’ (Interest) under Islamic Banking. As Islamic finance follows strict ethical practices in its dealing with jurisprudence to the Qur’an, it is only natural that Islamic banks as new competitors face steep challenges in sharing deposit and credit markets

Now that, Islamic law has been defined and explained in detail, Islamic Banking can be observed further. There are four rules that govern investment behaviour in Islamic banking (Suleiman 2001):

Some studies such as [30], [31], [32], Focused on risk management and Islamic banks in the countries of Middle East. Study [32] was conducted on 421 countries Bank Middle and Far East. found that Islamic banks are less vulnerable and more stable and able to cope with the financial crisis compared to conventional banks. The study [30] sees that the most important risks to Islamic banks in the Middle East is the liquidity risk, followed by credit risk, as well as other risks the

Islamic banks heavily in democracies. The advantage on return on assets of .0105 and on return on sales of .1507 outline conventional banks` better financial performance and asset utilization than Islamic banks compared to crisis period. The difference between conventional and Islamic banks on Net interest margin/ Total interest income have also grown from .0275 to .1001 point in the favour of conventional banks, this shows that conventional banks have become even more cost efficient than Islamic banks in democracies. Conventional banks are better on profitability, asset utilization, return on asset and were effective and efficient in all respects.