Similarities and Differences Between Islamic Banking and 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

Awaqf, the Arabic Pronunciation of the word endowment, has become a vital element of the economic sector of Sharia law as well as the Amana bank. “This asset, be it in real estate, inheritance, or savings in benefits, is something that will help someone in society,” which is one of the basic principle of Amana bank. This is a vital sector of the industry that the bank is especially wonder, careful with when it comes to its dealings with their

The banking system loans the fund to economic agents based on profit-risk sharing agreements. So, the loans are directed towards the production of goods and services in such a way to confirm the investment can pay for itself. The loans ultimately are paid back to the central bank. In this way, it is ensured that productive assets constantly back a society’s currency. There are two important characteristics of these loans. First,they can grow without any limitation, and second Islamic loans offer by the central bank are not only non-inflationary over time, but are counted-inflationary

In this case study on investment-linked takaful, there are some shariah issues. The following are some but not limited Shariah issues at the conception of the contract, the fund management and at the level of distribution of profit.

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 objectives of Islamic banking and conventional banking are similar, however, keep in mind that the Islamic banking system operating under the rule of sharia Islamic law based on the holy Quran and is guided by Islamic economics. In addition, Islamic law prohibits investing in businesses that are considered haram such as businesses that

This growing practice of Islamic banking will be discussed more fully in a later section as a modern application of usury prohibition.

Revenue focus. Any lending model can only succeed with the injection of adequate capital. The focusing of stagnant funds on revenue effectively removes funds that could be used for lending. The challenge will be to have the lender forego a profit yielding investment. Islamic scholars have identified this predicament as a negative attribute associated with interest; it prevents the creation of interest-free loans as the lender expects to realize a gain (Al-Fawzan, 2005). The

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.

Islamic finance took its roots at the beginning of the 7th century when the Prophet Muhammad claimed to have received revelations directly from God (Allah). At the time of these revelations the current standards/rules of financial operations were derived from the Quran and the Sunna, however, since then there has been a continuing process of coordinated adjustment

Islam means surrender before the GOD, because they have faith only in Allah and nothing else and Islam is the complete code of life of the human beings on the earth, it does not only cover the social life of the human beings but it covers also the economy. GOD means generator, operator and destroyer, Quran came through the Revelations made by God to the prophet Mohammed (P.B.U.H) and was compiled in a book form in the life of the third caliph and provides the direction to the human beings for the right actions on the earth. The business is also the part of the right actions for all the Human beings and for the first time on the earth the Mudarbah system meaning Profit and loss Sharing business was performed by the Prophet Mohammad (P.B.U.H) for his Wife khadija (Rajiallah anhu); before the commencement of the Islam the Mudarbah types of business was not performed by the world business groups and the business transactions were performed by the small and big Merchants on that time only for the sake of benefits and with the motive of acquiring unreasonable interest. In the holy Quran, the four chapters are governed for the business transactions relating against the interest such as Sura Baqra, Sura Nisa,Sura Al Rum and lastly Sura Al Imran and emphasize on the principle of the Free interest economy. In the Islam religion the interest word is used in the Arabic term” Riba” or usury which means excess,exorbitant,pre-determined and unreasonable, because it increases the

In most jurisdictions where Islamic banks operate, they have to compete with conventional banks involved in interest-based borrowing and lending. The legal framework governing the licensing of banks and their regulation was designed primarily for conventional institu¬tions, not least as there were no Islamic banks in existence in most cases when the banking laws were drafted. Three choices therefore arise: firstly, whether Islamic banks can be accommodated within existing legal provision, whether the existing banking legislation requires amendment or, more radically, whether new legislation is necessary.

Islamic financial institutions are growing faster all around the world. Most in Muslim countries, conventional and Islamic financial institutions exist side by side, interacting with one another. The development of Islamic financial institutions has the potential to play a leading role in serving the Muslim Ummah and contribute towards socio-economic development of Muslim countries in conformity with Islamic sensibilities.

the other hand, is either a merchant, or a trader, or a member of the