The Key Differences Between Islamic Banking And The Conventional Banking

The first work experience that I had after obtaining a bachelor degree was as Research Assistant of Center for Central Banking Research and Education of Bank Indonesia from February to July 2015. Having working experience in central bank helped me to develop my expertise in financial field. The responsibility as the research assistant was to aid researcher of Bank Indonesia in composing a book regarding products and sharia contracts of Islamic finance and Islamic monetary instrument. This book was addressed as a guidance for Islamic banking and finance practitioners to develop and offer financial products and services to their prospective costumers. Afterwards, I worked in Roosdiono and Partners (a member of ZICOlaw) as their sharia consultant. In this firm, I served as a consultant in several sharia or legal cases related with Islamic financial institution clients. Having these experiences, I understand and fully aware that my proficiency and expertness of Islamic finance was inadequate to become an expert in this field. Thus, I opt to enlarge my knowledge by pursuing higher level of education in master

Hennie and Iqbal (2008) stated in their risk analysis for Islamic banks book that Islamic

Almost 80% of respondents were non-Muslims. Therefore these research reports are mostly non-Muslim customer’s opinion on corporate banking Muslim. This study proves that Muslim banking products are not so popular among corporate customers in Malaysia and only a few maintain banking relationships under the Islamic banking system. In addition, nearly 65% of respondents indicated that their knowledge of Islamic banking system is very limited. This study shows that there is a misunderstanding among respondents regarding the objectives of Islamic banking. While 38.1% of respondents were uncertain about the nature of profit sharing system in Islamic banking, 50% believe that this principle is the only principle adopted by Islamic banks as a replacement Riba. Respondents were not familiar with other principles such as Musharakah, Ijarah, Wakala, and Istisna'a. Overall, the conclusions of the study are that there is a general knowledge that inadequate corporate banking products and services to Islam among

Shahjanaz Kamaruddin begins this article by stating that Malaysia has developed into becoming a full-fledged Islamic financial system operating in parallel to its conventional counterpart. Islamic finance is based on the Islamic principle of Syariah which is relevant in today’s world. According to the Islamic Finance Development (IFD) Report 2014, Malaysia is the undisputed in sukuk(bond) with a 63% of global market share. Malaysia performs very well across 5 indicators which are quantitative development, knowledge, governance, CSR (corporate social responsibility) and

Islamic banking refers to a system of banking that complies with Islamic law, also known as Shariah law. The underlying principles that govern Islamic banking are mutual risk and profit sharing between the provider of capital (investor) and the user of funds (entrepreneur). In other words, it ensures an equal contribution for all parties involved, whether in profitability or in case of any loss occurred. Activities that involve interest (riba), gambling (maisir) and speculative trading (gharar) are prohibited (Bank Negara Malaysia, 2010). Islamic banking is interest free banking; making it compulsory to take active part in business profit and loss sharing. Islamic banks prefer to take less risk (Shaikh & Jalbani, 2009)

Islamic banking refers to a system of banking that complies with Islamic law, also known as Shariah law. The underlying principles that govern Islamic banking are mutual risk and profit sharing between the provider of capital (investor) and the user of funds (entrepreneur). In other words, it ensures an equal contribution for all parties involved, whether in profitability or in case of any loss occurred. Activities that involve interest (riba), gambling (maisir) and speculative trading (gharar) are prohibited (Bank Negara Malaysia, 2010). Islamic banking is interest free banking; making it compulsory to take active part in business profit and loss sharing. Islamic banks prefer to take less risk (Shaikh & Jalbani, 2009)

In addition, Islamic bonds are still far superior as compared to conventional binds, underpinned by the following factors: • Fairness and transparency. The financier and customer share the risks and rewards based on an agreed profit-sharing ratio. The roles and responsibilities of the parties to a contract are also explicitly disclosed and transparent. Asset-backed transactions. Islamic financial transactions must be backed by an underlying tangible asset or legitimate productive activity. This discourages over-exposure of the financing facility beyond the value of the underlying asset, and hence provides continuous security to the investors Ethical investment. Islamic finance prohibits the charging or paying of interest, and imposes restrictions on unethical and speculative financial activities

They also highlighted that the conventional banks in Sweden will face problem to retain their Muslim customer if Islamic financial institutions such as Islamic banks who offer shari’ah compliance product and services come to the existence. This indicated that, how eager they are to get a shari’ah compliance banks that can save them dealing with conventional banks.

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.

The first states that paying interest is prohibited, thus Islamic banks have to use contracts that create exposure to the real sector and must ensure efficient risk management (citation needed). The second principle revolves around the profit and loss sharing concept, where any financial transaction must share both risk and reward so excessive losses and profits are minimized. The third principle prohibits uncertainty and/or speculation. Uncertainty in contractual terms and conditions is forbidden, however, risk taking is allowed only when all terms and conditions are clearly outlined to all participating parties. The last principle requires the use of asset-backing, where each financial transaction must relate to tangible and/or identifiable underlying assets that ensure Islamic banks remain connected to the real economy. A better understanding of Islamic finance is called for in all respects.

Thus it indicated the concept of Riba was though present, however there was no preset percentage neither any fixed charge. The charge dependent heavily upon the ability of the debtor (the one who owes money to the lender) and it can be increased at the discretion of the lender.

For interest-free banks, the mode for financing personal loans and pushing their own type of banks forwards is filled with hurdles due to the profit/loss sharing rule. Same percentage of returns is being offered by both the banks to their respective depositors, and largest fraction of their funds is forwarded towards the financing of durables. Murabaha is the mode of finance that interest-free banks make use of. Samad (2004) made contribution to the field through his comparative study of Bahrain Islamic bank’s performance against that of other conventional banks. Making use of the T-test, he explored same outcomes in terms of profitability and risk, whereas no variation was detected in liquidity of the two types of banks.

The Islamic finance industry has been evolving and growing rapidly for the past decade. The recent global financial meltdown has open opportunity to Islamic finance to offer a new outlooks and effective solutions to economics problems. Economists are now looking to the east, learning lessons and seeing advantage of Islamic finance. Since then, serious research on Islamic financial system has been carried out and Islamic financial system has been an interesting area of discussion.

In general, Islamic banking system is based on Sharī’ah principle, while non-Islamic banking system is based on interest rate. Sharī’ah is a set of norms, values and laws that go to make up the Islamic way of life. Characteristics of Sharī’ah -compliant banking and financial system are free from riba. Riba is prohibited in Islamic banking system, because Islamic banking system is based on the sharing of risk and profit. Interest is

Islamic finance refers to the provision of financial services in accordance with the Shari’ah Islamic law, principles and rules. The principles of which “emphasise moral and ethical values in all dealings have wide universal appeal” - (Institute Of Islamic Banking And Insurance - What Is Islamic Banking) Shari’ah does not permit the use of Riba (Interest), "gharar" (excessive uncertainty), "maysir" (gambling), short sales or financing activities that it considers harmful to society. The purposes and use of Islamic banks are similar to conventional banks, the only difference is that, Islamic banking is in accordance with the rules of Shari’ah which can also be known as ‘Fiqh al-Muamalat. Charging customers interest and fees for their services runs conventional banks. Islamic Banking is now well established, and heavily institutionalized in some 76 countries (Ariff and Iqbal). The existence of modern Islamic financial institutions was first recognized in 1960s and now has spread to a large number of Muslim countries including GGC (Gulf Cooperation Council), Arab, South and South East Asia, North Africa, and some of the west countries including UK, France, Denmark, etc. number