Conventional Banking vs Islamic Banking—Comparative Analysis of the Dynamics of Operations

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National Seminar on “Future of Financial Markets” in Centre of management Studies Jamia Millia Islamia, New Delhi Date: 5th September 2011

Conventional Banking Vs Islamic Banking—Comparative Analysis of the Dynamics of Operations

MatloobUllah Khan Research Scholar Department of Management JamiaHamdard, New Delhi, India Email: matloobullah.khan@gmail.com

Dr. ReshmaNasreen and Dr.SadafSiraj Assistant Professor Department of Management JamiaHamdard , New Delhi, India Email: drreshmanasreen@yahoo.com,sirajsadaf@gmail.com

Abstract: Main objective of this paper is to study the basic concepts of Islamic banking and analyze the working mechanism of both types of structures (Islamic and Interest based) along with the possibility of Risk factors in both model. This paper also shows the basic differences between Interest and Islamic based banking system in terms of profit earning function.

Keywords: Islamic Banking and Interest based banking

ISBN: 978-81-922331-0-9, Page no. 609-602 in Seminar Proceeding

National Seminar on “Future of Financial Markets” in Centre of management Studies Jamia Millia Islamia, New Delhi Date: 5th September 2011

Conventional Banking Vs Islamic Banking—Comparative Analysis of the Dynamics of Operations

Introduction The financial market in general is a highly leveraged market. History of Wall Street Crashes and the most recent Lehman Brothers is witness to the follies of over speculation. Most of the banking and financial activities are based on Interest rate structure, under such complicated condition. The concept of Islamic banking generates new innovation in the field of financial activity for those people who are not interested in receiving interest, or not interested to put their money in interest based organization. Basically the concepts of Islamic Banking focus on the community of those people who believe in Islamic Law (Shariah). According to the Islamic Law, Interest (Riba) „receiving and giving‟ both are prohibited or in Islamic language it is coded as „Haram‟. This poses a question from people who are skeptical of the concept of Islamic banking and they ask how can a bank survive without interest. But when you see the Islamic rules and regulations which are given in “Quran” related to trade and business; Islam only allows those business and trade in which both Profit and loss go hand in hand. If an investor or the owner of business only gets profit instead of loss, it is prohibited (Haram) in Islamic law, if they get profit as well as losses, it is acceptable (Halal). If the level of risk factor is minimum, it is also acceptable. It means risk factor should always carry with the business according to Islamic law otherwise that business is prohibited (Haram).

ISBN: 978-81-922331-0-9, Page no. 609-602 in Seminar Proceeding

National Seminar on “Future of Financial Markets” in Centre of management Studies Jamia Millia Islamia, New Delhi Date: 5th September 2011

Concept of Islamic banking Definition –Islamic banking is a system which follows the rules and regulation depend on the principles of Islamic law (Sharia), which is called ‘fiqh al-

mumalat’1(Islamic rules on transaction) which are given in „Quran‟ and different „Hadies‟2. Some of the basic concepts of Islamic banking are given blow with explanation Wadiahor Amanah (Safe keeping): This is an agreement between bank and a customer, in which customers deposit their money &tangible assets (gold, silver and Diamond, etc.) in a bank for the purpose of safety and if any time, a customer wants to receive their amount and assets, the bank returns their assets. On such kind of services bank charge some amount of fees from the customer according to the predetermined agreement. On „Amanah’ agreement Islamic bank also provide other kinds of services such asclearance of cheque, M-Banking, E-Banking, Deposits of fund, Foreign exchange service and Cash withdrawal service. On that deposit balance, when customer give...
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