Islamic Banking

Topics: Bank, Financial services, Islamic banking Pages: 38 (11621 words) Published: March 31, 2013
Around 2000 BC, banking was initiated by farmers and traders in Babylonia whereby, grain loans were made. Later, this new mode of ‘trading’ spread to Greece. Some developments were emerging as deposits and money exchange were initiated. Modern banking took birth in Italy in the 14th century and the most famous conventional bank was Medici Bank. The bank system spread to Europe, in Amsterdam in the 16th century where much innovation took place, in London in the 17th century and finally to the rest of the world. Today, major changes and development have occurred and banks are leaders in any country’s financial system.

Conventional banking, also known as commercial banking, has its own unique properties. 1. Interest based banking:
Conventional banks are business firms, and their primary aim is to make profits. These are financial institutions that bridge the gap between surplus and deficits units. They accept funds from the public and place them into current, savings or fixed deposit accounts. The lenders earn interest on their investment. Banks also grant loans to needy people and the latter pays a rate of interest to the institutions. The difference in the borrowers’ and the lenders’ interest rates is the profit of the bank. 2. Creditworthiness of borrowers:

Commercial banks will only accept to deal with a customer and grant him loan, if and only if, the latter is creditworthy and has some sort of collateral, such as a house or shares in a company. Business plans are surely studied, but even if a project seems to be promising, but the customer lacks of collateral, the loan will not be granted. 3. Legal framework:

In Mauritius, all banks are supervised by the Bank of Mauritius and they abide to the law of the Banking Act. There is a rigid and strict framework and all banks must adhere to the regulations to ensure fairness. 4. Socio-economic objectives:

Banks have been called upon to engage in some socio-economic activities to reduce inequalities of income and wealth, removal of poverty and elimination of unemployment. For example, in Mauritius, MCB and SBM give scholarships to needy students.

5. Banking on no faith:
Conventional banking has been developed by man, and is purely business. It is based on no religious terms. It looks for any type of business projects, whether ethical or not.

1. A vast range of products and services offered:
Commercial banks have a variety of services, which both an individual and a company will find useful. All these products attract customers as every single one can relate their needs to at least one product offered. For example, a person can opt for a housing, a car or a business loan. 2. Services located in many areas:

Commercial banks have retail banks all over a country. For example in Mauritius, MCB has an extensive network of 42 local branches. Commercial banks have ATMs situated in every corner of a country. This gives customers the ability to access their money and accounts from virtually anywhere. 3. Discounts:

Conventional banks offer products at low prices through a mechanism of buying and selling in bulk, at a discount. Most commercial banks, for example, will not charge a fee to open an account. 4. Professional Customer Care:

Commercial banks deal with thousands and thousands of customers everyday. Because of this, commercial banks have centralized call centers, with trained and professional employees to handle problems and disputes. 5. Acceptance of business plans without any restrictions: No business plan will be rejected in conventional banks, as long as they are legal and backed up with collateral and coming from creditworthy customers. 6. Innovations:

Banks are always trying to aim higher and better by making use of high technological development. Innovation is a priority for conventional banks to survive in this...
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