Islamic Banking vs Conventional Banking

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  • Topic: Sharia, Islamic banking, Bank
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  • Published : March 19, 2013
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Money and Banking: Islamic Banking & Conventional Banking

Submitted By: Rehman Sohail
Hamza Arshad

Submitted To: Ms. Shehla Akhtar

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Management Sciences Department National University of Modern Languages H-9, Islamabad Islamic Banking Vs Conventional Banking
 
One must refrain from making a direct comparison between Islamic banking and conventional banking (apple to apple comparison). This is because they are extremely different in many ways. The key difference is that Islamic Banking is based on Sharia’h foundation. Thus, all dealing, transaction, business approach, product feature, investment focus, responsibility are derived from the Sharia’h law, which lead to the significant difference in many part of the operations with as of the conventional The foundation of Islamic bank is based on the Islamic faith and must stay within the limits of Islamic Law or the Sharia’h in all of its actions and deeds. The original meaning of the Arabic word Sharia’h is 'the way to the source of life' and is now used to refer to legal system in keeping with the code of behavior called for by the Holly Qur'an (Koran). Amongst the governing principles of an Islamic bank are: * The absence of interest-based (riba) transactions;

* The avoidance of economic activities involving oppression (zulm) * The avoidance of economic activities involving speculation (gharar); * The introduction of an Islamic tax, zakat;
* The discouragement of the production of goods and services which contradict the Islamic value (haraam) On the other hand, conventional banking is essentially based on the debtor-creditor relationship between the depositors and the bank on one hand, and between the borrowers and the bank on the other. Interest is considered to be the price of credit, reflecting the opportunity cost of money. Islamic law considers a loan to be given or taken, free of charge, to meet any contingency.  Thus in Islamic Banking, the creditor should not take advantage of the borrower. When money is lent out on the basis of interest, more often that it leads to some kind of injustice. The first Islamic principle underlying for such kind of transactions is "deal not unjustly, and ye shall not be dealt with unjustly" [2:279] which explain why commercial banking in an Islamic framework is not based on the debtor-creditor relationship. The other principle pertaining to financial transactions in Islam is that there should not be any reward without taking a risk. This principle is applicable to both labor and capital. As no payment is allowed for labor, unless it is applied to work, there is no reward for capital unless it is exposed to business risk. Thus, financial intermediation in an Islamic framework has been developed on the basis of the above-mentioned principles. Consequently financial relationships in Islam have been participatory in nature. ISLAMIC BANKING

Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Sharia’h) principles and guided by Islamic economics. In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called riba. Generally, Islamic law also prohibits trading in financial risk (which is seen as a form of gambling). In addition, Islamic law prohibits investing in businesses that are considered unlawful or haraam. Islamic finance has been gaining momentum on a global scale for the last 30 years. Many Islamic Banks have sprung up over the last few years. These changes are occurring both in Muslim and in western countries, and are driven by a global trend amongst Muslims to become more observant of their faith. It might have been the reason why Islamic Banking emerged, however, today Islamic Banking is sought by Muslims and non-Muslims due to the benefits it offers. Industry size is currently estimated at more than $400 billion, with projected growth of 15%...
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