Relationship Between Deposit Rates of Islamic and Conventional Banking
The rate of return has always an important role in explaining the saving behavior of an individual. In fact that is considered as the basic of financial activities. That’s why different financial institutions offering different return rates on their different depository schemes. Deposit having high maturity has high rate of return and those having low maturity has low rate of return. For instance the current account has very shorter maturity having offered no return, and saving deposits have high maturity offered high rate of return.
The difference among the Islamic and conventional banking system can be judged on the basis of risk involvement. The Islamic jurists (Ullama Keram) argued that the element of risk should not be removed from the financial transaction, if that is removed from the financial transaction then that transaction is no more remained the business or trade but involved in the category of Usury(Riba). That’s why the profit rates of Islamic banks should be accrued form one year to another year, according to the performance of the bank, not according to the change in interest rate (Gafoor, 2001).
Just like to conventional banking, Islamic banking too provide the facility to their customers by offering different types of depository schemes. Islamic banking accept the capital provider’s right to utilize the best possible opportunity that arises from the factors such as the risk involvement, rate of profit and the period of investment. It found that Islamic banking system around the world use usually three main type of deposits; current accounts, saving accounts and investment accounts. On current and saving deposit the bank guaranty the depositor the nominal value that he has deposits but gives no guaranty on return; and the investment deposits are operated fully under the concept of profit and loss sharing (PLS) model (Ariff, 1988).
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