Comparison Study of conventional banking versus islamic banking

Topics: Islamic banking, Sharia, Bank Pages: 23 (7484 words) Published: May 7, 2014
Abstract

This paper describes how Islamic banking works and points out its differences with conventional bank. It provides examples of the unique features in Islamic banking and discusses how it benefits the organization or individual user. The special terms used in Islamic banking will be defined and how they carry out their difference role in Islamic banking.

There is a research carried out to identify the awareness of Islamic banking among Muslim and non-Muslim in Malaysia and examine their attitudes towards Islamic banking.

The objective of the research is to compare the financial performance of Islamic banking versus conventional banking in Malaysia. In particular, the research makes comparison of Islamic Bank(Bank Islam) and other 3 conventional banks(CIMB, Maybank, and Alliance Bank) performances for the year 2004 to 2008. Data for each year have been compiled from the income statements and balance sheets for respective banks as attached in appendix. In the bank performance study, this type of inter-bank analysis is pretty common (Sabi 1966) and it gives a clear picture to better understand the performance of a bank in today’s competitive financial market.

Financial ratios (10 in total) such as Return on Asset (ROA),Loan to Deposit ratio (LDR), Cash & Portfolio Investment to Deposit Ratio((CPIDR), Loan to Assets ratio (LAR), Debt to Equity ratio (DER), Debt to Total Asset ratio(DTAR), Equity Multiplier(EM), Asset Utilization (AU), and Income to Expense ratio (IER) will be analyzed to evaluate the performance of Bank Islam versus other 3 conventional banks in terms of profitability, liquidity, risk, and efficiency for the period of 2004-2008.

(1.0)Introduction

Islamic banking has achieved high growth rate in recent decades and it had successfully drawn a lot of attention in global market. There are varying estimates of recent growth rates of Islamic finance. Recent figures suggest that, currently, global Islamic finance assets are valued at US$800 billion, and that these could rise to US$4 trillion by 2015(Arthur D Little 2009). The annual average growth rate of Islamic Finance is estimated to be 10% to 20% and it is amongst the fastest growing financial sectors (Arthur D Little 2009).

There are various reasons for the huge growth in Islamic banking worldwide. There has been a large increase in the population and affluence of Muslims. In addition, there has been an increasing desire of Muslims to have available financial instruments which are Shariah compliant (Hamdan 2009). Islamic finance is not just restricted to Muslim, but the traditional values of Islamic finance have had an increasing appeal to Western Investors who are disillusioned with the banking practices of conventional banks in the wake of the global financial crisis (Arthur D Little 2009). Islamic banks are therefore no longer only a feature of traditional Muslim regions. There are more than 300 Islamic financial Institutions spread across 70 countries of the world. Indeed, there are now 5 Islamic banks in the UK (the only EU country to have Islamic banks), and 19 Islamic financial Institutions in the USA (Hamdan 2009).

The main objective of this paper is to provide a clear explanation on what is Islamic banking and how it differs from the conventional banks. The first hypothesis made in this paper is Islamic banking will provide more benefits to the economic system and the users compare with conventional banks. The second hypothesis is the Islamic banks in Malaysia will have a better financial performance than other conventional banks as Malaysia has achieved one the high growth Islamic finance country.

(1.1)Background of Islamic Banking in Malaysia

Islamic finance in Malaysia has made a significant growth since the launching of the first Islamic bank in 1983 and the establishment of the first takaful company in 1984. The strategy adopted by Malaysia has been to develop a comprehensive Islamic...

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