Islamic Banking vs Conventional Banking

Topics: Bank, Islamic banking, Sharia Pages: 10 (3330 words) Published: January 4, 2013
The American University of Sharjah

Ghada AL Ghazali
ID: 37506, Professor: George Naufal
The Main concept of Islamic banking vs. conventional banking systems

Islamic finance is one of the fastest growing sectors of the global financial industry. It has become essential in some countries and very relevant in others. Many factors have influenced to the rapid growth of Islamic finance, including: (i) high demand in many Islamic countries; (ii) growing demand of foreign investors to invest in Islamic banks, along with introducing it to their own countries; (iii) consistent progression in the strengthening of their legal framework to a more reliable and strong one; (iv) It is estimated that the size of the Islamic banking systems in terms of the global market was approximately around US$820 billion, at the end of 2008. (IFSB et al, 2010). Moreover, countries of the GCC are known to have the largest amount of Islamic banks (IBs). “The market share of Islamic finance in the banking systems of the GCC countries at end-2008 was in the range of 11−35 percent, compared with5−24 percent in 2004”. (Maher Hasan & Jemma Dridi, 2010) The following data shows the actual growth in asset of Islamic banks compared to conventional banks within the MENA region. | Market share in 2008| Growth rate of assets (Islamic banks)| Growth rate assets (banking system)| Period| Saudi Arabia| 35.0| 33.4| 19.0| 2003-08|

Bahrain| 29.9| 37.6| 9.60| 2000-08|
Kuwait| 29.0| 23.2| 14.3| 2002-08|
UAE| 13.5| 59.8| 38.1| 2001-08|
Qatar| 11.5| 65.8| 31.9| 2002-08|
GCC average| 23.8| 44.0| 22.6| |
Jordan| 10.3| 20.6| 11.2| 2001-08|
Yemen| 30.2| 26.5| 22.7| 2004-08|

Source: Central banks and Islamic banks annual reports.
1. Including Islamic banks
2. Including Islamic windows
3. Growth rate in calculated for the total of wholesale and retail while market share for retail only. Background
Islamic banking is an interest free banking system, in which there is no fixed rate of return. IBs operate in accordance to Islamic laws and the Shariah principles. The principles emphasizes on the moral and ethical values in all dealings, which has created a strong wide universal appeal. Islamic law prohibits the payments or acceptance of interest (Riba) for processes such as lending and accepting money, along with any activities that involve trading or exchange in the markets. While these principles were used as basis of both development and religious purposes, it is only in the late 20th century that IBs were formed and acted as an alternative for Muslims, but not restricted to Muslims only. Furthermore, IBs serves the same purpose as conventional banking systems except that it operates under the ruling of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The principle source of the Shariah is from the Quran followed by the recorded sayings and actions of Prophet Muhammad (pbuh)- known as the Hadith. Moreover, there are four rules for IBing and finance, which involve: 1) Risk sharing 2) Materiality 3) No exploitation 4) No financing for sinful activities. Literature Review and Theory

While the studies of the different banking approaches proved to show how effective Islamic banking is, in comparison to conventional banking. The main aim is for it to not be classified as a religious movement but rather be accepted as any other banking system that follows a certain financial intermediation. (Alkassim, 2005) In fact, the success of the Islamic bank’s performance has proven to become an attractive way of banking, to many investors around the world, despite the religion it follows. The way the Islamic bank appears to operate seems to generate great interest. There are, however, a series of studies that prove that the different approaches of banking systems whether Islamic or conventional seemed to give similar results in terms of...

References: Alkassim F. (2005). The Profitability of Islamic and Conventional Banking in the GCC Countries: A Comparative Study.
Bahari, Z.B., (2009)
Cihak M. & Hesse H., (2010). IMF Working Paper: Islamic banks and financial stability: An empirical analysis.
Dridi J
Gafoor. A.L.M. (1995). Interest-free Commercial Banking. Groningen: Apptec. The Netherlands
Saddy, F. (2009). Risky business: Islamic banking & finance. (3 ed., Vol. 7, pp. 20-25).
Subbarao, D., 2009, ―Ethics and the world of finance‖ Keynote address at the Conference on "Ethics and the World of Finance," organized by Sri Sathya Sai University, Prasanthi Nilayam, Andhra Pradesh, 28 August 2009.
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