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Islamic Banking Vs Conventional Banking
 
ISLAMIC ECONOMICS
Islamic banking is based on the principles of Islamic economics — aneconomic framework in accordance with Islamic law (Sharia'h).There are two types of Islamic economics:
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Caliphate , the Islamic form of government representing thepolitical unity and leadership of the Muslim world (Islamicpolitical framework)
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Assuming the political framework is non-Islamic, therefore,seeking to integrate some prominent Islamic tenets into asecular economic frameworkCaliphate is the absolute Islamic rule, thus the economy focuses ondistribution of resources in order to meet the basic and luxuriousneeds of individuals in society, and the state has a clear role inpolicing, taxation, managing public assets, and ensuring the circulationof wealth. Such a political framework in its true form does not exist intoday's world.Assuming non-Islamic political framework simply proposes two maintenets: no interestcan be earned on loans and socially responsibleinvesting. This is the way conventional banking is Islamized—the firststep towards an Islamic economic framework.Modern day Islamic scholars and academics have developed variousmodes of Sharia'h complaint financing that are designed to work withinthe prevailing capitalist economic framework. In order to achieve thisbalance numerous concessions have been afforded to financialinstitutions that would not apply if a viable interest free economicsystem existed. The intention behind making these concessions is toencourage the evolution of this type of alternative system.
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Islamic Banking Vs Conventional Banking
 
ISLAMIC BANKING
Islamic banking refers to a system of banking or banking activity thatis consistent with Islamic law (Sharia’h) principles and guided byIslamic economics. In particular, Islamic law prohibits usury, thecollection and payment of interest, also commonly called riba.Generally, Islamic law also prohibits trading in financial risk (which isseen as a form of gambling). In addition, Islamic law prohibitsinvesting in businesses that are considered unlawful, or haraam.Islamic finance has been gaining momentum on a global scale for thelast 30 years.Many Islamic Banks have sprung up over the last few years. Thesechanges are occurring both in Muslim and in western countries, andare driven by a global trend amongst Muslims to become moreobservant of their faith. It might have been the reason why IslamicBanking emerged, however, today Islamic Banking is sought byMuslims and non-Muslims due to the benefits it offers.Industry size is currently estimated at more than $400 billion, withprojected growth of 15% per annum.Financial institutions around the globe are trying to keep pace with thegrowing demand for Sharia’h compliant products and services.
Islamic Banking Global Scenario
Over the last three decades Islamic banking and finance has developedinto a full-fledged system and discipline reportedly growing at the rateof 15percent per annum. Today, Islamic financial institutions, in oneform or the other, are working in about 75 countries of the world.Besides individual financial institutions operating in many countries,efforts have been underway to implement Islamic banking on acountry wide and comprehensive basis in a number of countries. Theinstruments used by them, both on assets and liabilities sides, have
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Islamic Banking Vs Conventional Banking
 
developed significantly and therefore, they are also participating in themoney and capital market transactions. In Malaysia, Bahrain and a fewother countries of the Gulf, Islamic banks and financial institutions areworking parallel with the conventional system.Bahrain with the largest concentration of Islamic financial institutionsin the Middle East region, is hosting 26 Islamic financial institutionsdealing in diversified activities including commercial banking,investment banking, offshore banking and funds management. Itpursues a dual banking system, where Islamic banks operate in theenvironment in which Bahrain Monetary Agency (BMA) affords equalopportunities and treatment for Islamic banks as for conventionalbanks. Bahrain also hosts the newly created Liquidity ManagementCentre (LMC) and the International Islamic Financial Market (IIFM) tocoordinate the operations of Islamic banks in the world. To provideappropriate regulatory set up, the BMA has introduced acomprehensive prudential and reporting framework that is industry-specific to the concept of Islamic banking and finance. Further, theBMA has pioneered a range of innovations designed to broaden thedepth of Islamic financial markets and to provide Islamic institutionswith wider opportunities to manage their liquidity.Another country that has a visible existence of Islamic banking atcomprehensive level is Malaysia where both conventional and Islamicbanking systems are working in a competitive environment. The shareof Islamic banking operations in Malaysia has grown from a nil in 1983to above 8 percent of total financial system in 2003. They have a planto enhance this share to 20 percent by the year 2010. However, thereare some conceptual differences in interpretation and Shariah positionof various contracts like sale and purchase of debt instruments andgrant of gifts on savings and financial papers.In Sudan, a system of Islamic banking and finance is in operation atnational level. Like other Islamic banks around the world the banks inSudan have been relying in the past on Murabaha financing. However,the share of Musharaka and Mudaraba operations is on increase andpresently constitutes about 40 percent of total bank financing.Although the Islamic financial system has taken a good start in Sudan,significant problems still remain to be addressed.Like Sudan, Iran also switched over to Usury Free Banking at national
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