ADVANTAGES OF ISLAMIC BANKING

Some of the major advantages of Islamic banking:

1 Justice and Fairness: The main feature of the Islamic model is that it is based on a
profit-sharing principle, whereby the risk is shared by the bank and the customer. This
system of financial intermediation will contribute to a more equitable distribution of income
and wealth.

2 Liquidity: Follow the profit and loss-sharing principle to mobilise resources and are less
likely to face any sudden run on deposits. As such, they have a minimum need for
maintaining high liquidity.

3 Better Customer Relations: Financing and deposits are extended under the profit and loss
sharing arrangement. The banks are likely to know their fund users better in order to ensure
that the funds are used for productive purposes and vice-versa for investors. In this way, it
develops better relations between the financial intermediary and the fund providers or
consumers. It will also promote productive economic activities and socio-economic justice.

4 No Fixed Obligations: Islamic banks do not have fixed obligations such as interest
payments on deposits. Therefore, they are able to allocate resources to profitable and
economically desirable activities. This also holds good for Islamic financing, as the payment
obligations of the entrepreneur is associated with the revenue.

5 Transparency: Transparent to the account holders on the investments made in different

areas and the profits realized from these investments. The profit is then shared in the
pre-agreed ratio.

6 Ethical and Moral Dimensions: Their strong ethical and moral dimensions of doing
business and selecting business activities to be financed, play an important role in promoting
socially desirable investments and better individual/corporate behavior.

7 Destabilising Speculation: Most of the non-Islamic institutions are trading heavily into
financial markets and carrying out huge speculative transactions. These transactions are
sources of instability and the returns
on investments are highly speculative. On the contrary, Islamic banks are prohibited from
carrying out such activities. This destabilises the speculation and is in the better interest of
the depositors.
8 Banking for All: Although based on Syariah principles to meet the financial needs of
Muslims, it is not restricted to Muslims only and is available to non-Muslims as well.