Islamic Banking Vs Conventional

Banking
Best Answer - Chosen by Voters
The main difference between Islamic and
conventional banking is that
Islamic teaching says that money itself has
no intrinsic value, and
forbids people from profiting by lending it,
without accepting a level of
risk – in other words, interest (known as
"riba") cannot be charged.
To make money from money is prohibited –
wealth can only be
generated through legitimate trade and
investment. Any gain relating
to this trading are shared between the
person providing the capital and
the person providing the expertise.
At Islamic Bank of Britain, we generate all our
profit through sharia’a compliant trading and
investment activities. We then share the
profits with our customers at a pre-agreed
ratio. In order to share profits you must hold
one of our savings or investment accounts
There are two major difference between
Islamic Banking and
Conventional Banking:
1. Conventional banking practices are
concerned with "elimination of
risk" where as Islamic banks "bear the risk"
when involve in any
transaction.
2. When Conventional banks involve in
transaction with consumer they
do not take the liability only get the benefit
from consumer in form of
interest whereas Islamic banks bear all the
liability when involve in
transaction with consumer. Getting out any
benefit without bearing its
liability is declared Haram in Islam.
While the basics of what the business is are
the same, the term refers
to operating the business within Islamic law.
The main thing that
effects this business under that law is that
Islam prohibits the charging
of interest. Certainly a problem in modern
banking!
10

Islamic Banking Vs Conventional

Banking
However, what is considered to be interest
has different definitions by
different Islamic scholars...some say it can
only be considered on gold
and silver...but paying back the same weight
as you borrowed (the
same weight of paper money for example), is
not interest. Like in all
religious things, there would seem to be
some conflict and differences
between followers that may seem strange to
outsiders.
So basically, modern Islamic banking may
take many forms, each of
which strives to adhere to it's understanding
of Islamic l
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Islamic Banking Vs Conventional Banking

ISLAMIC BANKING
Islamic banking refers to a system of banking or banking activity
that
is consistent with Islamic law (Sharia’h) principles and guided by
Islamic economics. In particular, Islamic law prohibits usury, the
collection and payment of interest, also commonly called riba.
Generally, Islamic law also prohibits trading in financial risk (which is
seen as a form of gambling). In addition, Islamic law prohibits
investing in businesses that are considered unlawful, or haraam.
Islamic finance has been gaining momentum on a global scale for
the
last 30 years.
Many Islamic Banks have sprung up over the last few years. These
changes are occurring both in Muslim and in western countries, and
are driven by a global trend amongst Muslims to become more
observant of their faith. It might have been the reason why Islamic
Banking emerged, however, today Islamic Banking is sought by
Muslims and non-Muslims due to the benefits it offers.
Industry size is currently estimated at more than $400 billion, with
projected growth of 15% per annum.
Financial institutions around the globe are trying to keep pace with
the
growing demand for Sharia’h compliant products and services.
Islamic Banking Global Scenario
Over the last three decades Islamic banking and finance has
developed
into a full-fledged system and discipline reportedly growing at the
rate
of 15percent per annum. Today, Islamic financial institutions, in one
form 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 a
country wide and comprehensive basis in a number of countries.
The
instruments used by them, both on assets and liabilities sides, have
2
Islamic Banking Vs Conventional Banking
developed significantly and therefore, they are also participating in
the money and capital market transactions. In Malaysia, Bahrain
and a few other countries of the Gulf, Islamic banks and financial
institutions are working parallel with the conventional system.
Bahrain with the largest concentration of Islamic financial
institutions
in the Middle East region, is hosting 26 Islamic financial institutions
dealing in diversified activities including commercial banking,
investment banking, offshore banking and funds management. It
pursues a dual banking system, where Islamic banks operate in the
environment in which Bahrain Monetary Agency (BMA) affords equal
opportunities and treatment for Islamic banks as for conventional
banks. Bahrain also hosts the newly created Liquidity Management
Centre (LMC) and the International Islamic Financial Market (IIFM) to
coordinate the operations of Islamic banks in the world. To provide
appropriate regulatory set up, the BMA has introduced a
comprehensive prudential and reporting framework that is industry-
specific to the concept of Islamic banking and finance. Further, the
BMA has pioneered a range of innovations designed to broaden the
depth of Islamic financial markets and to provide Islamic institutions
with wider opportunities to manage their liquidity.
Another country that has a visible existence of Islamic banking at
comprehensive level is Malaysia where both conventional and
Islamic
banking systems are working in a competitive environment. The
share
of Islamic banking operations in Malaysia has grown from a nil in
1983
to above 8 percent of total financial system in 2003. They have a
plan
to enhance this share to 20 percent by the year 2010. However,
there
are some conceptual differences in interpretation and Shariah
position
of various contracts like sale and purchase of debt instruments and
grant of gifts on savings and financial papers.
In Sudan, a system of Islamic banking and finance is in operation at
national level. Like other Islamic banks around the world the banks
in
Sudan have been relying in the past on Murabaha financing.
However,
the share of Musharaka and Mudaraba operations is on increase and
presently 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
3

Islamic Banking Vs Conventional Banking

level in March 1984. However, there are some conceptual
differences
between Islamic banking in Iran and the mainstream movement of
Islamic banking and finance.
Owing to the growing amount of capital availability with Islamic
banks,
the refining of Islamic financing techniques and the huge
requirement
of infrastructure development in Muslim countries there has been a
large number of project finance deals particularly in the Middle East
region. Islamic banks now participate in a wide financing domain
stretching from simple Shariah-compliant retail products to highly
complex structured finance and large-scale project lending. These
projects, inter alia, include power stations, water plants, roads,
bridges
and other infrastructure projects. Bahrain is the leading centre for
Islamic finance in the Middle East region. The establishment of the
Prudential Information and Regulatory Framework for Islamic Banks
(PIRI) by the BMA in conjunction with AAOIFI has gone a long way
towards establishing a legal and regulatory framework to meet the
specific risks inherent in Islamic financing structures.
The BMA has quite recently signed MoU with the London Metal
Exchange (LME) to pool assets to develop and promote Shariah
compliant tradable instruments for Islamic banking industry. The
arrangement is seen as a major boost for industry’s integration in
the
global financial system and should set the pace for commodity-
trading
environment in Bahrain. BMA has also finalized draft guidelines for
issuance of Islamic bonds and securities from Bahrain. In May 03,
the
Liquidity Management Centre (LMC) launched its debut US$ 250
million Sukuk on behalf of the Government of Bahrain.
National Commercial Bank (NCB) of Saudi Arabia has introduced an
Advance Card that has all the benefits of a regular credit card. The
card does not have a credit line and instead has a prepaid line. As
such, it does not incur any interest. Added benefits are purchase
protection, travel accident insurance, etc and no interest, no extra
fees
with no conditions, the card is fully Shariah compliant. It is more
secure than cash, easy to load up and has worldwide acceptance.
This
prepaid card facility is especially attractive to women, youth, self
employed and small establishment employees who sometimes do
not
meet the strict requirements of a regular credit card facility. Saudi
Government has also endorsed an Islamic-based law to regulate the
kingdom's lucrative Takaful sector and opened it for foreign
investors.
4

Islamic Banking Vs Conventional Banking

Islamic banks have also built a strong presence in Malaysia, where
Standard & Poor's assigned a BBB+ rating to the $600 million
Sharia-
compliant trust certificates (called sukuk) issued by Malaysia Global
Sukuk Inc. Bank Negara Malaysia (BNM) has announced to issue new
Islamic Bank licences to foreign players. The Financial Sector Master
plan maps out the liberalisation of Malaysia's banking and insurance
industry in three phases during the next decade. It lists incentives to
develop the Islamic financial sector and enlarge its market share to
20
percent, from under 10 percent now. A dedicated high court has
been
set up to handle Islamic banking and finance cases.
In United Kingdom, the Financial Services Authority is in final stages
of
issuing its first ever Islamic banking license to the proposed Islamic
Bank of Britain, which has been sponsored by Gulf and UK investors.
The United States of America has appointed Dr. Mahmoud El Gamal,
an
eminent economist/expert on Islamic banking to advise the US
Treasury and Government departments on Islamic finance in June
2004.
MODES OF ISLAMIC FINANCE
MURABAHA
Literally it means a sale on mutually agreed profit. Technically, it is
a
contract of sale in which the seller declares his cost and profit.
Islamic
banks have adopted this as a mode of financing. As a financing
technique, it involves a request by the client to the bank to
purchase
certain goods for him. The bank does that for a definite profit over
the
cost, which is stipulated in advance.
5

Islamic Banking Vs Conventional Banking

IJARAH
Ijarah is a contract of a known and proposed usufruct against a
specified and lawful return or consideration for the service or return
for
the benefit proposed to be taken, or for the effort or work proposed
to
be expended. In other words, Ijarah or leasing is the transfer of
usufruct for a consideration which is rent in case of hiring of assets
or
things and wage in case of hiring of persons.
IJARAH-WAL-IQTINA
A contract under which an Islamic bank provides equipment,
building
or other assets to the client against an agreed rental together with a
unilateral undertaking by the bank or the client that at the end of
the
lease period, the ownership in the asset would be transferred to the
lessee. The undertaking or the promise does not become an integral
part of the lease contract to make it conditional. The rentals as well
as
the purchase price are fixed in such manner that the bank gets back
its principal sum along with profit over the period of lease.
MUSHARAKAH
Musharakah means a relationship established under a contract by
the
mutual consent of the parties for sharing of profits and losses in the
joint business. It is an agreement under which the Islamic bank
provides funds, which are mixed with the funds of the business
enterprise and others. All providers of capital are entitled to
participate
in management, but not necessarily required to do so. The profit is
distributed among the partners in pre-agreed ratios, while the loss is
borne by each partner strictly in proportion to respective capital
contributions.
MUSAWAMAH
Musawamah is a general and regular kind of sale in which price of
the
commodity to be traded is bargained between seller and the buyer
without any reference to the price paid or cost incurred by the
former.
6

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Islamic Banking Issues

HUMAN RESOURCE FOR SHARIA'H COMPLIANCE
Users of Islamic financial services assign primary
importance to
Sharia'h compliance of the services they use. It is
understandable that
Sharia'h noncompliance entails a serious operational risk
and can
result in withdrawal of funds from and instability of an
Islamic bank,
irrespective of its initial financial soundness. Sharia'h
compliance is
hence a serious matter for an Islamic bank, in addition to
its
compliance with other regulatory requirements.
UNRESOLVED FIQH ISSUES
Lack of standard financial contracts and products can be a
cause of
ambiguity and a source of dispute and cost. In addition,
without a
common understanding of certain basic foundations,
further
development of banking products is hindered.
LEGAL FRAMEWORK
An appropriate legal, institutional and tax framework is a
basic
requirement for establishing sound financial institutions
and markets