Essays on Main Differences between Islamic and Conventional Bank Case Study

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  The paper 'Main Differences between Islamic and Conventional Bank" is a great example of a finance and accounting case study.   Comparison between Islamic and conventional banking can not be made like apple to apple comparison. The two are extremely different the key difference being Islamic banking is based on the foundation of Shariah. Sharia law is the basis through which business approach, transaction, responsibility product features, investment focus and all dealings are made (Samad 5). Islamic banking is based on Islamic economics principles, in accordance with the Islamic Law (Sharia). These principles are caliphate and assuming the political framework is non-Islamic.

Caliphate is the form of Islamic government which represents the leadership of the Muslim world and political unity. Assuming the political framework is non-Islamic is a principle which integrates prominent Islamic doctrines into an economic framework that is secular (Al-Omar & Abed-Haq 21). Conventional banking is based on a principle that the more you have is the more you get and if you got nothing then you get nothing. The main difference between Islamic banking and conventional banking is that money according to the teachings of Islam has no intrinsic value and people are not supposed to profit from lending it out.

Interest (riba) cannot be charged. There is the prohibition of making money out money and wealth is only accepted if it is generated through investment and trade that is legitimate. In case of any gain resulting from trading, it should be shared between the expertise provider and the capital provider. This means if profit is made as a result of trading the profit is shared between the bank and its customers at an agreed ratio.

But for someone to share profits with the bank, he or she must hold a savings or investment account with the bank (Zaman & Movassaghi 32) Conventional banking practices aim is to eliminate risks while Islamic banking is aimed at bearing risks in any transaction involved. Conventional banks don’ t take the liability when involved in a transaction with a consumer and only get benefits from the consumer in the form of the interest charged. Islamic banking when involved in a transaction with any consumer, thy bear all the liability and it is declared Haram if the bank benefit without bearing its liability. The Islamic banking foundation is based on the Islamic faith and its deeds and actions must stay within the limits of Shariah.

Among the principles governing Islamic banks are the absence of Riba (interest-based transactions), avoiding oppression (zulm) involving economic activities, avoiding any trading activities that involve speculation (gharar), the introduction of tax (zarat) and discouragement of goods and services production which contract the value of Islam (haram) (Al-Omar & Abed-Haq 23). Conventional banking is based on the relationship of debtor-creditor which is between the bank and the depositor and the bank and the borrowers.

The price of credit considered is the interest charged and reflects the opportunity cost of money. In conventional banking besides being a store of value and a medium of exchange, money is a product, whereas in Islamic banking money is just but a medium of exchange and the real asset is the product. The basis for charging interest on capital in conventional banking is time value whereas the basis for earning profit in Islamic banking is the profit on the exchange of goods and services.

In case an organization suffers loss in conventional banking still interest in charging and thus no loss sharing. In Islamic banking, losses are shared when the organization runs at a loss.

Works Cited

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Ariff, Mohamed. Islamic banking in Southeast Asia: Islam and the economic development of Southeast Asia. Institute of Southeast Asian Studies, 1988

Hassan, Kabir & Lewis, Mervyn. Handbook of Islamic banking. Edward Elgar Publishing, 2007

Kuncara, Ari & Rochmah, Siti. “The Interest Prohibition and Financial Performance of Islamic Banks: Indonesian Evidence”. International Business Research, 1.3 (2008).

Melaty, Ghazali. The Bank Specific and Macroeconomic Determinants of Islamic Bank Profitability: Some International Evidence. University of Malaya, 2008

Mohamad, Shamsher , Hassan, Taufiq & Khaled, Mohamed . Efficiency of Conventional versus Islamic Banks: International Evidence using the Stochastic Frontier Approach (SFA).

Muljawan, D, Dar, H & M. J. B. Hall. A Capital Adequacy Framework for Islamic Banks: The Need to Reconcile Depositors, Risk Aversion with Managers’ Risk Taking. Loughborough University Economics Papers, 13 (2002)

Olson, D & Zoubi, T. “Using accounting ratios to distinguish between Islamic and conventional banks in the GCC region”. The International Journal of Accounting 43 (2008): 45-65.

Pratomo, W & Ismail, A., “Islamic bank performance and capital structure”. Munich Personal RePEc Archive Paper . University Library of Munich, Germany. 6012 (2006)

Samad, A. “Relative Performance of Conventional banking vis-à-vis Islamic Bank in Malaysia”. IIUM Journal of Economics and Management 7.1 (1999): 1-25.

Tarawneh, M.. “A comparison of financial performance in the banking sector: Some evidence from Omani commercial banks”. International Research Journal of Finance and Economics 3 (2006): 101-112.

WSBI/ESBG. Islamic Banking: Insight on Possibilities for Europe. World Savings Banks Institute//European Savings Banks Group, 2009.

Wu, Yang & Liang, L. “Using DEA-neural Network Approach to Evaluate Branch Efficiency of a Large Canadian bank”. Journal of Banking and Finance, (2005) 1– 8.

Yudistira, Donsyah. Efficiency in Islamic Banking: an Empirical Analysis of 18 Banks. University, Leicestershire, 2003.

Zaman & Movassaghi, “Islamic banking: A performance analysis”, The Journal of Global Business 12 (2001):31-38.

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