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Islamic Banking Vs Conventional Banking
ISLAMIC ECONOMICS
Islamic banking is based on the principles of Islamic economics — an
economic framework in accordance with Islamic law (Sharia'h).
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Islamic Banking Vs Conventional Banking
ISLAMIC BANKING
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.
Financial institutions around the globe are trying to keep pace with the
growing demand for Sharia’h compliant products and services.
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
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Islamic Banking Vs Conventional Banking
Like Sudan, Iran also switched over to Usury Free Banking at national
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Islamic Banking Vs Conventional Banking
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.
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Islamic Banking Vs Conventional Banking
MURABAHA
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Islamic Banking Vs Conventional Banking
IJARAH
IJARAH-WAL-IQTINA
MUSHARAKAH
MUSAWAMAH
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Islamic Banking Vs Conventional Banking
ISTISNA'A
BAI MUAJJAL
MUDARABAH
A form of partnership where one party provides the funds while the
other provides expertise and management. The latter is referred to as
the Mudarib. Any profits accrued are shared between the two parties
on a pre-agreed basis, while loss is borne only by the provider of the
capital.
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Islamic Banking Vs Conventional Banking
BAI SALAM
LEGAL FRAMEWORK
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Islamic Banking Vs Conventional Banking
EXCESS LIQUIDITY
Conventional Banking
Conventional banking is based on the principle that the more you
have, the more you can get. In other words, if you have little or
nothing, you get nothing. As a result, more than half the population of
the world is deprived of the financial services of the conventional
banks. Conventional banking is based on collateral. Conventional
banks look at what has already been acquired by a personConventional
banks go into ‘punishment’ mode when a borrower is taking more time
in repaying the loan than it was agreed upon. They call these
borrowers “defaulters”. When a client gets into difficulty, conventional
banks get worried about their money, and make all efforts to recover
the money, including taking over the collateral. In conventional banks
charging interest does not stop unless specific exception is made to a
particular defaulted loan. Interest charged on a loan can be multiple of
the principal, depending on the length of the loan period.
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Islamic Banking Vs Conventional Banking
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!
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Islamic Banking Vs Conventional Banking
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Islamic Banking Vs Conventional Banking
disobservance risk”. Risk analysis refer to the forces that may cause
the outcome of investment to be sub optimal. Certainly an Islamic
investor earning non-permissible income is an outcome that is
most undesireous, and it may cause the value of his investment to
be reduced.
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Islamic Banking Vs Conventional Banking
Indeed, experience has shown that Islamic banks are powerful means
of mobilizing resources. Operationally, however, both the Islamic
financial systems in the three countries that have adopted it as well as
individual Islamic banks face challenges that need to be addressed.
The most important among these challenges is the fact that, while it
has been relatively easy to create a system in which deposits do not
pay interest, the asset portfolios of Islamic banks do not contain
sufficiently strong components that are based on profit-sharing. The
main reasons for this are: (a) lack of a legal and institutional
framework to facilitate appropriate contracts as well as mechanisms to
enforce them; and/or (b) lack of appropriate menus containing a broad
range and a variety of maturity structures of financial instruments.
Consequently, a relatively strong risk perception has become
associated with profit-sharing methods in particular and Islamic
banking in general. This, in turn, has led to concentration d asset
portfolios of the Islamic banks in short-term and trade-related assets
with inimical effects on investment and economic development. The
problem is exacerbated by the fact that Muslim countries, as is the
case in much of the developing world, suffer from a lack of deep and
efficient capital and money markets that can provide the needed
liquidity and safety for existing assets. The absence of suitable long-
term instruments to support capital formation is mirrored in the lack of
very short-term financial instruments to provide liquidity.
a. The challenges facing individual Islamic banks
Impressive as the growth record of individual Islamic banks may be,
the fact is that at present, those banks have mostly served as
intermediaries between the financial resources of Muslims and major
commercial banks in the West. In this context, this has been a one-
way relationship, so far. There is still no major Islamic bank that has
been able to develop ways and means of intermediating between
Western financial resources and the demand for them in Muslim
countries.
It also appears that individual Islamic banks face difficulties in fund
placement because they have had a major bias towards short-term,
secured, low-return but liquid investments. The challenge for these
institutions stems from motivational and technical factors.
Motivationally, their basic aim appears to have been that of
demonstrating the viability of Islamic banking without taking too many
risks. Admittedly, this is a noble and a very important objective,
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Islamic Banking Vs Conventional Banking
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Islamic Banking Vs Conventional Banking
In the wake of high Asian domestic savings rates and build up of the
region’s foreign exchange reserves as well as oil surpluses of Middle
East in the last few years, Islamic finance is now also emerging as a
way to wealth management, both of richer nations and high
net worth individuals.
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