Islamic banking vs.
conventional banking
In the global financial system, banking plays a pivotal role in economic
development and stability. Traditionally, baslamic Banking and Finance
Definition: History and Example // Investopedia URL:
https://www.investopedia.com/terms/i/islamicbanking.asp (дата обращения:
06.06.2024).
2. What Is Islamic Finance And How Does It Work? // Global
Finance URL:
https://gfmag.com/features/islamic-finance-faq-what-islamic-finance-and-how-d
oes-it-work/ (дата обращения: 06.06.2024).
3. Differences between conventional banks and Islamic banks //
Research Gate URL:
https://www.researchgate.net/figure/Differences-between-conventional-banks-a
nd-Islamic-banks_tbl2_304810961 (дата обращения: 06.06.2024).
4. Understanding Islamic Banking // Al Hilal Bank URL:
https://www.alhilalbank.ae/en/tools-resources/islamic-vs-conventional-banking/
(дата обращения: 06.06.2024).
5. L. Cerović, S. Suljić Nikolaj, D. Maradin COMPARATIVE
ANALYSIS OF CONVENTIONAL AND ISLAMIC BANKING:
IMPORTANCE OF MARKET REGULATION // EKON. MISAO I PRAKSA
DBK. - 2017. - №26. - С. 241-263.
nking has been dominated by the conventional banking system, which
operates on interest-based transactions and profit maximization. However, in
recent decades, Islamic banking has emerged as a significant alternative,
offering a distinct approach rooted in Shariah principles. This essay explores the
fundamental differences between Islamic banking and conventional banking,
their respective benefits and challenges, and their impact on the global financial
landscape.
Conventional banking has its roots in ancient civilizations, evolving
significantly during the Renaissance and the Industrial Revolution. The system
is based on the principles of interest (riba), risk transfer, and profit
maximization. Conventional banks act as intermediaries between depositors and
borrowers, earning profits primarily through interest on loans and other
financial products. They provide a wide range of services including savings
accounts, loans, credit cards, and investment products.
Islamic banking, on the other hand, is grounded in the principles of
Islamic law (Shariah), which prohibits interest (riba), excessive uncertainty
(gharar), and speculative behavior (maysir). The foundation of Islamic banking
lies in promoting social justice, ethical investing, and equitable distribution of
wealth. Key concepts include profit and loss sharing (PLS), asset-backed
financing, and the prohibition of investments in haram (forbidden) industries
such as alcohol, gambling, and pork products.
The most notable difference between conventional and Islamic banking
is the treatment of interest. Conventional banks charge interest on loans,
generating profit through the difference between interest paid to depositors and
interest received from borrowers. Islamic banks, however, operate on a profit
and loss sharing model. Financing methods such as Mudarabah (profit-sharing)
and Musharakah (joint venture) align the interests of the bank and its clients,
promoting risk-sharing and partnership.
Conventional banks transfer risk to borrowers through fixed interest
rates and predetermined repayment schedules. Islamic banks, by contrast,
engage in risk-sharing arrangements where both the bank and the client share
the risks and rewards of the investment. This is evident in modes like Ijarah
(leasing) and Murabaha (cost-plus financing), where the bank takes ownership
of the asset and bears the associated risks until it is fully paid off by the client.
Islamic banking emphasizes ethical investing and social responsibility.
Investments must comply with Shariah principles, which means funds cannot be
allocated to industries or activities considered harmful or unethical.
Conventional banks, while increasingly incorporating corporate social
responsibility (CSR) practices, do not have such stringent ethical constraints on
their investments.
Both banking systems offer deposit accounts, but with different
structures. Conventional savings accounts pay interest to depositors, whereas
Islamic savings accounts offer profit-sharing arrangements. For example, in a
Mudarabah savings account, depositors act as investors, sharing in the profits
generated by the bank's investment activities.
Conventional banks provide various types of loans, including personal,
auto, and mortgage loans, with interest charged on the principal amount. Islamic
banks offer Shariah-compliant alternatives such as Murabaha, a cost-plus
financing agreement where the bank buys an asset and sells it to the customer at
a marked-up price, allowing payment in installments. Ijarah is a leasing
arrangement where the bank buys an asset and leases it to the customer for a
fixed rental fee. Musharakah is a joint venture where the bank and the customer
contribute capital to a project and share the profits and losses according to
pre-agreed ratios.
Conventional banks provide various investment products including
mutual funds, stocks, and bonds. Islamic banks offer similar products but ensure
they comply with Shariah principles. For example, Sukuk (Islamic bonds) are
asset-backed securities that generate returns without interest, instead providing
profit-sharing from the underlying assets.
Islamic banking promotes investments in socially responsible and
ethical sectors, enhancing the overall well-being of society. It encourages
equitable distribution of risk and rewards, fostering a more stable financial
system. Additionally, it attracts clients who seek Shariah-compliant financial
services, expanding the customer base and promoting financial inclusion.
However, Islamic banking requires a robust regulatory framework to ensure
compliance with Shariah principles, which can vary between jurisdictions.
There is also limited awareness and understanding of Islamic banking principles
among potential clients and even within the banking sector itself. Moreover, the
lack of standardization in Islamic financial products and services can lead to
inconsistencies and complexities in implementation.
Conventional banking is well-established and widely accepted globally,
providing a broad range of financial services. It offers high liquidity and
flexibility in financial transactions, making it easier for clients to access funds.
The continual innovation in financial products and services, driven by
competition and technological advancements, is another strength. However,
investments in industries such as gambling, alcohol, and weapons raise ethical
concerns among socially conscious investors. The interest-based lending can
lead to risk concentration and financial instability during economic downturns.
Furthermore, the emphasis on profit maximization can sometimes overshadow
social and ethical considerations.
Islamic banking has grown significantly over the past few decades, with
assets estimated to exceed $2 trillion globally. Countries like Malaysia, Saudi
Arabia, and the United Arab Emirates have become major hubs for Islamic
finance, attracting both Muslim and non-Muslim clients seeking ethical
financial solutions. The expansion of Islamic banking has also prompted
conventional banks to adopt more socially responsible and ethical investment
practices.
Conversely, conventional banking remains dominant, particularly in
Western economies. The global financial crisis of 2008 highlighted the
vulnerabilities of the conventional banking system, leading to increased scrutiny
and calls for reform. In response, there has been a gradual shift towards
incorporating more ethical and sustainable banking practices, influenced partly
by the principles underlying Islamic finance.
Islamic banking and conventional banking represent two distinct
approaches to financial intermediation, each with its own set of principles,
benefits, and challenges. While conventional banking continues to dominate the
global financial landscape, Islamic banking offers a viable alternative for those
seeking ethical and Shariah-compliant financial services. The growing interest
in socially responsible investing and ethical finance suggests that the principles
of Islamic banking could increasingly influence the future direction of global
finance. Both systems have much to learn from each other, and their coexistence
can contribute to a more diversified and resilient financial ecosystem.
