ISLAMIC FINANCIAL INSTITUTIONS

Islamic Financial Institutions



Islamic Financial Institutions

Introduction

The research study is based on the Islamic banking and finance that takes into account the special issues with regard to the Islamic banking in the banking industry of the whole world. Different issues have been highlighted by the workers of the conventional banks that have been faced by them while operating within the Islamic banking system. The most prominent issue of the Islamic bank is the difference between the conventional and non conventional banking system that is still not clear to most of the banking officials. The Islamic banking system is based on new and different principles whose primary concern is the interest free banking system. The banking industry of the United Kingdom and other countries has started operating according to the principles of the Islamic banking system. The principles of the Islamic banking system are completely different from the conventional banking system among which the main difference is the profit loss sharing. The concept of profit loss sharing is introduced by the Islamic banking system. The sharing of profit and loss is one of the crucial topics of the Islamic banking system (Abdulmalik, 2006, Pp. 123).

Existence of the Islamic Banks

The beginnings of banking are found in ancient times, even before the invention of money, when religious places like temples were used to store commodities (Hildreth, 2001). Banking can be traced in later times to medieval and early Renaissance Italy. Banks first appeared in the cities of Florence, Venice, and Genoa. The first signs of an Islamic banking system appeared in the early 1970s. The Dubai Islamic Bank (DIB) in the United Arab Emirates was the first Islamic bank followed by the establishment of the International Islamic Development Bank (IDB) in Jeddah, Saudi Arabia. Thereafter, many private and semi-private commercial Islamic banks were created in Egypt, Sudan, Kuwait, and Bahrain after 2005 (Iqbal & Molyneux, 2005).

According to Santos (2000), a banking system is an intermediate financial institution for borrowers and savers. The Western banks generate profit through the spread between the interest rate depositors receive, the interest charged for loans, and fees on different products that banks offer to their customers (Santos, 2000). For example, a bank might give its depositors 2% on savings while charging borrowers 6% on loans. Western banks in this case make a profit of 4% after paying their depositors (Abdul, 1999, Pp. 90).

Islamic Banks

Islamic banks serve the same intermediary function but do not receive a pre-established rate from borrowers, nor do they pay a pre-agreed-upon rate of interest to the depositors. The amount of profits in this banking system is based on profit-sharing arrangements with both depositors and borrowers. Furthermore, the banks offer fee-based banking services that are similar to those of Western banks (Adam, 2004, Pp. 154).

Difference between Islamic and Conventional Banking Systems

The main difference between Islamic banks and Western banks is that Islamic banks avoid pre-established interest payments in all transactions. The Islamic banking system is a different type of banking since ...