Islamic Banking System Term Paper
Accomplishments of the Islamic Banking System
The banking industry serves as the key enabler of businesses in various countries. As a result, the majority of entrepreneurs seek funds to boost their business on a daily basis. However, the existence of numerous bottlenecks hinders their loan applications, especially if they do not have verifiable financial statements. Fortunately, Islamic Banking is open to all types of clients, which has made them accomplish extensive objectives compared to conventional financial service providers. According to Djebbar (2012), the Islamic Financial Markets (IFMs) have been recording exponential growth of approximately 10 to 15 percent yearly. Besides, they have increased their presence to more countries by opening extra branches. Their success is based on their banking principles, including the eradication of interest (riba), asset backing, ethical investments, observance to profit-and-loss sharing (PLS), and gharar (uncertainty) among others. The financial entity boasts of several accomplishments. For instance, their financial modes, particularly the PLS, have inspired development since they avail funds demanded in all sectors, including long, medium, and short-term projects. Moreover, the bank is currently available in many countries, including the non-Islamic ones, which has raised its customer base. Largely, the Islamic banking system has managed to offer friendly services to its customers, while at the same time ensure profitability. In order to understand clearly the various aspects that differentiate the Islamic Financial Institutions from conventional banks, it is important to highlight comparators between the two.
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Comparison between Banking Systems
To start with, Islamic banks are against Riba (interest). In contrast, conventional financial institutions give their clients total freedom regarding their money. Therefore, the latter allows people to have cash lying idly in their accounts, with an objective of earning revenues in the form of accrued interest. On the hand, the Muslims prohibit that type of behavior. As reported by Abdelrahman (2015), instead of customers being encouraged to save in order to earn interest, their savings are used in projects whose proceeds undergo what is called Islamic Profit/Loss sharing scheme, which give the banks authority to direct the cash towards economic activities meant to ensure productivity. Overall, their system discourages savings and terms it as hoarding. Instead of letting the money stay idle, they teach their customers that it is significant and more beneficial to utilize such resources in rational and productive purposes.
In the case of other banks, most customers adopt saving as a method of storing money since they lack information and knowledge concerning the avenues available for investment. Further, entering into a venture as an individual exposes them to conmanship, swindlers, and crooks. Thus, the majority of them opt to leave their money at their bank accounts. Contrastingly, Islamic banks are powerful establishments, capable of evaluating a potential investment before committing money to it. Hence, they are less vulnerable to fraudulent activities. In case such investments create profit or loss, customers receive their share. The norm minimizes the possibility of suffering immeasurable losses. Evidently, Islamic banks, unlike conventional ones, are far ahead in terms of strategizing. The fact that they do not entertain individualism makes them formidable organizations insusceptible to destruction.
Role of Islamic Banks in Avoiding Financial Crisis
Financial crisis happens once the prices of assets suffer a sharp decline, businesses make losses, and people with debt are unable to finance it. Besides, banking entities experience shortages of liquid cash, meaning they are not in a position to lend customers more money. Eventually, the economy enters a standstill position. Investors panic and start selling their assets in fear of entirely losing them. At the same time, they withdraw their savings to prevent the devaluation of the currency. Fortunately, it is possible to avert similar circumstances by embracing the Islamic Financial Institution model. Under the conventional system, it is certain for investors to receive annual interests from their savings. If that does not happen, they experience severe losses solely. By comparison, one of the core elements of Islamic banking is risk sharing. Considering the world is full of uncertainty when the expected returns are negative, the impact felt by an individual is minimal. Thus, the risk levels, which might drive sole investors into panic status when the economy is performing badly, drop drastically. Hence, with Islamic banking, it is almost impossible to feel the impact of a financial crisis since the economy is not dependent on a few wealthy persons.
In conclusion, the practice of Islamic finance and banking started several years ago. Although initially, the establishments existed in Muslim-based countries only, they have recently expanded, opening branches even in nations containing less percentage of people practicing their religion. Consequently, the bank has opened its doors to all types of businesses, even the ones that could not access funding from conventional banks. Due to their friendly terms, Islamic banks have managed to accomplish various objectives, including empowerment of people, ethical management of investments, and sharing of profits and losses. As a result, the entity, and its customer base remains immune to the financial crisis. Therefore, it would be essential if the world learns from such practices, eliminate individualism, and encourage togetherness, in order to avert possible economic disasters.
Abdelrahman, A. (2015). Does Islamic banking help in economic development of Muslim countries? Munich Personal Repec Archive, 6(2), 1-33.
Djebbar, M. (2012). Islamic Financial Markets: Achievements, prospects, and challenges. Management Sciences, Sétif University, Algeria, 393-423.