Why Islamic Banking Is Superior To Western Banking And Their Comparisons Finance Essay

Banks are really popular fiscal establishments, they are considered the biggest entities which provide loans to persons and concerns, Bankss besides provide loans to authoritiess which run states. Banks can be found in every state. Normally every bank in a state works under the regulations of cardinal bank of every state.

There is no uncertainty about this fact that function of banking sector is really of import for growing of any economic system around the Earth. Banks are such establishments which provide chance to entities to lodge their money in there on some benefits like involvement and loan out that money to different entities ( persons or concern ) etc. Basically Bankss receive money in signifier of sedimentations from one entity and give that in signifier of loans to other entity, and during that procedure the bank makes certain that every including party must acquire some benefits including itself. There are two sorts of Bankss, one is called conventional bank whereas other one is called Islamic bank, conventional banking which is besides known as western banking is really popular around the Earth while the Islamic banking is now demoing a greatest advancement in its enlargement particularly after the recent recession. The major difference between Islamic banking and western banking is involvement, involvement is non allowed at all in Islamic banking, while western banking can non work without involvement.

1.2 Rationales for the Study

An Islamic bank can be defined as a fiscal organisation that has capableness of placing itself with the regulations of Shariah, as it has mentioned in the Holy Quran ( Humid & A ; Jalal, 2005 ) . In general from the point of position of Islamic banking it means a banking architecture where involvement is non allowed at any status, where as the definition of conventional banking does non finish without involvement. To replace involvement, the perfect reproduction provided by Islamic for the intent of funding under the Golden regulations of Islamic funding is “ Financing on Profit & A ; Loss Sharing ” , it is besides known as ( PLS ) footing. Cipher can deny this fact that in present conventional banking system, the both borrowers and loaners are being exploited ( Trigg & A ; Luke, 2009 ) . In conventional banking system involvement is normally paid by borrowers on borrowed money, we can besides state that involvement on debt. In last twosome of decennaries debt is considered one of the best ways of supplying funding. Harmonizing to ( Wigglesworth, 2008 ) it is besides a rough fact that debt plays an of import function on spread outing of an economic system, one the other side it besides creates endogenous ricketiness and fiscal tenderness. ( Humid & A ; Jalal, 2005 ) described the strategy of endogenous ricketiness and fiscal breakability. That is, in the beginning when the debt equity ratio of a concern is non really high, the concern really pays for financing enlargement by borrowed financess. In that stage, outlooks of both involved parties, i.e. , borrower and lender are more frequently than non satisfied, that supplies the footing for traveling farther deep in debt. So, in that instance it has been seen that demand for borrowed financess rises really rapidly than the capableness of paying. Normally in conventional banking system one thing has been noticed in about every instance, the Bankss in western banking do non believe much about the security of the borrowers, Bankss normally are interested in publishing loan at higher involvement rate, and if concern of adoption does non de good so Bankss urge them to borrow more at difficult footings and conditions, normally in such instances loans are secured against any fixed assets, if the concern floating-point operations, the bank merely take over the plus and sells the assets in order to retrieve their capital and involvement sum. It is besides one of the major drawbacks of western banking system.

1.3 Research aim

From the footing provided in upper paragraphs, it is now obvious that it is indispensable that appropriate concentration should be given to the viability of Islamic banking every bit compared to western banking system while concentrating on the job statement of this research work, the research worker designed following research aim:

“ Why Islamic banking is superior to western banking and how Muslim banking is different from western banking ”

1.4 Research inquiries:

Concentrating on the research object job this research wove, this thesis would reply the undermentioned inquiries:

What is Muslim banking construction with regard to its regulations and tools?

How Muslim banking architecture is poles apart from western banking system?

What types of benefits is associated with Islamic banking system, and what is the hereafter of Islamic banking?

Why Islamic banking system has been accepted more feasible than western banking system?

1.5 Why the survey is of import

The research worker is seeking to happen out why Islamic banking is superior than western banking, there is no uncertainty that most of the universe is enduring through difficult economic clip, many concern ( little, medium and little ) have closed down, and besides a batch of Bankss which follow conventional banking have closed down every bit good due the recession all over the universe, one of the illustrations is shuting down of Lehman brothers, which is considered one if the most powerful and rich Bankss around the Earth, a batch of concerns which were linked to that Bankss besides collapsed down, but interesting to detect barely any Muslim Bankss became close down in the recession, because Islamic banking does non follow involvement scheme. A batch of western Bankss have started supplying Islamic banking services in America and China, and besides some of so supplying Islamic banking merchandises every bit good. The Islamic banking is spread outing at a really high rate around the Earth ; harmonizing to ( Humid & A ; Jalal, 2005 ) Islamic banking is doing advancement at the rate of 19 per centum per twelvemonth. A batch of Islamic Bankss have opened new subdivisions in several non Muslim states, and a several fiscal experts in America and Europe are agreed that the solution of current fiscal crisis is merely implementing of Islamic banking. Harmonizing to ( Trigg & A ; Luke, 2009 ) Russia and Chinas are earnestly believing of conveying back gilded criterion and a joint currency in both states.

The research worker would make his best in researching following points in this research work,

To demo up most of import features of Islamic banking system.

To compare Islamic banking system with western banking system.

To look into whether Islamic banking is at least every bit practical as western banking system on economic evidences.

To retroflex future positions of Islamic banking architecture, if people are made cognizant of the difference between Islamic banking system and western banking system.

The Islamic is presently available in about in every Muslim and non-Muslim state, Iran and Sudan are such states where banking system is 90 nine per centum is on Islamic regulations, the current recession could non coerce even one bank to be closed down More and more universities and colleges have started offering instruction on Islamic banking, many universities in America and Japan are offering Masterss grades in Islamic banking and finance, employees of many Islamic Bankss are being offered good occupation and wages from many western Bankss, because most of the western Bankss have understood that Islamic banking system is much stronger and powerful as compared to western banking system. Many Bankss in Germany started supplying Islamic banking merchandise and services in 2008, after the recession ( Trigg & A ; Simon 2009 ) .

Literature reappraisal

2.1 What is Bank? ( Fredric Mishkin )

Bank can be described as an establishment, which has capableness of covering with money ( Wright & A ; Yuniar, 2007 ) . The bank has capableness of pulling the excess money from the people ; Bankss pay involvement to entities which deposit their money at that place.

One of the basic intents of Bankss is to supply loans to persons or concern, loan taking entities have to pay involvement on that loan set in an understanding between bank and loan taking entity.

2.2 What are Muslim Banks ( RIIC by Prof. Khursheed )

Harmonizing to ( Humid & A ; Jalal, 2005 ) such fiscal or other types of establishments which completes prohibits involvements and run under sharia law Torahs are known as Muslim Bankss. Harmonizing to ( Wright & A ; Yuniar, 2007 ) Islamic Bankss have to do certain that money is invested in operable undertakings, and besides do certain that borrowers are trusty. In instance of net incomes bring forthing, the bank portions profit harmonizing to a fixed per centum which is usually set at the clip of doing contract, and if the contract got failed so bank have to endure. Harmonizing to ( Israr & A ; Zamin 2004 ) wealth of oil played a really of import function in assemblage of foreign capital in Arab states, so most of the Arab thought about creative activity of Islamic fiscal establishments which must be strictly based on Islamic fiscal Torahs, so Muslim states showed a rapid growing in creative activity and enlargement of Islamic banking sector all over the universe particularly in Arab side, Malaysia, Pakistan, Iran and Indonesia. Harmonizing to ( Wright & A ; Yuniar, 2007 ) there are more than twenty nine different Islamic Bankss are working in Arab side and gulf country and they have a several subdivisions in that country and about in more than 100 states.

2.3 Knowledge about Islamic Bank

A research work was carried out in Indonesia and Malaysia in 2008 revealed that about every individual Muslim is cognizant of handiness of Islamic banking and that is because of fast advancement in telecasting, wirelesss and particularly electronic media, though it can besides be said that joint civilization in Muslim states around the Earth have been playing an of import function in enlargement of Islamic banking ( Trigg & A ; Luke, 2009 ) . Mediums of communications played their function in popularity of Islamic banking. Harmonizing to ( Hastings & A ; Garrot, 2007 Hastings & A ; Garrot, 2007 ) around 80 per centum non-Muslim population in Indonesia and Malaysia is cognizant of Islamic banking, and same mediums of communications played their function in popularity of Islamic banking. Harmonizing to ( Wigglesworth, 2008 ) Islamic banking was foremost implemented in Malaysia in 1973, since so a concatenation of Islamic Bankss started which spread all over the universe.

2.4 Principle of Islamic Banking

Harmonizing to ( Wigglesworth,2008 ) the Islamic banking religions stop Muslim from such traffics which that include vigorish or involvement ( Reba ) , there is no uncertainty that Muslims require banking services like any other individual on this Earth planing machine. Muslims besides need Bankss for opening a bank history, for taking loans from Bankss for house, concern and sometimes for vehicles etc. But depositors of money in Islamic are non acquire paid any involvement on the money but they have to put that in different undertaking after their preparedness with the individual other entities. Harmonizing to ( Asad & A ; Saif, 2001 ) foremost Islamic banking was revealed on Muhammad ( P.B.U.H ) through Angle Jibrael. Harmonizing to ( Hastings & A ; Garrot, 2007 ) it was thought by western bookmans execution of Islamic banking is non practically possible, though, in this fast moving universe, about more than 1400 old ages after the Prophet ( P.B.U.H ) Muslims managed to demo that execution of Islamic banking is rather possible, nowadays a immense a international web of Islamic establishments and several other types of establishments are supplying Islamic banking services and merchandises in several parts of the universe.

Harmonizing to ( Wigglesworth, 2008 ) worth of Islamic assets is more than 3 millions and it is operation in more than 103 states around the Earth. One of the most celebrated and best known feature of Islamic banking is the prohibition on involvement. The rules of Islamic banking are really easy, clear and rather implementable, some of the most common regulations are given here.

2.7 The cardinal countries of difference between Money and Commodity

Money has no built-in value. It is non allowed to use in direct achievement of human demands. It has a house set objective which is it merely has capableness to be used for obtaining some types of goods or services. While a trade good, conversely, got built-in value and could be used in a consecutive line without interchanging it for some other thing. It is indispensable to maintain in head that Commodity can hold dissimilar excellence at the same clip as money got no excellence except that it is a step of value or a medium of exchange. In instance of trade good, the concern trades about sale and purchase normally influenced on a recognized exacting trade good. For illustration if x has bought a specific vehicles like auto by pin-pointing it, and marketer is besides has the same sentiment, so he deserves to take bringing of the indistinguishable auto. In that instance marketer has no right to coerce him to take the bringing of a different auto, despite the fact that of the same type or quality.

2.6 Concerns with Financial Steadiness

There is no uncertainty in this fact that Islamic banking and finance has become highly indispensable for the steadiness of the international fiscal construction. Harmonizing to ( Kareem & A ; Delfi, 2009 ) fiscal solidness is an of import status for continued economic expansion and societal betterment. Harmonizing to ( Adeel,2003 ) some bad experiences of last twosome of decennaries clearly reveal that economic growing attained over a figure of old ages could be extensively turn around during a really little period of clip. Harmonizing to ( Jogan & A ; Nisarr,2000 ) because of conventional banking system, the planetary banking architecture has to confront a recession at least one time in every 12 old ages, which pushes back the wheel of growing of banking system. Harmonizing to Israr & A ; Zamin,2004several economic crisis forced the planetary fiscal sector present new fiscal architecture, which must be strong plenty against economic crisis and must vouch valuable ordinance and disposal, improved corporate administration, hazard direction and improved transparence so that the economic recessions could be stopped from taking topographic point. Harmonizing to ( Wright & A ; Yuniar,2007 ) many western banking experts gave their suggestions in favour of Islamic banking and forced to implement it or at least up to an extent, harmonizing to them there are many advantages in presenting Islamic banking in western banking system, some of the most utile advantages are investing sedimentations of Islamic banking sector are based on hazard sharing, and besides any extension in funding by an Islamic bank is secured against any assets, like land or edifice etc, these are the two most important grounds which would play their function in halting fiscal crisis taking topographic point. Harmonizing to ( Razzaq & A ; James,2007 ) some Muslim provinces in Arab and some states in Asia made glorious alterations in Islamic banking under Shariah Board and several western Bankss which are runing their rich person started supplying Islamic banking services and even some of them are besides provided Islamic banking under merchandise under same roof.

Harmonizing to ( Wood, 2007 ) Iran is one of such states around the Earth where banking sector is 97 per centum is Islamic, and in current fiscal crisis Hardy any fiscal establishments became closed down.


In this portion of thesis a research worker has to advert what research methods he or she would utilize for assemblage of informations, this portion of the research is considered really of import, because research workers do analysis on base of the informations gathered in this subdivision of a thesis. That ‘s it is really of import to give particular attending on this chapter, and besides a research worker must take into history the advantages and disadvantages of research methods he or she is traveling to utilize for assemblage of informations. Normally qualitative and quantitative research methods are used for roll uping of informations in a research work.

3.1 Quantitative or Qualitative

Normally qualitative and quantitative research methods are used for assemblage of informations in a research work ; it is besides possible that in some research works both qualitative and quantitative research methods are used for assemblage of informations.

The research worker is cognizant of the advantages and disadvantages of both types of informations. And it is besides indispensable to take right type research attack for assemblage of informations. In instance of qualitative research methods, different methods of informations aggregation are available like face to confront interviews and sound or picture interviews. In that instance it is indispensable to maintain in head what kinds of advantages are associated with every method. In instance of face to confront interviews, a research worker has chance to bring forth inquiry at the clip of interview and he or she can inquire that inquiries at the clip of transporting out the interview, and besides the face to confront interviews supply the chance of taking into history the facial looks of interviewees, whereas in instance of audio interview these installations are non available. In the research work, the research worker would utilize face to semi structured interviews for roll uping of informations which would be used in analysis portion.

In instance of measures inter methods, a research worker might take study m questionnaires or structured methods for roll uping of informations. The quantitative method of informations aggregation is easier as compared to qualitative method, as in the qualitative method a research worker has to book an assignment, he or she has to see an entity, whereas in instance of quantitative research worker attack even emails can be used for assemblage of informations, merely email questionnaires to interviewees, or merely send list of questionnaires to the interviewees and they would merely make full in the signifier and so they would return those signifiers to the research worker. Normally qualitative research methods are used when a research worker is interested in depth understanding about an issue or job, while qualitative research methods are used when a reercher is interested in happening out exact relationship between two or more than two variables,

In this research work the research worker would utilize qualitative research methods for assemblage of informations.

3.2 Primary and Secondary Data

In this research work, the research worker would both primary and secondary informations for analysis between Islamic and western banking. The research worker would travel through literature ; he would utilize books, web sites, studies, articles and one-year statements issued by different Islamic Bankss for assemblage of secondary informations. For the aggregation of primary informations the research worker would take at least two Muslim Bankss and two conventional Bankss, and face to confront interviews with the staff of the Bankss would be conducted for assemblage of informations.

3.3 Ethical angle

The research worker would non disregard ethical angle in the research work at all. The research worker would utilize Islamic and conventional Bankss for assemblage of informations, and he would do certain that the name of participants in the interviews would non look anyplace in the research work, and besides the research worker would include any inquiry in interview which could coerce the participants to reply specific inquiries, and besides the research worker would do certain to include proper citing in the research work as he is cognizant of the right of first publications issues etc. The research worker is cognizant that Bankss normally do non give their comparatively confidential informations to every individual entity, for acquiring the deepness information from the direction of Bankss, the research worker would give each bank a signed understanding, which would bespeak that the chief intent of the information which would be gained through interviews would be the analysis, and the research worker would non reassign that informations to any other entity. The research worker knows that it is easy to state but hard to make, as the Bankss do non truly swear every one.