The Hundred Differences between Islamic and Conventional Banking Systems

Transcription

1. International Journal of Scientific Research and Management (IJSRM) ||Volume||5||Issue||09||Pages||7093-7106||2017|| Website: www.ijsrm.in ISSN (e): 2321-3418 Index Copernicus value (2015): 57.47 DOI: 10.18535/ijsrm/v5i9.19 The Hundred Differences between Islamic and Conventional Banking Systems S Nayamath Basha Assistant Professor, Department of Commerce and Management Dr. Abdul Haq Urdu University, Kurnool, Andhra Pradesh, India – 518 001. Abstract Islamic Banking is a catchphrase now to many of the policy makers in the globe. Neither receipt nor payment of interest in this system questions its survival. Astoundingly, it has proved itself as a more effective system than currently practiced interest based banking system. However, the recent global economic crisis has impacted financial performance of many banks all over the world. It has forced around 123 banks in the U.S. to file for bankruptcy in just a year, including American giant bank Lehman Brothers that was never been expected to fail. Fascinatingly, even in such turmoil Islamic banks are found to be relatively less affected by the crisis than their conventional peers (S E Hidayat et al, 2012). Consequently, a lot of interest is shown by the economists across the world in assessing its feasibility in adapting in main stream economy. In this context, an attempt is made in this paper to understand the differences between Islamic and conventional banking systems in practices and their impact on economic variables such as inflation, full employment, exports, business cycles etc. Key Words: Islamic Banking, Conventional Banking, Differences, Impact Introduction Islamic Banking though has origin from the era of Prophet Mohammad (Peace Be Up on Him), evolved as a formal banking system since 1970s. In its journey of over 40 years, it has spread to over 90 countries worldwide about 40% of which are non-Muslim countries. Islamic Financial Services Industry Stability Report (2015) has reported that Islamic Finance Industry’s assets are evidenced double-digit compound annual growth rate (CAGR) of 17% between 2009 and 2013 and are estimated to be worth USD1.87 trillion as at 1st Half 2014, having grown from USD1.79 trillion as at end-2013. Apart from Arab countries, modern, secular and industrialized countries like Britain, Singapore, Japan and Hong Kong have become hub for Islamic Banking and Finance. (H. Abdul Rakeeb, 2010) HSBC, Citi Bank etc. have started separate branches that offer Islamic financial products. (CA Ashutosh Verma, 2008) Proponents of Islamic Banking argue that it is superior to conventional banking system in achieving socio economic objectives of the society. MS Swaminathan, the father of Green Revolution in India, speaking at Karuna Ratna award presentation function, “The exorbitant lending rates charged by money lenders in Vidarbha had created a vicious cycle of debt and suicide in the region. “Even yesterday we heard news about 30 farmers who committed suicide in Vidarbha. Islamic banking, which propagates zero interest lending, could hold the key to solving this crisis.”(H. Abdul Rakeeb, 2010) Saleh Al Tayar, Secretary General, FACC commented; „If global banking practices were based on Islamic practices then we wouldn't be seeing the kind of crisis we are living through now. The $ 4.9 billion hit taken by Societe Generale SA from what it calls unauthorized trading by Jerome Kerviel couldn't have happened in an Islamic institution‟. (M M T Usmani, 2009) Islamic Banking – Concept and Principles Islamic Banking can be described as a system of banking that adheres to the principles of Sharia i.e. The Islamic Law. (Mohammad Badi et al, S Nayamath Basha, IJSRM Volume 05 Issue 09 September 2017 [www.ijsrm.in] Page 7093
2. DOI : 10.18535/ijsrm/v5i9.19 2008) In other words, it can be viewed as a  Disclosure Principle: All the parties are financial system which identifies itself with the treated as partners in the business. Hence spirit of Sharia (The Islamic Law), as laid down they must be adequately informed on all by the Holy Qur'an and Sunnah (the practices of the financial dealings i.e. there will be full Prophet Mohammed (Peace Be Upon Him)), as disclosure of information on all the aspects regards its objectives, principles, practices and of the business to all the concerned parties. operations. (Dr. Shahid Hasan Siddiqui, 2008) (H. Abdul Rakeeb, 2010) Islamic Banking is based on the following principles regarding its operations. Differences Between Islamic And Conventional  Prohibition of receipt and payment of Banking Systems interest (H. Abdul Rakeeb, 2010) Islamic banking is not strange to business world as it is perceived by certain quarters. It is a  Emphasis is on profit and loss sharing (H. banking system very much like conventional Abdul Rakeeb, 2010) banking within certain restrictions imposed by  Prohibition of Qimar (gambling), Iktinaz Islamic law. At the same time, Islamic banking is (hoarding), Ihtikar (monopoly), Israf not a mere copy of conventional banks. It has its (extravagance), Fasad (corruption), own way of doing business and all operations are Mujazafah (speculation), Ghish duly certified by Sharia experts Islamic Fiqh (deception), Tadlees (fraud), Kathib Academy (IFA). Portfolios of IFIs are dominated (lying) etc. (Dr. Abdelkader Chachi, 2013) by Sharia compliant modes of financing. There  Prohibition of contracts involving Gharar exists a plethora of differences in the practices of (excessive risk). (Dr. Abdelkader Chachi, Islamic and conventional banking systems and 2013) thus have different impacts on the economy. The  Prohibition of financing socially major differences between these banking systems detrimental projects that deals with Khamr are tabulated below under the following heads. (intoxicants), Khinzir (Pork), and all A. Differences in the Assumptions (S. No. 1 – unethical dealings such as prostitution, stealing etc(Dr. Abdelkader Chachi, 2013) 21)  Prohibition on selling what is not owned B. Differences in the Operations (S. No. 22 – or possessed. (Dr. Abdelkader Chachi, 2013) 74)  Prohibition on selling fruits before they are B.1. Acceptance of Deposits (S. No. 22 ripe(Dr. Abdelkader Chachi, 2013)  Prohibition on selling debts (Dr. – 35) Abdelkader Chachi, 2013) B.2. Financing (S. No. 36 – 64)  Asset Backing Principle: It is required that financial transactions should be unpinned B.3. Investments (S. No. 65 – 74) by an identifiable and tangible underlying C. Differences in the Impacts of the Banking asset. (H. Abdul Rakeeb, 2010) It means financial transactions must be Systems on Economy (S. No. 75 – 10 accompanied by an underlying productive economic activity that generates legitimate wealth. (Dr. Zeti Akhtar Aziz, 2010) Table – 1: Differences between Conventional and Islamic Banking System S. No. Characteristic Feature Conventional Banking Islamic Banking A. Differences in the Assumptions ( 1 – 21) 1. Origin Man made laws (with trial Almighty made laws (who is (Dr. Md Alwosabi, 2013) and error method) the creator of the man and hence his laws are more wise than manmade laws) 2. Laws followed Government Laws Government Laws prevailing (M A Majid et al, 2008) prevailing in the country in the country + Sharia (The S Nayamath Basha, IJSRM Volume 05 Issue 09 September 2017 [www.ijsrm.in] Page 7094
3. DOI : 10.18535/ijsrm/v5i9.19 S. No. Characteristic Feature Conventional Banking 3. Can they finance all the businesses or not? Objective is to fulfill (Iqbal Khan, 2009) Wealth creation approach (Dr. Md Alwosabi, 2013) Yes, provided they are legal in the country. economic needs of the society Economic methods of wealth creation but ignores social, ethical and moral methods of wealth creation. Profit Maximization Type (M Abu Bakar, 2010) Approach in financing social value destroying businesses like gambling, alcohol, casinos etc. Handling of ZAKAT (A tax that a Muslim rich has to pay to the poor) (M A Majid et al, 2008) Accounting Standards followed (Dr. Md Alwosabi, 2013) It aims at unrestricted profit maximization. 4. 5. 6. 7. 8. 9. Financed as the criterion for financing the project is the profitability. Do not collect and pay any religious tax British, American and International Accounting Standards 10. Assumption about the Money is a store of value + nature of money medium of exchange + (Mabid Ali et al, 2013) product. Therefore, trading of money take is allowed. 11. Time value of money concept (M.A. Siddique, 2015). Type of assets involved in business transactions Receipt and Payment of interest (H. Abdur Rakeeb,2010 ) Banking operations revolve around (S Malhotra, 2010 ) Profit and Loss Sharing modes of finance are (Dr. Abdelkader, 2013) Contracts between Depositors – Banks (Dr. Abdelkader, 2013) Operations focus on (J Ahmed et al, 2011) Risk associated to 12. 13. 14. 15. 16. 17. 18. Adopted. Financial Assets Islamic Banking law of Islamic Religion) No, they must be legal as well as Sharia compliant. Socio - economic needs of the society Social, ethical and moral methods of wealth creation are first priority. Economic attractiveness of business is the next priority. It aims at profit maximization subject to Shariah restrictions Not financed (though profitable) as they are social value destroyers and harmful to mankind One of the functions of the Islamic Banks is to collect and distribute Zakat. Further, they pay their own Zakat. Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) formed in 1988 Money is both a store of value and a medium of exchange but not product. Hence, trading in money is prohibited. Ignored. But time value of commodity is considered. Real Assets Heart and soul of this Prohibition on receipt and system payment of interest in any form Lending money and getting Investing i.e. participation in it back with compound business activities interest Not allowed Allowed Debt contracts Equity as well as Debt contracts (without interest) Elimination of Risk Bearing Risk Deposits are risk free as the Deposits are exposed to risk S Nayamath Basha, IJSRM Volume 05 Issue 09 September 2017 [www.ijsrm.in] Page 7095
4. DOI : 10.18535/ijsrm/v5i9.19 S. No. Characteristic Feature deposits Conventional Banking Islamic Banking return is assured and to earn the return. In this predetermined process, if the loss is the result, it has to be shared. 19. Who bears the risk? Total risk is born by the Risk is shared with the bank depositors 20. Nature of Risk sharing Asymmetric distribution of Symmetric distribution of risk with bank carrying total risk among the all risk but the depositor is risk free. 21. Return sharing No returns sharing as total Profits and Losses of the risk is borne by the bank. banks are shared with the Only a fixed amount of depositors. interest is paid to the lender. B. Differences in the Operations ( 22 – 64) B.1. Acceptance of Deposits ( 22 – 35) 22. Way of mobilizing the Borrowing Coordination with partners deposits (Sarika Malhotra, 2010) 23. When collecting the Borrower of money for Agent on behalf of the deposits from the public, interest depositors to disburse the the bank acts as a (Dr. money to the users MIA Usmani, 2003) 24. Deposits are treated as Liability of the bank i.e. Quasi – equity but not debt (J Ahmed et al, 2011) debt due to profit and loss sharing type of agreement between the bank and depositors. 25. Whether all the banks are Yes. Because bank deposits No. Only those banks will be able to mobilize savings are guaranteed, all the banks able to collect deposits who or not? (Muhammad are able to get deposits can establish trust in the eyes Hanif, 2011) of masses 26. Whether Guarantee given Yes. Letter of Guarantee No. by the bank on behalf of and Shipping Guarantee are its customer is charged or charged. not? (Dr. MIA Usmani, 2003) 27. Assurance of Principal All the deposits i.e. Fixed Only deposit accounts which i.e. deposits with the Deposits, Savings and are based on al-wadiah bank (A Fizulayev, Current Accounts are principle are guaranteed. 2011) guaranteed. 28. Assurance of The investor is assured of a No such provision is Predetermined return i.e. predetermined rate of available. interest (Alimshan interest. Faizulayev, 2011) 29. Reward to depositors Interest Profit and loss sharing as per agreement 30. Nature of Return Fixed, predetermined and Variable, post determined (reward) to depositors positive. and may or may not be positive. 31. Basis for payment of Time value of money or profit or loss is the basis for interest capital rewarding. S Nayamath Basha, IJSRM Volume 05 Issue 09 September 2017 [www.ijsrm.in] Page 7096
5. DOI : 10.18535/ijsrm/v5i9.19 S. No. 32. 33. 34. Characteristic Feature Reward (interest / profit) is shared with the depositors or not? (Muhammad Hanif, 2011) Whether Fixed Deposits, Savings accounts and current accounts are allowed or not? (Dr. MIA Usmani, 2003) Whether the depositors know about what the bank does with their money or not? (J Ahmed et al, 2011) Conventional Banking Bank enjoys total reward as it has born total risk. However, interest is paid to the depositors as per the agreement. Allowed Islamic Banking Reward (Profit) is shared by the bank with its depositors as per the agreed ratio. Fixed deposits and Savings accounts are prohibited as they offer interest. But current accounts are allowed. Depositors are unaware of Islamic bank entitles its the bank’s investment and investment account holders liquidity management to be informed of what the activities. bank does with their money and, for some particular contracts, to have a say in where their money would be invested. 35. Importance given in Low. Since income from the More. Since it has to share developing project advances is fixed. the profit and loss. appraisal techniques (A Faizulayev, 2011) B.2. Financing (36 – 64) 36. When disbursing the Lender of money for Partner with the users of the collected deposits, the interest money bank acts as a (Dr. MIA Usmani, 2003) 37. Financing mode to the Interest oriented, and a fixed Based on risk and reward customers is or variable interest rate is sharing (M A Majid et al, 2008) charged for usage of money 38. Criteria for financing the  Economic criterion (ability  Economic as well as Social projects to repay) (Sarika Malhotra, welfare (not detrimental to 2010 ) the society)  More importance is given to  More importance is given to viability of the projects than credit-worthiness of the credit-worthiness of the clients than viability of the clients projects (Alimshan Faizulayev, 2011) 39. Contracts between Banks Debt contracts Equity as well as Debt – Users of Funds (without interest) contracts 40. Customer and Bank Debtor and Creditor Type of relationships are; Relationship Partner, (Dr. Md Alwosabi, 2013) Lesser - Lessee, Seller – Buyer, Creditor – Debtor, Principal – Agent. 41. Type of loans offered to Three types of loans. Only one type of loan is borrowers (Muhammad offered i.e. Qard-e-Hasna  Long-term loans Hanif, 2011) (Benevolent Loan).  Short- term Loans S Nayamath Basha, IJSRM Volume 05 Issue 09 September 2017 [www.ijsrm.in] Page 7097
6. DOI : 10.18535/ijsrm/v5i9.19 S. No. 42. Characteristic Feature  Interest is charged on the loans or not? the Conventional Banking Islamic Banking Overdrafts Yes. It is charged on all the No. Bank seeks share in the loans. profit earned but not interest on loans. Ambiguity about the type of Full disclosure of business the debtor is going information to do Doesn’t exist. But it is There exists genuine end– available through venture investor participation capital firms and investment banks, which may also participate in management. No monitoring by the Monitoring at each level and parties involved on all activities 43. Knowledge about business proposal 44. Participation of banks in business activities 45. Monitoring of the business activities of banks and customers Penalty on default Traditional banks normally (M A Majid et al, 2008) charge additional money (compound interest) in case of late payment Can’t charge penalties for their enrichment. They may however allow imposition of default or late-payment penalties to discourage late payments or defaults, which includes administrative costs on bank for processing and collecting the amount owed. 47. Treatment of penalty in Income to the bank It is prohibited to earn case of default income by this way hence it cannot be treated as income of bank. However, such amount is donated towards charity. 48. Loan rescheduling done at higher interest rate Prohibited. 49. If the project fails The loan is written off as it The management of the (Mabid Ali Al-Jarh et al, becomes non performing organization can be taken 2013) loan. over to hand over to a better management. B.2.1. Long Term Loans 50. What is given in the Cash is provided but not Asset is provided but not loan, cash or asset? asset. cash. B.2.2. Leasing 51. Who poses title of the Banks posses the title but Banks posses the title, thus asset? Who bears risk? risk is beard by customer. bear all ownership risks. 52. If asset is lost or Though the title is with the Though the customer is using destroyed (Muhammad bank, as the customer is it, as the title is with the Hanif, 2011) using it, he has to pay bank, bank will not claim remaining installments. further installments. 53. During the period of Yes No major repairs, rent can be demanded or not? (Muhammad Hanif, 2011) 46. S Nayamath Basha, IJSRM Volume 05 Issue 09 September 2017 [www.ijsrm.in] Page 7098
7. DOI : 10.18535/ijsrm/v5i9.19 S. No. 54. Characteristic Feature In case of default of rent, additional rent or penalty can be demanded or not? (Muhammad Hanif, 2011) B.2.3. Short Term Loans 55. What is given for meeting inventory requirements? Cash or asset? (Md Hanif, 2011) 56. While financing the projects, agreement to exchange goods or services is made or not? (Mabid Ali Al-Jarh et al, 2013) 57. Refinancing facility is available or not? (Muhammad Hanif, 2011) 58. For meeting day to day expenses Conventional Banking Islamic Banking Rent is demanded with Not demanded in most of the interest cases except a penalty (if stipulated in original contract of lease) Cash is given and interest is Asset is purchased by the charged. bank and then transferred to firm for a profit to meet its requirements. While disbursing cash The execution of agreements finance, running finance or for the exchange of goods & working capital finance, no services is must, while agreement for exchange of disbursing funds under goods & services is made. Murabaha, Salam & Istisna contracts. Yes No Cash is given and interest is Participation Term charged Certificates are issued where by profit of a certain period (e.g. quarter, six month, one year) is shared by banks on pro - rata basis. B.2.4. Overdraft 59. Overdraft facility is Yes. It is offered through available or not? credit cards. A customer can (Muhammad Hanif, shop any product at shops 2011) No. Cash cannot be over drawn. However, if a customer want to buy the product but there is no credit balance in his account, then bank buys the product and sells him for an agreed profit 60. Fee for using the facility Interest Profit on the product bought 61. If defaults i.e. not able to Can avail the opportunity of Can claim only the original pay installment rescheduling by entering receivable amount agreed in (Muhammad Hanif, into a new agreement to pay initial contract 2011) interest for extended period 62. Strategies to deal with Rescheduling by entering  Blacklist the defaulter for defaulters into a new agreement to pay any further financing interest for extended period. All installments will be due at once  Penalty shall be imposed (but the same shall go in charity) B.2.5. Personal Consumption Loans 63. Whether personal loans Issued at certain interest rate Not issued. However, if are issued or not? someone needs anything for his personal use, Murabaha scheme is used whereby S Nayamath Basha, IJSRM Volume 05 Issue 09 September 2017 [www.ijsrm.in] Page 7099
8. DOI : 10.18535/ijsrm/v5i9.19 S. No. Characteristic Feature Conventional Banking Islamic Banking bank buys the product and sells him for an agreed profit. B.2.6. Short-term Agricultural Loans 64. Nature of the loan Money on interest is Money is given without (Muhammad Hanif, supplied to farmers to buy charging the interest with the 2011) seeds and fertilizers agreement to sell the crops to the bank. B.3. Investments (65 – 73) B.3. 1. Investments in Central Banks and Other Banks 65. Mandatory reserve with Yes. The banks can earn No. These reserves are not central banks is rewarded interest on these reserves. rewarded by central bank. or not? (Muhammad Hanif, 2011) 66. Interbank deposits are Yes. Interest is rewarded. No. Interest cannot be rewarded or not? demanded. (Muhammad Hanif, 2011) B.3.2. Investment in Shares 67. What conditions have to Must yield attractive profits Must yield attractive profits be met to invest in the in the future in the future + business of shares of the companies? the firm and its operations (Muhammad Hanif, are Sharia compliant i.e. 2011)  Business must be Halal i.e. ethical  Financial operations of underlying firm should be interest free. B.3.3. Investment in Bonds 68. Whether they invest in Yes. They can buy the No. Assurance of fixed income bearing bonds of companies which predetermined return is not securities or not? offer predetermined interest allowed in Sharia. However, without risk. they can invest is Islamic Bonds (Sukuks) which offer predetermined return but expose to ownership risk. These bonds are based on Ijara (Leasing) Scheme. 69. Can they invest in short Yes and earn interest from No. because these are term loans, bonds and these investments. interest based transactions. money at call and short notices? (Muhammad Hanif, 2011) B.3.4. Investment in Derivatives 70. Investment in derivatives Allowed Not allowed B.3.5. Liquidity Management Practices 71. How do they meet By investing in marketable Ijara sukuks, Murabaha liquidity requirements? securities sukuks, Musharaka sukuks etc. which are tradable in secondary security market. 72. Can they create liquidity Yes No S Nayamath Basha, IJSRM Volume 05 Issue 09 September 2017 [www.ijsrm.in] Page 7100
9. DOI : 10.18535/ijsrm/v5i9.19 S. No. 73. Characteristic Feature Conventional Banking by issuing the bonds against their receivables? Speculative activities Allowed. Most transactions involve an element of uncertainty. 74. Borrowing of banks from Relatively easier money markets (Alimshan Faizulayev, 2011) C. Impact of the Banking System (75– 100) 75. Impact on human Interest generates vices like personality (M Hasan, miserliness, selfishness and 2012). petty-mindedness, thereby creating ‘idlers and cruel blood suckers’ in the society. 76. Impact of high interest High market interest rate rates on productive encourages the public to go economic activity (M. for fixed deposits rather Arif, 2012) than undertaking productive economic activities. 77. Impact on investment environment (M. Arif, 2012) 78. Impact on achieving full employment (M. Arif, 2012) 79. Impact on Lender (M M T Usmani, 2009). 80. Impact on Borrower Islamic Banking Not allowed. Transactions and activities that involve uncertainty (speculation) regarding the outcome and/or timing of execution or delivery are not allowed. It must be based on a Shariah approved underlying transaction Islamic Banking system honors human beings, removes selfishness in the society e.g. Islamic Banks offers Interest free loans viz. Quard – e – Hasna In this system, Interest has no impact on the economic activity. However, it encourages public to undertake economic activities; even they don’t have funds but have profitable ventures. Higher interest rate creates Uncertainty is reduced in uncertainty in investment investment environment as environment which makes there is no interest. long term investments difficult and thus the growth process stalls. The process of investment As there is no interest, full in an economy continues as employment can be long as MEC is higher than achieved. the interest rate or at least at par with it. As soon as MEC falls below the interest rate, the process of investment will be stalled. Thus, the only obstacle in the way of achieving full employment is interest. Causes injustice to lender Profit is shared thus justice is when borrower gets huge ensured to lender profits from the borrowed funds and throws meager portion as interest to him. Causes injustice to borrower Loss is shared and hence S Nayamath Basha, IJSRM Volume 05 Issue 09 September 2017 [www.ijsrm.in] Page 7101
10. DOI : 10.18535/ijsrm/v5i9.19 S. No. Characteristic Feature (M M T Usmani, 2009). 81. Efforts to ensure growth with equity (Alimshan Faizulayev, 2011) 82. Impact on Inclusive Growth (M M T Usmani, 2009) 83. Impact on Depositors’ When the depositors Growth (M M T Usmani, (middle and lower class 2009) people) who saved money with the banks, need funds to start business, banks deny loans as they cannot offer collateral. Hence depositors are not leveraged with their deposits as so by the rich. Impact on Sovereignty of Poor countries borrow loans Nations (W.A.M. Visser on interest from IMF and et al., 1998) World Bank (which are run by rich countries) But unable to pay interest due to low GDPs. Hence they have to tolerate the interference of rich nations in their policy framing. Thus, their sovereignty is at stake. Impact on Inflation Due to non existence of (Mabid Ali Al-Jarh et al, goods and services behind 2013) the money while disbursing funds, expansion of money takes place which creates inflation. Extent of impact of Cost of the product inflation (Mabid Ali Al- increases to the extent of Jarh et al, 2013) inflation at each level of production. Ability to curb deficit The expanded money in the financing (Mabid Ali Al- money market without Jarh et al, 2013) backing the real assets, results in deficit financing. Impact on salaried Debts financing gets the persons (Mabid Ali Al- advantage of leverage for an Jarh et al, 2013) enterprise, due to interest expense as deductible item 84. 85. 86. 87. 88. Conventional Banking as he has to pay interest though he incurs losses. No importance is given to public interest. Very often, bank’s own interest becomes prominent. It makes no effort to ensure growth with equity. Inappropriate distribution of profits results in noninclusive growth and creates monetary monopolies. Islamic Banking justice is ensured to borrower It gives due importance to the public interest. Its ultimate aim is to ensure growth with equity. Profit and Loss sharing mechanism ensures that lender gets share in profit of borrower. Hence both the parties are benefited. Offer loans to these sections of the society without collateral if they prove to the bank that the project is viable. If sovereign debt during the 1970s had been advanced on an equity investment basis, debtor countries would not have been caught on the rack of compounding interest. Due to existence of goods & services behind the money while disbursing funds, no expansion of money takes place and thus no inflation is created. Due to control over inflation, no extra price is charged by the entrepreneur. Due to non expansion of money, balance budget is resulted. Sharing profits provides extra tax to Federal Government. This leads to minimize the tax burden over S Nayamath Basha, IJSRM Volume 05 Issue 09 September 2017 [www.ijsrm.in] Page 7102
11. DOI : 10.18535/ijsrm/v5i9.19 S. No. Characteristic Feature 89. Impact on GDP (Mabid Ali Al-Jarh et al, 2013) 90. Impact on Currency (Mabid Ali Al-Jarh et al, 2013) 91. Impact Cycles 92. Role in Economic Crisis (Dr. Zeti Akhtar Aziz, 2010) 93. Ability to curb real estate crisis (Muhammad Hanif, 2011) 94. Impact on MSME’s growth (M M T Usmani, 2009) 95. Impact on employment (Muhammad 2011) on Business self Hanif, Conventional Banking from taxable profits. This causes huge burden of taxes on salaried persons. As salaried persons have to pay more taxes, the saving and disposable income of them is affected badly. This results in decrease in the real GDP. Due to decrease in the real GDP, the net exports amount becomes negative. This invites further foreign debts and the local-currency becomes weaker. Banks issue loans with a free hand when the trade is brisk but as soon as signs of a slump appear they start recovery of the loans. As a result capital shrinks and the slump starts declining to its lowest level (M. Arif, 2012). As the money grows irrespective of productive activity in the economy, there is a mismatch between financial (liabilities) and productive (assets) flows which result in crisis-prone financial economy. When the value of the real estate asset diminishes, the whole burden of loss is to be borne by the customer only. If the customers default installments at such stage, crisis occurs like of 2008. MSME earn fewer profits after withstanding in the stiff competition with large scale firms but most of the profits are eaten by banks in the form of interest. In this system, big firms create most of the employment. Self employment is created in Islamic Banking salaried persons. As the tax burden over salaried persons is reduced, savings and disposable income of the people increase which in turn increases the real GDP. Due to increase in the real GDP, the net exports amount becomes positive, this reduces foreign debts burden and local-currency becomes stronger. Islamic banking system prevents extravagance thus frees a large portion of economic resources. Thus, the magnitude of business cycle will be reduced and economic stability will be relatively increased. (Bijan Bidabad, n.d) Close link between financial (liabilities) and productive (assets) flows result in real economy which is less prone to economic crisis. When market value of property decreases both bank and customer suffers according to their share in property and whole burden is not shifted on customer alone. Hence crisis can be avoided. Expertise and contacts of the bank with market intermediaries make MSME to earn more profit and flourish. Under Mudaraba mode of financing by extending capital facility to skilful persons lacking capital, self S Nayamath Basha, IJSRM Volume 05 Issue 09 September 2017 [www.ijsrm.in] Page 7103
12. DOI : 10.18535/ijsrm/v5i9.19 S. No. 96. 97. 98. 99. 100. Characteristic Feature Conventional Banking small proportion. Islamic Banking employment can be created and they can grow with the expertise of the bank. Impact on projects of Fall short of capital as they Islam encourages these kinds national importance have lesser MEC than of projects as they lead to (W.A.M. Visser et al., Market Interest Rate. social welfare. 1998) Impact on natural Discounting of future In Islam, time value of resources (W.A.M. affects the rate at which we commodity is acceptable but Visser et al., 1998) use up natural resources - time value of money is not the higher the discount rate acceptable. Thus, thus (derived partly from the resources are consumed only interest rate); the faster the when the economic activity resources are likely to be is undertaken. depleted. Impact on As the resources of depleted As there is no discounting of Intergenerational Equity quickly, an age-old precept money based on time and and Right Livelihood of right livelihood is resources consumed only (W.A.M. Visser et al., violated which is based on when the economic activities 1998) the presumption that are undertaken, intergenetraditional land users must rational equity and right hand over the land on to the livelihood are achieved. next generation in at least as (M.A. Siddique, 2015). good heart as it was inherited from the ancestors. Borrowing of Government very easily Government cannot obtain Government from central obtains loans from Central loans from the Monetary banks (Alimshan Bank through money market Agency without making sure Faizulayev, 2011) operations without initiating the delivery of goods to capital development expen- National Investment fund. diture. Creation of Black Money Parking of assets in off It is not possible as each (Dr. Zeti Akhtar Aziz, balance sheet items is party knows what the bank is 2010) possible as the outsiders doing with the money and (including banks) do not what the firm is doing with have any knowledge about the asset. the business activities of the borrowers (frims). Thus, creates black money. Conclusion There exists a plethora of differences between currently practiced interest based banking system and interest free Islamic banking system. Conventional banking system considers economic methods of wealth creation but ignores social, ethical and moral methods. Islamic banking system gives first priority to social, ethical and moral methods of wealth creation; economic attractiveness of business is the next priority. Thus, it focuses on achieving socio economic welfare. Differences in the operations of these two extreme poles of banking systems, has distinctive impact on the economy. Islamic banking system grounds on sound ethical and economical principles incites productive economic activity, instrumental in achieving full employment, causes inclusive growth, reduces inflation, creates real economy, finance the projects of national importance though have less MEC, supports S Nayamath Basha, IJSRM Volume 05 Issue 09 September 2017 [www.ijsrm.in] Page 7104
13. DOI : 10.18535/ijsrm/v5i9.19 intergenerational equity and the concept of right livelihood, which are far achievable in conventional banking system. In light of its superiority over the interest based banking system, it is recommended to the policy makers across the globe to explore the feasibility of adopting it in their main stream economy. References 1. Alimshan Faizulayev, 2011: Comparative Analysis between Islamic Banking and Conventional Banking Firms in Terms of Profitability, 2006-2009: retrieved from 2. http://irep.emu.edu.tr:8080/jspui/bitstream/11129 /107/1/Faizulayev.pdf 3. Bijan Bidabad (n.d ). Stabilizing Business Cycles by PLS Banking and Ethic Economics. retrieved from http://www.bidabad.com/doc/pls-businesscycles-en.pdf 4. CA Ashutosh Verma (2008). Banking and Finance, Charted Accountant PP 338 5. Dr. Abdelkader Chachi, 2013: Contribution of Islamic Finance to Economic Development: retrieved from http://idbgbf.org/assets/2013/4/15/pdf/29b 28d92-d62f-4a9f-bcb8-e7e9bc38f2cc.pdf 6. Dr. Mohammed Alwosabi, 2013: The Basic Principles of Islamic Financial Institutions: Compared to Conventional Ones: retrieved from www.nzibo.com/IB2/basic.pdf on 02/10/2013 7. Dr. M I A Usmani, 2003, Meean Bank Guide to Islamic Banking: retrieved from http://iugc.yolasite.com/resources/Text%2 0Book%2003%20%20Meezan%20Banks %20Guide%20to%20Islamic%20Banking. pdf 8. Dr. Shahid Hasan Siddiqui, 2008, Islamic Banking - True Modes of Financing: retrieved from http://www.islamicbanking.com/iarticle_2.aspx, 9. Dr. Zeti Akhtar Aziz, 2010, "Islamic Finance: An Agenda for Balanced Growth and Development": retrieved from http://www.wbaonline.co.uk/full_text_for m.asp?abnum=55703&title=Islamic+finan ce:+an+agenda+for+balanced+growth+an d+development&subd= 10. H Abdul Rakeeb, 2010, Islamic Finance: An Ethical Alternative To Conventional Finance; retrieved from http://www.radianceweekly.com/220/6021 /islam-the-alternative/2010-09-05/coverstory/story-detail/islamic-finance-anethical-alternative-to-conventionalfinance.html, 11. Iqbal Khan, 2009: Issues and Relevance of Islamic finance in Britain: retrieved from http://www.islamicbanking.com/iarticle_3.aspx, 12. Junaid Ahmed et al, 2011: Benchmarking of Financial Solutions offered by Islamic Banks, retrieved from http://www.divaportal.se/smash/get/diva2:831670/FULLT EXT01.pdf 13. Mariani Abdul Majid et al, 2008: Efficiency in Islamic and Conventional Banking: An International Comparison retrieved from eprints.aston.ac.uk/18778/1/0811.pdf 14. Mehboob ul Hassan, 2012: An Explanation of Rationale behind the Prohibition of Riba in the Doctrines of three major Religions with special reference to Islam; Retrieved from https://ncu.repo.nii.ac.jp/?action=repositor y_action_common_download&item_id=47 6&item_no=1&attribute_id=25&file_no=1 . 15. Dr. Mufti Muhammad Taqi Usmani, 2009, The adverse effects of interest on society: retrieved from http://www.alhilalbank.kz/upload/iblock/6 39/63923d30f2654c4e467ad2374cc2b32a. pdf 16. Mohammad Arif et al. (2012). Riba Free Economy Model; International Journal of Humanities and Social Sciences Volume 2 Issue 6 (Special Issue) March 2012; Retrieved from http://www.ijhssnet.com/journals/Vol_2_ No_6_Special_Issue_March_2012/12.pdf 17. M A Siddique et al. (2015); The Concept of Discounting and Time Value of money in Islamic Capital Budgeting Framework: A Theoretical Study; Journal of Islamic Banking and Finance: Vol 32 Jan – Mar 2015 No. 1; Retrieved from http://islamicbanking.asia /wp- S Nayamath Basha, IJSRM Volume 05 Issue 09 September 2017 [www.ijsrm.in] Page 7105
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