UNIVERSITI TEKNOLOGI MARA
KAMPUS PUNCAK ALAM
FACULTY OF ACCOUNTING
MAT402 – BUSINESS MATHEMATICS
TITLE: BASIC ISLAMIC BANKING CONCEPT & COMPARISON BETWEEN CONVENTIONAL AND ISLAMIC BANKING
NUR DINAH MARDIAH BITI MAD NAZIR
MADAM ZAMMARIYAH BT MUSTAFA KAMAL
Praise is be due to Allah because only with his mercy and his guidance, so I can fiish to write this assingment with the title the basic Islamic Banking concept also comparison between Conventional Banking and Islamic Banking. I realizes that so many limitations, weaknesses and not perfect. However, I can handle and finish that because of helping hands and support from many sides. So, appreciation and honest thanks go to Madam Zammariyah Bt Mustafa Kamal the lecturer Business Mathematics who give me guidance so this paper can be finished and also to my fellow friend who helping hands in arrange this assignment.
1.0 Basic Islamic Banking Concept …………………………………….
2.0 Comparison Between Conventional and Islamic Banking …………
1.0 Basic Islamic Banking Concept
Islamic banking refers to a system of banking that complies with Islamic law also known as Shariah law. Syariah law of course is the basic Islamic legal system derived from the Quran and recorded sayings or actions of Muhammad. It spans all manner of detail in a Muslim’s life, including the matter of finance. While Syariah law does not specifically dictate that special banks be formed for the purposes of a Muslim’s finances, it is however explicit in its stance against several things that regular banks typically allow. The major concern are firstly is Riba’. Riba’means interest based transactions like any borrowing or lending where interest is incurred. Syariah law claims that any form of interest is unlawful gains. Second is Gharar and Maysir that is transactions that involve the element of uncertainty, chance, randomness, or speculation. Syariah law insists on full transparency in financial transactions to avoid fraudulent behaviour. Thirdly, Halal Investing which is Syariah law is against banks contributing their business to activities that run counter to Islamic values like non-halal meats, gambling, pornography, alcohol and prostitution. Islamic banking aims to address these concerns by providing financial products and services that a bank would, but by still adhering to Syariah law. Therefore, Islamic banks would aspire to only do business with Syariah compliant industries, never engage in speculative trading, use its funds for social good, conduct its businesses with transparency and never handle trade that involves interest.
While Islamic banking as a service would not put to be profitable as its main objective, it still needs an income to keep itself running. To achieve this without bear interest, Islamic banking treats its customers as business partners instead of lenders. For example, in the case of a home loan, the bank would buy the property outright and sell it at a predetermined rate of profit to the borrower, where they can pay in instalments. This profit rate is also what you typically see in place of interest rates when shopping around for a Syariah compliant personal loan. By fixing the profit rate early on in the loan application, it removes the uncertainty of variable interest as well as keeping everything transparent. For other types of loans, the bank may also elect to purchase other forms of assets. The rate of profit is what the bank makes money on. Malaysia’s Islamic banking industry has been in existence for over 30 years. The enactment of the Islamic Banking Act 1983 enabled the country’s first Islamic Bank to be established and thereafter, with the liberalisation of the Islamic financial system, more Islamic financial institutions have been established.
Rapid liberalisation in the Islamic finance industry, coupled with facilitative business environment has encouraged foreign financial institutions to make Malaysia their destination of choice to conduct Islamic banking business. This has created a diverse and growing community of local and international financial institutions.Currently, Malaysia has a significant number of full-fledged Islamic banks including several foreign owned entities; conventional institutions who have established Islamic subsidiaries and also entities who are conducting foreign currency business. All financial institutions are given permission to conduct both ringgit and non-ringgit businesses. Malaysia continues to progress and to build on the industry by inviting foreign financial institutions to establish international Islamic banking business in Malaysia to conduct foreign currency business.
2.0 Comparison Between Conventional and Islamic Banking
Conventional bank are limited to the moneytary affairs and to the monetary markets with a purpose to gain monitory benefits in rightly or wrongly. Islamic banking is a financial instituation with Islamic norm and directive as defined for the betterment of sicioeconomics development as the benefits of the society, with the commercial viability of the monetary affairs, ventures and transaction in gaining and disposal of basic need and resources.
The real difference between Islamic and conventional banking, as apparently both seem the same as in conventional banking interest is charged on its transactions and on the other hand Islamic banking is based on interest free banking but they also charge some fees for their transactions. Many employees even in the Islamic banks do not know the basic concept or rational behind Islamic modes of financing. Islamic banking is asset based banking which means that it’s transactions must be backed by some assets. Interest or Riba is prohibited in Islam therefore it is also prohibited in Islamic banking operations. We cannot earn money out of money in Islamic banking. On the other hand conventional banking is totally based on interest they charge interest on their transactions and take out profit from that. In conventional banking only the profit is shared whereas in Islamic banking, profit and loss both are shared.
Islamic banking must stay within the limits of Islamic law and Shariah in all actions and transactions. Islamic banking is done by laws and regulations which are defined in the Quran and Sunnah in which the product or services are not introduced by the Islamic banks which contradicts the Islamic values. These banks also introduced tax and Zakat system according to the Islamic values. Profit sharing is fixed in Islamic banking based on real profit. Islamic banks based on the buyer-seller relationship, whereas conventional banking based on the debtor-creditor relationship. The regulations, laws, rules and transactions of conventional banking system are fully manmade. Investors are encouraged by maximum interest rate. The aim of conventional banking system is to earn profit. In case of any default by the investors it charges extra amount of money, whereas in Islamic banking is case of defaults the extra amount charged to customer will go for charity not in the bank’s income. Conventional banks always encourage providing loans with fixed interest rate to its customer which is against our Islamic values.
The accounting and auditing of both banking system is to some extent similar but the documentation in Islamic banking is different as compared to conventional banking. If a person wants to start his business he will take a loan on interest basis from a conventional bank and pay the principle amount plus the interest on that, on the other hand if the same person goes to an Islamic bank the Islamic bank asks him about the type of business he wants to start and provides all resources or material to him to start his business instead of giving him only cash and charge some fees on that.
Now many conventional banks also open Islamic banking window or moves towards Islamic banking due to change in the trend of banking. So Islamic banking is relatively better from conventional banking because it follows all the Islamic values and conditions which are given in the Quran and Sunnah. We have briefly overviewe the basic Islamic Banking Concept also comparison between Conventional Banking and Islamic Banking. Islamic Banking provides profit sharing schemes, reserve allocations alongside the ability to perform in both good and adverse scenarios. It covers all types of businesses like corporate financing, insurance, retail banking, cards, treasury management etc. Islamic Banking seems to be a Comprehensive system covering all aspects of accounts keeping, regulatory reporting, anti- laundering, risk management etc. which is capable of accommodating new products and services. All these features of Islamic Banking will enable us to build a world class environment for the young talented entrepreneurs. Interest free mode supported by equity participation makes it deadly tool for the promotion of Entrepreneurship in developing countries.. As banking is the backbone of the economy, a definite support is required from all the sections of the community and of course a significant growth of the community too. This system is having benefits and based upon Shariah laws. That’s why it can be implemented in a very success manner. The need is only to understand the concept and to create awareness of this system. However, the fact that IB cases are decided by Civil Courts by Non Muslim judges or judges who are not well versed in Islamic transaction, raised doubts in the society.
BIBLIOGRAPHY Chouhan, M. T. (2018). Difference Between Islamic Banking and Conventional Banking . Retrieved from AIMS grow your career: http://www.aims.education/study-online/difference-between-islamic-banking-and-conventional-banking-system/
Islamic Banking and Takaful. (n.d.). Retrieved from Bank Negara Malaysia: http://www.bnm.gov.my/index.php?ch=fs_mfs;pg=fs_mfs_bank
MAHAYUDIN, I. (2015). ISLAMIC BANKING OPERATION THE MALAYSIAN EXPRERIANCE. Penerbit Press, Universiti Teknologi MARA.
Mudhakkir, A. (2017). A Beginner’s Guide to Islamic Banking. Retrieved from Ringgit Plus: https://ringgitplus.com/en/blog/Banking/A-Beginner-s-Guide-to-Islamic-Banking.html