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In the Name of Allah, The Most Gracious, The Most Merciful

ISLAMIC APPRAISAL OF CONVENTIONAL BANKING

WHY ISLMIC BANKINGBefore explaining the concept what is Islamic Banking the elaboration of concept why Islamic Banking is very important. Islam is a complete code of life that provides guidance regarding each aspect of life.

WHAT IS ISLAMIC BANKINGIslamic bankingrefers to a system ofbankingorbankingactivity that is consistent with the principles of the Shari'ah (Islamicrulings) and its practical application through the development ofIslamiceconomics. The principles which emphasize moral and ethical values in all dealings have wide universal appeal.An Islamic bank is a deposit taking banking institution whose scope activates includes all currently known banking activities excluding borrowing and lending on the basis of interest.

Principles of Islamic Banking Any predetermined payment of over and above the actual amount of principal is prohibited.

The lender must share in the profits/losses arising out of the enterprise for which the money was lent.

Making money from money is not acceptable in Islam/Islamic bank.

Gharar and maisir are also prohibited.

GHARARThe Arabic word Gharar is a fairly broad concept that literally means deceit, risk, fraud, uncertainty or hazard that might lead to destruction or loss. Gharar in Islam refers to any transaction of probable objects whose existence or description are not certain, due to lack of information and knowledge of the ultimate outcome of the contract or the nature and quality of the subject matter of it.

For Instance: The Prophet (pbuh) has forbidden the purchase of the unborn animal in the mothers womb, the sale of the milk in the udder without measurement, the purchase of spoils of war prior to distribution, the purchase of charities prior to their receipt, and the purchase of the catch of a diver.

MAISIRMaisir has been depicted as involving two parties in a game played for the sole purpose of winning at the expense of one's opponent. A readily available and popular example is the lottery.

Maisir or gambling is prohibited in Islam because it breeds hostility and abhorrence and also involves consuming property bi-al-batil, which is a type of oppression. The Quran is very clear in its prohibition of gambling.

DIFFERENCE BETWEEN ISLAMIC AND CONVENTIOANL BANKING

ISLAMIC BANKINGCONVENTIONAL BANKINGFunctions and operations are based on Shari'ah principlesPromote risk-sharing between provider of capital (investor) and user of funds (entr)Aim at maximising profit but subject to Shari'ah restrictionsPartners, investor and traders, buyer or seller relationshipEncourage asset-based financing and based on commodity trading

1) Functions and operations are based on fully man made principles 2) Investor is assured of pre determined rate of interestAim at maximising profit without any restrictionsCreditor-Debtor relationshipBased on money trading. Money is the medium of exchange not commodity.

DIFFERENCE BETWEEN ISLAMIC AND CONVENTIOANL BANKINGISLAMIC BANKING

CONVENTIONAL BANKING

6) No right of profit if there is no risk involved. The profit and loss sharing depositor may lose money in case of loss7) In the modern Islamic banking system, it has become one of the service -oriented functions of the Islamic banks to be a Zakat collection centre and they also pay out their Zakat.8) Guarantee deposits for only deposit account, which is based on the principle of al-wadiah, thus the depositors are guaranteed repayment of their funds, however if the a/c is based on the Mudarabah concept, client have to share in a loss position.

6) It is almost risk free banking and depositor has no risk of losing its money because interest is guaranteed.It doesnt deal with Zakat.8) A conventional bank gives guarantee to all its depositors.

Global development of Islamic Finance

Global Islamic banking assets with commercial banks reached $1.6 trillion in 2013 representing average annual growth of 17% and will grow by an average of 19.7% a year to 2018. Islamic banking growth by 50% faster than overall banking sector in several core markets . Shariah compliant financial assets have been growing at rate 20-25% over the last 10 Years estimated at US$ 1.8 Trillion in 2012, That represent only 1.2 % of the global financial system .

MAJOR PROBLEMS FACED BY ISLAMIC BANKSLACK OF PROFIT SHARING ON THE ASSET SIDEADVERSE SELECTIONMORAL HAZARDLACK OF PROJECT APPRAISAL MACHINERYLACK OF PROJECT MONITORINGDEFAULTERS AND THE ISSUE OF PENALTIESILLIQUIDITY OF ISLAMIC FINANCIAL MARKETSHORT TERM ASSET STRUCTUREEXCESS LIQUIDITYTAXATION PROBLEMS