Differences and Similarities in Islamic and Conventional Banking

Abstract:     
Islamic Banking is growing at a rapid speed and has showed unprecedented growth and expansion in last two decades in spite of mismatching of existing financial framework and business practices. By the end of 2011 volume of assets under Islamic banking has reached to US $ 1,289 Billion with operation in more than 50 countries. Middle East is the center of Islamic banking with contribution of approximately 80% while 20% share is contributed by rest of the world. In Pakistan Islamic banking is at infant stage although last 9 years growth is marvelous. Islamic banking has grown at an average annual rate of 66% in the last nine years (01/04 - 09/12) in Pakistan. Although Islamic banking faces multi challenges however three of them are very vital for its existence. First is Shari’a compliance in its operations in an environment which is dominated by interest based practices even in Muslim societies. Second is perception of financial industry practitioners about its performance whether the system is able to serve the total needs of trade and industry. Third is the perception of a large majority of Muslims whether existing practice of Islamic banking is Shari’a compliant or mere copy of conventional practices under the banner of Shari’a.

This study is an attempt to address the perceptional issues by identifying the similarities and differences in Islamic and conventional banking. Evidences suggest Islamic banking is very much practiced like modern conventional banking with certain restrictions imposed by Shari’a and addresses the large number of business requirements successfully hence perceiving Islamic banking as totally foreign to business world is not correct. It is further found in the study that Islamic banking is not a mere copy of conventional practices rather major differences exist in the operations of Islamic Financial Institutions (IFIs) in comparison with conventional banking. IFIs have succeeded in creating trust in the eyes of depositors and receive deposits on profit and loss sharing basis however investment and financing options available to Islamic banks are limited in comparison with conventional banks.

Number of Pages in PDF File: 28

Keywords: Islamic banking, Pakistan, Islamic finance, Islamic modes of financing, Sharia compliant

JEL Classification: G21, G24

Accepted Paper Series