Islamic Banking Essay

Introduction

Islamic banking alludes to a system of managing an account or the action of saving money that is trustworthy with the theory of Islamic rules and values (Shari’ah) and its feasible utilization through the progress of Islamic financial economics. The most vital concept is the charging and receiving of the interest charges (riba) is strictly prohibited. Although the theory has guided all hypothetical task on Islamic banking is prohibited, but trade and profit are supported. Islamic banking and conventional banking are different. Islamic banking is actually focused on investment. So, it is interest-free banking and there is no fixed return rate. The most important difference between Islamic and conventional banking is that Islamic

Islamic banking concept

From the view of Islamic Banking concept, it is encouraging equal income distribution and which bring benefits for long term growth of the economic development. This is because the concept of profit sharing in Islamic Banking can help to foster economic development. (The World Bank Research Observer, 1996),

At the same time, the profit and loss sharing scheme can efficiently improve capital allocation as a return on capital depends on productivity and the allocation of funds is based on the success of the project. The depositors can receive a share in the bank profits when do invest in a profit sharing scheme. On the other hand, this increase in investors will implicitly result in the increase in employment. (Abdouli, 1991).

The Islamic financial system is more stable than the conventional banking system due to the elimination of debt financing. Moreover, it also decreases the inflation rate in the economy as the supply of money is not permitted to go above the supply of goods. (Zaher and Hassan, 2001).

Lastly, from the concept of Islamic banking both investors and entrepreneurs are sharing any risks that are involved in the business. So, the Islamic banks are less risky than conventional banks. (Sarker,