“Bank” is a very common word for society nowadays since it’s always applied in our daily life. As we know that, banks are involved in the activity of finance transaction and business investment. In the Malaysian banking system, it can be divided into two main system which is Islamic banking system and conventional banking system. Both of the banking system operate in different ways and give a different perspective to the different customers. In this paper, I am going to investigate about the level of efficiency of the Islamic and conventional commercial banks before and after the Global Financial Crisis.
Islamic banking system has holds the six principles for their operation system which is (1) money as capital, (2) Rabbulmal and Mudarib relationships, (3) risk sharing (4) markets set prices and generate profits, (5) Islamic banking stability and (6) Islamic banks as agents for economic growth (Ismail, 2010). For Islamic banking system, payment of interest is prohibited. The money that invested in the business is considered as the potential capital and it can be used to purchase the goods and services. Besides, money which advanced to a business is a debt of the business and it is not allowed to apply to any interest.
For the conventional banking, their core principle is time has value which means that the amount of the financial transaction will affect by the time of payment (Ismail, 2010). The borrower is allowed to make their payment by a series of time through the conventional loan contract that fixed. For example, if you buy a car and borrow a loan, the bank will allow you to make the payment according to the period that agreed. At the end of the period, you will find that the amount of payment will exceed the amount of loan that borrowed. The amount that exceed is used to compensate the period of loss of the lender.
In term of business operations, Islamic bank is different from conventional banking. Islamic banks operate according to the principles, Shariah or known as Fiqh al-Muamalat. The main principle that holds by Islamic banking is that Islamic banking is sharing of profit and loss and interest (riba) is prohibited (Ismail, 2010). There are few types of Islamic contracts that being introduced in Islamic banking, that is Mudarabah (profit sharing), Wadiah (safekeeping), Musharakah (partnership), Murabahah (cost plus) and Ijarah (leasing). For example, in the case of Islamic mortgage transaction, the bank will buy the house from the seller and resell it to the buyer. This process does not incur any profit since there is no penalty for the late payment. However, bank will ask for the strict collateral to protect them from any unexpected incident. This type of contract is known as Murabahah. For Musharakah, it is a general partnership whereby they go into the contract to share the profit and loss together by joining their capital and labor. Mudarabah is a contract whereby the capital is entrusted to the entrepreneur...