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Islamic Banking Practices Compared To Conventional Banking Practices

1746 words - 7 pages

Introduction
The co-existence of conventional banking along with Islamic banking gives an exceptional platform to compare Islamic banking practices with those of conventional banking practices. It is clearly known that Islamic banks are different from those of conventional banks since they do not deal with interest (Riba), i.e. usury, which is totally banned in Islam. In other words, banks are not allowed to take an interest rate on the loans given to customers. The concept considered in Islamic banking is the profit-and-loss sharing (PLS) which is based on profit-sharing and joint-venture that goes with Islamic Sharia. In fact, PLS adapts the system of integration in which borrowers share profits and losses with banks with their depositors ( Khan and Mirakhor, 1990). To some extent, Islamic banks are quite better than conventional banks, in a sense that borrowers and depositors share profits and losses with each other. Adapting the PLS paradigm can allow borrowers to have long-term loans on their projects which lead to a boom in the economic growth (Chapra, 1992) and (Mills and Presley, 1999). The privilege of PLS paradigm is to set off good customers from bad ones since the PLS requires to search more for potential customers. This might force banks to control and watch their investments and borrowers closely to ensure that their capital is invested properly and effectively. To this effect, the key positive about PLS banking is the allocation of capital which depends on productivity and quality of projects financed (Khan, 1986).
Islamic Banking in Jordan
Islamic banking started in Jordan in the late seventieth of the last century. Looking at the Jordanian banking system, we could find that is not Islamic in which only four Islamic banks are operating in Jordan; three local and one foreign. These banks are the Jordan Islamic Bank for Finance and Investment established in 1978, the Islamic International Arab bank, established in 1997, the Jordan Dubai Islamic Bank, established in 2010 and one foreign bank, Al Rajhi Bank, established in 2011(Central Bank of Jordan annual report, 2012).
Importance of the Study
The privilege of Islamic banking is that it provides the same services the conventional banks provide but with the Islamic Sharia. What is more important of this study is to find out more about the profit-and-loss sharing PLS paradigm.
Objectives of the Study
The main objective of this study is: (a) to find out the extent of using profit-and-sharing paradigm in Islamic banks in Jordan; (b) to search about the main principles of Islamic interest – free banking and operations compared to interest – based banking system in Jordan; and (c) to compare between conventional deposit rates and Islamic investment rates.
This study examines the principles and criteria Islamic banking operates in providing their financial services which make different from those of conventional banks.
The Methodology
To find out more about the usage of profit-loss...

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