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How Islamic Banks and Conventional Banks Differentiate
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The topic of this dissertation proposal is to differentiate Islamic banks and conventional banks.
Background of the study
The Islamic and conventional banking are different from each other as conventional banking follows man made principle whereas Islamic banks follows shariah principles (Difference between Conventional and Islamic banking). In contrary to this, they accept deposits from public and also lend to the borrowers. The interest rate is the main source of profit or income for the conventional banking whereas it is prohibited in Islamic banks as it is against shariah rules.
The investment in alcohol, tobacco are forbidden in the Islamic banks. The conventional banks are forbidden to purchase goods for the reselling purpose such as buying fixed assets. The Islamic banks contain partnership contract which is referred as Mushraka which is same as in conventional banks have partnership between two or more parties. In partnership, allocation of loss or profit is determined in advance only and not based on capital contributed by the contractual parties.
The aim of this research is to distinguish between conventional and Islamic banks
Objective of the study
- To differentiate between Islamic and conventional banking
- To highlight and analyse the main principles of both the banks
The significance of this research is to make out the main underlying differences between Islamic and conventional banks which is related to principles, sustainability, business and including interest rates (Waemustafa and Sukri, 2015). They both differentiate from each other on the grounds of interest rates as it is forbidden under Islamic banks whereas in conventional banks, it is not prohibited. Moreover, the principles which conventional banks follows is man made principles which are commonly followed by banks. In contrary to this, Islamic banks follow the rules based on shariah which prohibits the interest as the source of income and as such, it is worth significant to carry out the research on these both banks which are distinguished from each another.
The research outlines issues which differentiate both Islamic and conventional banks from one another (Ben Naceur, Barajas and Massara, 2015). The principles which are observed in both banks are different and as such, research is based to formulate basic understanding about the banks. This is done with a view to resolve issues by rational conducting the research problems and thus gives a concrete solution to the problem under consideration. There are complex issues related to principles followed by both the banks and as a result, solution may be achieved by understanding of the topic of the research by carrying out the research problems under consideration.
The differences related to Islamic and conventional banks are numerous and is based on capital adequacy, asset quality, management, earnings and liquidity as well. The banks play vital role in the economy of the country and as such, it provides much stability to it and as a result, economy becomes stable as profits are provided by banks in totality. Financial ratios are applied in the Islamic banks to assess the performance of them effectually. To measure the performances of both banks author took (Beck, Demirgüç-Kunt and Merrouche, 2013) ROE (Return on Equity), ROA (Return on Assets) play essential role to measure performances. The results observed in total assets has a negative relationship with the performance of conventional banks but in contrary to this, Islamic banks has a positive result of total assets. Moreover, the overheads of both the banks are similar.
In contrary to this (Hanif, 2014), competitive conditions also play important role in Islamic as well as conventional banks prevailing in the market. The author says that (Johnes, Izzeldin and Pappas, 2014), Islamic banks allocates large amount of assets to activities like Mushraka, Ijara and many more and have better capital. However, Islamic banks are at greater risk which is related to credit. Islamic banks are more exposed to credit risks and as a result, they are not much competitive than conventional banks in terms of effective functions and also income as interest income is not utilised by it which is the main source of conventional banks as they earn income from charging interest.
The author says (Islam, Alam and Hossain, 2014), Islamic banks are getting on the track as they are earning steadily and are earning more profits and as a result, they are becoming competitive as compared to conventional banks. Islamic banks are earning good profits as liquidity and profitability ratio is increasing and they are becoming competitive and are equally making profits as compared to conventional banks. The author says that (Baklaci, AydoÄŸan and Tunç, 2014), conventional banks lends money and in return compound interest with the principal amount which is the main function of it. However, participation in partnership business is the main function of Islamic banks and as a result, it ignores interest on lending purpose. Islamic banks do not charge any penalty in case of defaulters, they charge small compensation amount which is donated to charity. In contrary to this, conventional banks charges penalty in case lenders default the payment obligations.
The research approach taken is qualitative one. It is also called exploratory research. The aim of this approach is gain underlying motivations and opinions related to problem under research. The qualitative data is used to take a deeper dive into the research so that problem may be studied with much ease. The sample size is relatively small in this approach and provides concrete solution to the research problem. Common methods of qualitative approach includes group discussions and individual interviews as well.
The inductive research will be used by researcher to solve problems under consideration. It is also called as inductive reasoning. No theories will be applied in the beginning but it will be applied at the end by the researcher in assessing to solve the problem (Khediri, Charfeddine and Youssef, 2015). The inductive research is used to produce meanings from the data collected from the respondents to build a pattern of the theory.
The research philosophy such as interpretvitism will be used by researcher as it carried out in the research in small depth about the topic and small samples are undertaken in it. Research design is the framework which is developed to find research solutions.
The data collection will be taken by researcher in the qualitative approach as it will be required to carry out and maintain integrity of the research in effective way. Informed decisions may be made so that researcher will be able to draw out conclusion from it.
The sampling will be used by researcher as it is not possible to study each and every aspect of population and as such, random sampling will be used by it to assess the results of the research problems with much ease (Souiden and Rani, 2015).
Data analysis is a process of inspecting and modelling the data so that meaningful conclusion and information may be drawn out of it and this helps researcher to find the difference between the Islamic and conventional banks which is the topic of research.
Hereby it can be concluded that Islamic banks and conventional banks differ a lot from each other. It is because conventional banks follows common principles which are universally applicable whereas Islamic banks are ruled under shariah principles. The functioning of both the banks are also different from each other and as such, from the research it is clear that the aspects of both are different from each and has its own significance.
- Waemustafa, W. and Sukri, S., 2015. Bank specific and macroeconomics dynamic determinants of credit risk in Islamic banks and conventional banks. International Journal of Economics and Financial Issues. 5(2).
- Beck, T., Demirgüç-Kunt, A. and Merrouche, O., 2013. Islamic vs. conventional banking: Business model, efficiency and stability. Journal of Banking & Finance. 37(2). pp.433-447.
- Hanif, M., 2014. Differences and similarities in Islamic and conventional banking.
- Johnes, J., Izzeldin, M. and Pappas, V., 2014. A comparison of performance of Islamic and conventional banks 2004–2009.Journal of Economic Behavior & Organization. 103. pp.S93-S107.
- Islam, K. A., Alam, I. and Hossain, S. A., 2014. Examination of profitability between Islamic banks and conventional banks in Bangladesh: a comparative study. Research in Business and Management. 1(1). pp.78-89.
- Erol, C., F. Baklaci, H., AydoÄŸan, B. and Tunç, G., 2014. Performance comparison of Islamic (participation) banks and commercial banks in Turkish banking sector. EuroMed Journal of Business. 9(2). pp.114-128.
- Khediri, K. B., Charfeddine, L. and Youssef, S. B., 2015. Islamic versus conventional banks in the GCC countries: A comparative study using classification techniques. Research in International Business and Finance. 33. pp.75-98.
- Souiden, N. and Rani, M., 2015. Consumer attitudes and purchase intentions toward Islamic banks: the influence of religiosity. International Journal of Bank Marketing. 33(2). pp.143-161.
- Ben Naceur, S., Barajas, A. and Massara, A., 2015. Can Islamic Banking Increase Financial Inclusion?
Difference between Conventional and Islamic banking, 2017 [Online] Available Through: <http://www.mib.com.mv/blog/guide-to-islamic-banking/difference-between-conventional-and-islamic-banking>