Comparison of Western and Islamic Banking

on Wednesday, July 3, 2013

Islam is a set of principles and rules according to which people can spend their lives peacefully. It isn’t only about worshiping your Creator; rather every walk of life is covered with the teachings of this religion. Economics and finance are specialized fields of Islamic law (Shariah), which is entirely different from contemporary economic system of the world. In this article, I shall discuss the distinguishing features of Islamic Banking System, and how this system is superior.

The Biggest Difference:

The greatest distinguishing element here is “Interest”. Islam lays great importance on shunning the evil system of interest and Usury.

What is Interest?

It is the amount that a borrower pays to the lender as fees for the loan. It is usually expressed in the form of monthly/ yearly percentage. For instance, when A gives a loan of $500 to B, and a term of contract states that B will have to pay a 10 percent of the total loan every year till the loan is paid off; the ten percent of the total amount is interest. It is also called Usury.

As you can understand from the example, interest is nothing but an extra and unwanted burden on the already helpless borrower. Besides having to pay off the debt, he also has to reimburse the extra amount of interest which makes him even more dependent. This is why interests are hated by Allah Almighty.

Interest and Quran:

Quranic word for interest is “Riba”. Allah has strictly prohibited Riba in the second chapter of Quran by calling it a “War against Allah and His Prophet PBUH”. The stern stance of Islam against this malicious practice shows the kindness of Islamic economic system.

The Western Banking System is entirely dependent upon interest on loans. In fact, these institutions cannot survive without the very existence of interest.

On the other hand, Islamic banking system bans interest and instead relies solely upon interest-free banking. There can never be any alternative of interest in the Islamic banking because Usury is exploitation, and Islam has no room for the same. Interest free banking is the only way through which world can achieve debt-free and burden less financial condition.

The Current Scenario:

Though many Islamic banks have begun operating in most Islamic countries, yet major stakeholders are the contemporary banks. Even the State Banks do not operate in an Islamic way i.e. interest free operations. However, many contemporary banks offer the option of Islamic banking side by side.

Islam offers “Mudarabah” in which one partner provides the capital, whereas the other invests it in a venture and both share the profits and loss. The other option is “Musharakah” which is the Islamic terminology for Partnership. Both the partners share their losses and gains.

The recent global financial crunch is nothing but an evidence of failure of non-Islamic banking and economic system. Nature will always resist against exploitation; and it has. The only way out of the international financial crisis is nothing but adaptation of Islamic interest free banking.

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