Conventional Banking And Islamic Banking System

Introduction

Banking is a process that is involved in many ways with the business and trade. There are different types of banking in the present world. Two major types are the Conventional Banking and the Islamic Banking. Both of the banking systems are playing very important roles in the trade and business. The focus in this discussion is an evaluation about these two banking system. The chapters will address important bank characteristics that will be included in the regression models. The Ordinary Least Square method will be used to identify how bank characteristics impact bank profitability. The adopted methodology examines the sensitivity of internal bank characteristics on profitability indicators. The profitability study is conducted on Islamic banking system and is compared to conventional banking system. The discussion begins with a literature review and moves on to the critical evaluation and analysis, variable definition, model, and data variables, advantages, disadvantages, points agreed with, points disagreed, reasons, and evidence.

Literature Review

The study of profitability compares Islamic banks to conventional banks. The research paper investigates the efficiency of a sample of Islamic and conventional banks in different countries that operate Islamic banking over the past couple of decades using an output of distance function approach. We will obtain measures of efficiency after allowing environmental influences such as state macroeconomic conditions, accessibility of banking services and different bank types. While these factors are assumed to influence the shape of the technology directly, we assume that state dummies and size of banks influence technical inefficiency directly too. The parameter estimates...

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...ation, for the whole idea is a myth and cannot be introduced in a country where normal banking exists, and which claims to be secular. To create a legislation which allows no interest to be paid or received would mean subjecting ordinary savers to enormous risks - which surely cannot be the intention of Islamic banking. If Islamic banks cannot invest in bonds, T-bills, and commercial paper, or lend to finance inventory or projects for interest, it defeats the whole purpose of banking. Even in Muslim countries, what is called Islamic banking is - to put it in the dismissive words of one western critic - "normal banking sprinkled with holy water." At best, Islamic banking is a way to deny the existence of interest and make it easier for Muslims to accept the idea of banking since the Qur’an includes strong injunctions against the giving or taking of "riba" - interest.