Islamic Banking Practices Compared to Conventional Banking Practices

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 Is...

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...ere enlarged. Not only this, both banks have been able to fund projects in Jordan. Also, these banks have accentuated their efforts on funding short-term investments. Finally, these banks have grown and established for themselves in deals and facilities in the market.

Siraj and Pillai (2012) on their study about the 'Comparative study on performance of Islamic banks and conventional banks in GCC region" investigated the operation of six Islamic and six conventional banks in Arab league countries during 2005-2010. They assessed the expense operation, assets, operating income and deposits for these banks. They found that the tested Islamic banks have higher Return on Assets (ROA) and Return on Equity (ROE) than conventional banks. Considering the speed of development of operating income at Islamic banks, it was also higher than operating income at conventional banks.