Compare and Contrast between Islamic and Conventional Banking Term Paper

Compargon and Contrast between Moslem and Conventional Banking - terminal figure Paper ExampleYet, riba or interest is not precisely defined in the Quran at the time of its parapet. The prohibition of interest is generally understood to refer to any increment over and to a higher place the principal. It represents the return on minutes involving exchange of m sensationy for money, or an addition, because of delay in payment, to the agreed toll on sale debts/debts. From an Islamic point of view under some concept of fairness, there are two dimensions the supplier of capital possesses a right to reward, but this reward should be commensurate with the fortune and effort involved and should be determined by the return realized on the individual shed for which funds are supplied (Abdi, 2010, p 80). One of the primary rationales espoused by Muslim scholars is that the existence of riba (interest) in the deliverance is a form of frugal exploitation, which violates the core Islami c teaching of social justice. Therefore, the elimination of interest from the economic system would be more fair and ethically and morally more appropriate economic behavior. The prohibition of interest (riba) and permission of trade drive the financial activities in an economy towards asset-backed businesses and transactions. This implies that all financial transactions must be representative of real transactions for the sale of goods, services or expediencys (Abdi, 2010, p 81). Interest-free loans (alternative for usury) Islamic financial institutions must not only focusing on maximizing profit, but they should also animate a vital role in addressing socio-economic issues such as poverty reduction and improvements in grave aspects of human welfare (like education, illiteracy, reducing child mortality, youth insecurity and...Generally, equity financing under non-Islamic finance, savers would deliver the goods funds to enterprises in return for a share in its prospective net ret urns as swell up as a share in its management. However, in contrast, profit overlap funding of projects under Islamic finance is not for the whole life of the financed enterprise, but for a shorter period, as in the case of providing works capital. Profit sharing finance may be provided with and without sharing in management, Linked with profit sharing is the notion of risk sharing. This is based on the principle of liability, which states that profit is justified based on ones obligation to take a loss. This legal maxim is said to be derived from a manifestation of the Prophet Mohammed that profit comes with liability implying that Sharia distinguishes lawful profit from all other forms of gain. One becomes empower to profit only after one bears the liability, or risk, of loss.Tax in Islamic banking (Zakat) Zakat- This is the requirement to benefit society through the collection of alms, which is known as Zakat Benefits Zakat For society, fractional reserve system allows banks to act as intermediaries that facilitate the movement of funds from savers to investors in a society. There are also significant economies-of-scale in banks making investment and lending decisions, as they have access to knowledge and expertise which individual investors or lenders generally do not.