Acceptance of Islamic Banking in Muslim Customers: A Comparative Study on Flaws of Interest Based Banking vs Positive Aspects of Islamic Banking

By Asif, Muhammad; Anjum, Muhammad Asif | International Review of Management and Business Research, December 2012 | Go to article overview

Acceptance of Islamic Banking in Muslim Customers: A Comparative Study on Flaws of Interest Based Banking vs Positive Aspects of Islamic Banking


Asif, Muhammad, Anjum, Muhammad Asif, International Review of Management and Business Research


Introduction

The different economic crisis and the flaws in the many different systems across the world have called for many new trends and many emerging patterns in many different business lines. One of the most emerging trends in the global economies is the concept of Islamic banking and Finance (Ahmad 2000). The Islamic banking system is based on the concept of interest free banking. In the last few decades the Islamic banking has developed very speedy in many different economies and has been established in theses economies as one of the most influential alternative to the conventional banking system which is based on the transaction of the interest (Ahmad and Haron 2002).

The conventional or the traditional banking system is based on the pricing of the money in the money markets and theses banks accept deposits on a lower interest rates on the people who saves money and then advance theses deposits to the borrowers in a higher rates and the margins between theses two rates is what is called the profits of thesis banks (Almossawi 2001). This is what is the conventional or the interest based banking which price the money in the markets and have their profits from theses pricing of money in the markets. Theses banking systems has many different flaws attached with them which have many different disadvantages for the communities which are dependent on the interest based banking system.

The most basic flaw which is attached to the interest based banking is that the crisis is embedded in the conventional banking system and as long as the economies are dependent on the conventional or the interest based banking systems then the economies will goes into crisis at some point of time Almossawi. (2001). The second most important disadvantage which is attached to the conventional banking system is the fast and speedy growth of inflation in the conventional banking system.

The conventional banking system develops inequality in the economies and there is a wider difference in the income levels of the people living in theses economies.

On the other hand the Islamic banking system is based on the pricing of goods and services instead of the pricing of money in these economies. The Islamic banking system follows the principal provided by the Islamic Sharia (Umer 1985). This principal provided by the Islamic sharia prohibits interest in the money transaction in the Islamic economies and forbids the pricing of money in these economies.

The Islamic banking system follows the principal of Islamic sharia as provided by the Islamic sunnah and the Quran and implement theses principals in their transaction and their transaction to make them free of Riba (Gait and Worthington 2007).

The Islamic economic system prohibits interest and all the transactions which involve interest in order to remove the drawbacks of the interest based banking from the Islamic economic system. With the passage of time the many different communities around the world have realized the fact that the interest based banking has many flaws associated with it and theses flaws has very harmful and very serious consequences for the economies in which the banking system operates with the element of interest (Erol and Bdour (1989). Theses societies have realized the fact that the interest based banking is just in the interest of a very minor portion of the society and the other half of the society specially the poor people in these communities suffer from the flaws of the interest based banking. The Islamic banking system on the other hand promotes and facilitates the flow of funds in the society in such a manner that the distribution of wealth in the society remains just and equitable and all the people living in theses societies enjoy equal opportunities and equal status the society (Haron, Ahmad and Planisek 1994). On the other hand the Islamic banking and economic system allow the economy a shield against the different type of crisis and recessions n the economies. …

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