CRITICAL THINKING ASSIGNMENT

Introduction

Financial transactions and practices differ based on the geographic region as well as the culture of the society. The banking system has been convenient in most areas due to its flexibility to accumulate the various lifestyles and needs of individuals. Sharia banking practices are most common amongst the Islamic community and are entirely adopted globally in regions where the Islam culture is practiced. Western banking also identified as conventional banking is based on the culture of the west of doing business hence relied on across all areas where the members are satisfied with it. This paper aims to compare the Sharia and western banking systems to understand their differences and similarities as well as the challenges faced by Saudi corporations in countries that do not have Sharia banking.

Comparison between Sharia banking and Western banking

Differences

 The western banking system relies on the interest that is charged on other lenders as well as other investments to get revenues. In contrast, Sharia banking relies on Islamic teachings and Syariah laws in making profit rates instead of interest rates.  The ‘Riba’ principle dictates that in Sharia law, transactions are interest-free. For Sharia banking, the bank and customer share the risk of the investment in a joint manner; in western banking, the whole risk of conducting business is based on the client; hence the bank does not participate in any risk exposure apart from providing the finances. However, excessive risks are prohibited by their dealings in that the principles of ‘Maysir’ and ‘Gharar’ define uncertainty in predictions and speculations in businesses simultaneously. The two strategies are highly uncertain and could encourage fraudulent behavior hence prohibited by Sharia banking.

Participatory arrangements between clients and the bank are conducted by an Islamic principle known as ‘Mudaraba,’ which advocates for the sharing of both profits and losses between parties. The Islamic banks, therefore, participate actively in aiding businesses to grow since it increases their possibility of earning profits; this overall contributes to increased societal, economic growth. In conventional banking, the bank is entitled to make profits whether or not the business is profitable since they gain revenue from the interest rates charged. The governments in western banking systems can acquire loans from the Central bank by money market operations even when they have not secured initial capital (Islamic banks: Introduction and comparison with the conventional banks, 2018). In sharia systems, the government is required to first deliver goods to the National Investment fund so that it can acquire finances from the monetary agencies. This creates a regulation of the funding from the banks to the state and portrays the reliance on financial instructions for investments.

Islamic banks trade in commodities, while traditional banks base their trade mostly on money. The sharia banking systems aim to create a sustainable economy by creating equitable contributions in the share of wealth. While conventional banks primarily lend money intending to get profits only, and their main emphasis is not placed on the activities that will be undertaken to generate the interest gained. Sharia banking and financial management practices are solely based on Islamic religious practices, while western banks base their activities on capitalism (Mutuku, 2018). Western banks are not bound by any religious doctrines; hence their dealings with their customers are that of debtor-creditor relations.

Similarities

Both Sharia and western banking aim to conduct businesses ethically; hence have adopted measures to mitigate them from engaging in immoral acts. For the Sharia banking systems, their objective is to do transactions based on Islamic beliefs that uplift the socio-economic state of companies. This has led to the abolishing of haram businesses that deal with sinful goods and services such as gambling and pornography. Western banking has put up systems to investigate the authenticity of the companies they fund by conducting regular checks and ensuring that the relevant authorities approve the business operations.   Sharia banking highly adheres to Islamic ethical standards to create a pleasant business environment. In contrast, western banking relies on state laws or codes of practice that are aligned to meet the needs of society. This shows business ethics maintained by both financial institutions.

Cross-cultural influence is being observed between the two banking systems as they aim to accommodate all individuals who would like different banking exposé is becoming more evident and profitable (Lake, 2017). For instance, western banks have had to acquire various Sharia practices to meet the demands of Muslim clients; the vice versa is also true. Sharia banking systems only incorporate lessons from western banking that have successfully yielded results and are certified ethically as per the business codes of conduct. Both banking systems offer their clients similar benefits in terms of deposit transactions; the difference arises in terms of the condition of the agreement. In conventional banking rewards on deposits are fixed rates while in Sharia banking systems, the rewards are variable depending on the profits attained.

Difficulties encountered by Saudi companies in countries that lack Sharia systems

There are numerous challenges faced by the Saudi company when conducting businesses outside Muslim jurisdictions. The issue of acquiring funding whereby they are charged interest loans may discourage some companies from doing business since they are not used to this system of learning finances at higher rates. Cultural differences between the company’s setup and the country’s rules may hinder its growth due to unfavorable business policies that may not be adhered to by the company (Mutuku, 2018). For instance, a Saudi company may set up its policies based on Islamic laws and religious practices, which may not be practiced in other countries.  The issue of liability arises as well when taking loans since conventional banks do not cushion the business against any risks and losses encountered. This means that the company is under pressure to perform extraordinarily to repay the loans despite facing unprecedented challenges.

For Saudi companies, getting Sharia banks in unconventional regions is quite a challenge; hence they are sometimes forced to engage banks in incorporating some of the Sharia systems that are beneficial to them. This process is quite tricky and timely since most since getting favorable banks that are willing to adopt this strategy and make a profit from the venture are sometimes tricky.  Dispute resolution mechanisms in Saudi Arabia are based on Islamic laws that use Islamic scriptures and other religious sources to determine the resolution of the conflict. In other non-Islamic states, the rule of power is based on the constitutional and legal framework regulations that govern the wellbeing of society. The dispute resolution mechanism is mostly by litigation, especially in the corporate framework.

Conclusion

Globalization is affecting the business environment, and hence the various systems put in place by financial institutions are adopting new mechanisms and strategies. The financial institutions in different geographic locations are looking for ways to increase their clientele; hence cultural backgrounds, and foreign practices are frequently being incorporated to boost revenue and performance. Technological fads also encourage and influence the growing business environment to make finances more available and resourceful to all people regardless of their culture or background.

References

Islamic banks: Introduction and comparison with the conventional banks. (2018). IOSR Journal of humanities and social sciences, 22-28.

Lake, A. (2017, 9 29). A modern comparison of western banking to Islamic banking. Retrieved from Classroom: https://classrooms.synonym.com/a-modern-comparison-of-western-banking-to-islamic-banking-12086596.htm

Mutuku, C. (2018). Islamic Banking Vs. Western Banking. In C. Mutuku, Business economics- Investments and Finance (p. 11).