Banking System in the Sharia and Saudi concerning the Western

Banking System in the Sharia and Saudi concerning the Western

Introduction

Banking is one of the critical sectors that determine the economy of a country. It is devoted to the holding of assets with monetary value for their clients. They invest the assets as a leveraged method of generating more wealth. The sector is governed by the regulations put in place by the central bank. It oversees all the activities of the banks. The industry includes control of banking practices by insurance companies, mortgages, government agencies, and credit cards. The core function of the bank is to hold financial assets. However, various banks, such as the Western and Islamic banking systems, have a different structure of how they operate. This depends on the country and the culture of the place of origin. Although there exist differences, several similarities still occur between the banking systems.

Sharia Banking

Islamic banking adheres to Islamic or sharia laws. The system has become more prevalent in regions dominated by the Muslim community (Alison, 2017). Islamic banking is implementing banking services in accordance with the Sharia laws to cater to Muslim clients. Sharia banking does not allow charging of interest, which is also called riba in Arabic. It also prohibits saving of investments that are considered sinful in the Muslim religion. The systems that aim at charging the clients to benefit the banks’ such credit cards are also highly prohibited (Suliman, 2006).

Western Banking

Western banking is the widely accepted system in many countries. It does not operate based on any religious or cultural beliefs. Its operations is based on capitalism, thus aims at making profit out of the services they offer (Muhammad, 2011). They charge specific amount of interests on deposits and loans. The interest charged on their clients form the main income in the operation of the bank.

Contrast between the Sharia Banking and the Western Banking

Islamic and Western banking resembles one another in the sense that both aim at making profit by lending capital to clients (Alison, 2017). They both focus on ethical investment and lending of capital without an aim of victimizing the clients. Islamic bank avoids interest but this does not affect its operation as it may seem. What the Sharia banking does is to share in a joint venture with the clients a proportion of the risk and the profit. It creates its own financial products through Islamic contracts and sharing of profits (Suliman, 2006). Islam banks like the Western Banking offers loans based on the viability of the project and contracts are signed by both parties.

Based on moral purposes, Islamic, Arabs and Western banking conveys an interest to achieve ii through its financial services (Suliman, 2006). The goal of Sharia and Saudi banking is to offer financial services upholding their religious beliefs (Alison, 2017). They advocate for socio-economic justice in every commercial deals. Industries that are considered to be dealing in sinful activities are not permitted to invest with the banks. The so called sharia laws are set in content that is typically governed by the Islamic council.

The influence of immigration of people has raised demands for the banks to offer diverse services. The Islamic and Arab banking’s are not limited to companies only owned by Muslims (Alison, 2017). The Western banks have been responding positively to demands of immigrants from the Muslim and Arab communities to incorporate both the Sharia and Saudi banking services. The Sharia banking have ben adopting the Western practices in the sense of the ethics, and codes of conduct.

Although contracts profit earned in both the Islamic and Western banking are comparable, there exists a difference in the risk. The nature of the risk is entirely different from each system. In the Western banking, the only risk is that of default, while under the Islam several risks exist. The risks include the price, technology and security on top of the credit risks (Muhammad, 2011).

According to the contract bank purchases a lease of an asset to the client under the Islam banking is held for a specific period of time (Muhammad, 2011). During the lease period, the asset still belongs to the bank and the risk is borne by the same institution. After the lease period, the asset is either handed for free to the client or charged a small fee. The total amount charged on the leased property is the equal in the both systems of banking. However, there is a difference in the risk held by both banking. While the Muslim banking only bears the risk of default, the Islamic banking bears more risks including theft and repair costs.

Difficulties faced by a Muslim Company in a non-sharia Banking Country

A company that is owned and operates in the Islamic guidelines may face challenges when operating in a non-Muslim country. Since the banking and financial management policies in a Sharia` governed country differ with the ones in the Western, the enterprise will experience some changes. In the sharia banking policies, loans do not have interests charged on top of the initial loans. However, in a country which is not observing the sharia laws the company will be required to pay interest on top of the loan. Such a company will have to adjust to the requirements of the bank. Since the Western banking is established on the bases of capitalism, it depends highly on the interest charged on deposits and loans (Muhammad, 2011). Its ability to survive in the western environment will be minimal.

Conclusion

The banking system is an essential sector in the business enterprises. The different policies that a banking system is operating in determine its effectiveness to the economy of the country. Businesses and lenders depend on the favorable policies that the banks put in place. The no interest loans benefit the business since there are no additional expense costs. Culture determines the policies that guide a banking system. Favorable policies favor the business operations and survival in the market.

References

Alison L (2017) A Modern Comparison of Western Banking to Islamic Banking Retrieved from: https://classroom.synonym.com/the-concept-of-riba-banking-in-islam-12086331.html

Suliman H (2006) Banking and Finance Retrieved from: https://www.arabdevelopmentportal.com/publication/banking-system-islamic-countries-saudi-arabia-and-egypt

Muhammad H (2011) Differences and Similarities in Islamic and Conventional Banking Retrieved from: https://www.researchgate.net/publication/228201721_Differences_and_Similarities_in_Islamic_and_Conventional_Banking