Finance Management and Accounting

Finance Management and Accounting

Banking as an institution is dating back to the 2nd Century BC. The ancient banking came into place during the agrarian revolution. The resources were not enough for formal trade, and hence the various institutions saw the need to set up banks. However, the institution did not involve money. Instead, there was the banking of items such as cattle, gold, grains, and so on. Temples and palaces were the safest places for storage. Priests and monks served as the “tellers” at that time. The banking institution later gained significant changes due to civilization. Subsequently, different fronts embraced separate systems of banking. The western banking system was adopted by the European countries and numerous other non-Islamic states. Islamic states, on the other hand, decided to practice Sharia Banking. This paper takes an in-depth look at the comparison between the two approaches to banking.

At a glance, both western and Islamic banking systems have more or less the same goal and purpose. The significant difference is that the Islamic system incorporates Sharia laws in its banking operations. Both sides make an equal contribution to the economy with the distinction of observing strict Islamic practices when it comes to Sharia banking. The different line is narrow because the methods on both sides aim at more or less the same purpose. One of the primary principles of banking is a commercial relationship between interest rates and banking. The Sharia system involves religious practices in the order. The conventional/western policy also applies the same principle but does not include spiritual matters. Otherwise, the difference gradually becomes invisible as the world moves towards a better financial standpoint. To prove this point, some banks operate both as conventional and Sharia. Citibank, Saudi American Bank, and Saudi British Bank are typical examples. The main reason is that commercialization is increasing, and the various economic fronts have to adjust accordingly. However, there has to be a distinction between the two systems, as we will see.

A look at the banking practice on the religious paradigm shows that both systems have a common origin. Despite all these, conventional banking is free from religious restrictions. Instead, this system is purely basing its practice on capitalism. Capitalism, as a tradition dictates the form of relationship among all parties within the system. The nature of the relationship in capitalism is for “creditor-debtor “and nothing else. In Sharia banking, the relations between the parties in a banking system are entirely based on Sharia laws. The Sharia laws (which come from the Holy Quran) are to determine the form of relationship between the bank and its clients (Ahmed et al., 2015). A portion of these standards under which the Islamic bank’s work incorporates; riba – the nonappearance of premium based exchanges. Grammar – evasion of financial exercises, including hypothesis. Zulm – shirking of monetary practices, including mistreatment. Zakat – Islamic duty paid by all clients and haram, which disheartens the creation of products and enterprises in opposition to Islamic worth. Additionally, Islamic banking has two approaches to contracts; profit-sharing (mudarabah) and joint venture (musyarakah).

The differences above bring significant variations to the two systems. The western system gives loans with interests according to the amount of investment and the time of payment. There is also a penalty for the lateness in paying a loan (defaulting). All these ideas are not the case in the Islamic system of banking. Loaning in the Sharia system is governed by the above standards. Riba, for example, does not allow interests on loans. In Sharia banking, profits and losses are equally shared among banks following mudarabah as a guideline. Decisively, the western financial targets boosting benefits with no limitations while Islamic banking, similar to the previous goals augmenting allowance yet under outrageous limitations of the Sharia law (Amir-Ud-Din, 2014). However, the bank is infrequently influenced: while in the Islamic financial worldview of benefit and misfortune sharing, the borrower is supported with bunches of motivations to complete tasks, including very high hazard. The business visionary is padded against misfortunes on the off chance that risk happens and then again appreciating incredible advantages on fruitful ventures, however the bank bear all the accidents caused in case of a hazard. It is, in this way, critical to look at the two financial structures in terms of danger and risk. Regarding this viewpoint, Islamic banking requires full cost observing on ventures embraced by borrowers to abstain from causing the large size of hazard.

When it comes to deposits, there is a bold lone of similarities between the two systems. In both systems, there are benefits to the individual who deposits money to the bank.

The depositors on both sides get rewards according to the amount of deposit given to the bank. The difference between the two parties only comes in the reward agreement terms. The western banking system has a fixed reward for the depositor. On the other hand, Islamic banking has the reward variable following minimum or no terms and conditions. This scenario being the case, it is clear that long-term deposits will attract high profits and vice versa in conventional banking. The same situation is in the Islamic system. The traditional system also offers fixed rates on deposits. The opposite is exact in Sharia banking; the prices are non-fixed.

The differences between the two sides are significant when it comes to business. A Saudi company that does business will find it difficult to operate in a conventional system due to these differences. Many companies take loans from banks to either start or boost operations. The Saudi company will find it challenging to take a loan due to the interest rate, which varies in many ways. The other difficulty will be the terms and conditions of acquiring an investment as well as investing elsewhere.

In many cases, the same sanctions on depositing money in a conventional system apply when investing. The company may also suffer additional charges on late payment of loans and interest rates (Jana et al., 2017). Additionally, interest rates change according to certain conditions in a particular country. These aspects of conventional banking will deem challenging for a Saudi company. Another difficulty will be coming from industrial policy. Countries that have a western banking system have different industrial policies in comparison to the Sharia system. There is a close relation between industrial policies with the banking system of a country. This concept will make it difficult for the Saudi company to comply with the general procedures.

Generally, a keen look into the various practices of banking in both systems outlines the underlying differences. Islamic system shows an approach of banking from a religious perspective. The regulations in the order are more directed to the sharing of risks and profits. The western system, on the other hand, requires responsibility in banking, which is governed by human-formulated regulations. The Islamic system tends to take charge of all the liabilities and risks as a way of relieving the clients. This case is a result of the strict Sharia law. The conventional side puts all the threats on the customers in the form of interests, penalties, and other types of charges. This case is a result of capitalism, where the participant bears all the potential risks. There is, however, a close relationship between the two sides. One looks at the main aspects of banking, such as investments, deposits, interests, and so on. Despite the glaring differences, both institutions strive to find ways of dealing with risks amicably.