Financial and management practices

Financial and management practices

Introduction

Financial management practices have a significant impact on the financial performance of any corporate organization. This, therefore, calls for sound financial decision making. This will contribute to getting the desired profitability from their day to day operations. Every continent has its financial management practices, especially when it comes to banking. One of these variances is Islamic financial management practices and western banking. Islamic banking is also known as Sharia-compliant finance. Sharia law tends to influence banking and financing activities that lead to a more developed Islamic economy. It comprises various models such as the Wadiah (safekeeping), Ijara (leasing), among others. All of these models help them to become stricter when it comes to matters pertaining to finance. Western or conventional banking has also formed the paradigm of banking. Both of these banking operations have the same operations and purposes; the only difference comes in that the sharia compliance is strict and follows the laws set to the latter. The more substantial gap between the two is the religion cut, which does not in any way interfere in the way operations are run. Their main aim is providing a wide range of financial requirements to communities and societies worldwide. Due to the increased rise in new businesses that require financial support from these banking paradigms, it has thus seen a merger in these two banking, for example, the Saudi American bank. Even though they operate differently, their alliance is solely to offer financial services to the people.

Broad research done on the various similarities and differences of these banking systems has shown that they have one significant difference, which is, Islamic banking follows and is supported by the shariah law. In contrast, that of western banking is governed by regulations made by humanmade principles. This difference is brought out by the way they handle liabilities and risks. Islamic banks require one to have a liability beneficiary before any transaction takes place with their clients, while the western banks do not accept liability during sales with their clients. The banking of the west tends to gain benefits from their clients in the form of interests put on the debt issued (Iqbal, Molyneux, 2016). Western banking deals more with the elimination of risks rather than bearing the threat as it is seen in the Islamic banks. In this case, the client bears all the risk since capital is a significant factor in production; therefore, a fixed risk-free reward. This risk-free reward is in the form of interest.

Religion is a primary contributing factor in both paradigms of banking that has led to their existence. However, the conventional way of banking does not entirely rely on religion but also on capitalism, unlike Islamic banking. The western banking puts across operations as a debtor-creditor relationship. Islamic banking follows the codes of ethics in the Holy Quran. They fully follow the shariah law, which thus makes its relationship with its clients based on this law (Bilal, Abbas, 2015, pp39-43). This means that they do not offer interest-based transactions; they avoid all economic activities that include oppression and speculations. They also discourage the production of any goods that tend to drift away from Islamic law. They, however, use two banking principals that are the joint venture and profit venturing.

Islamic banks do not ask to follow the profit and loss model to get their operations running. This is because their law prohibits the same (Jawadi, Cheffou, Jawadi, 2016, pp293-302). They do not fine or ask their clients to pay the defaulters fee for not paying on time. For Islamic banking, a small fee is paid but not for the running operations at these banks but is considered as or for charity. Their profits and losses are equally shared between the banks, the depositors, and the borrowers. This tends to encourage the borrower to engage in even more risky businesses since the risk in Islamic banking is shared equally (Lone, Aldawood, Bhat, 2017, pp273-380). The deposits in both models of banking ensure that the depositor enjoys full benefits on each deposit that they make on the bank. The only variance comes in how these banks reward their depositors. The terms and conditions are different. The western banks use predetermined fixed rewards to all their depositors.

In contrast, for Islamic banking, the compensation varies from deposited to deposited with almost no terms and conditions attached to it. In the western banking system, the long term deposits tend to reap a lot of benefits while the lower the deposits, the lower the profits. This is also similar to Islamic banking. However, depositors can gain benefits from both banks, even though they face unfixed rates in Islamic banking. The western banking offers total profits and risks to their clients, while the Islamic banking systems offer rewards and threats that have been equally shared with the depositor. In this case, the depositor does not take full responsibility for risks.

A Saudi company might encounter a lot of challenges when doing business in a nation that does not follow the shariah law and is more into the western banking paradigm. One of the challenges they might face is that the public might not be aware of this type of banking; therefore, the need to do a lot of marketing. This company is likely to exploit people in the name of religion; for example, the India case that turned out to be a scam after it took Rs1500 cores from the people. Since they do not have better regulation policies and co-operation, they might not be able to face the unique risks in the industry as the western banking does. They do not have policies that are meant to uplift the poor and small investments, unlike western banking, thus having a hard time when it comes to looking for clients. They will have a small customer base, especially in this country that follows the western banking. In states that do not follow the Islamic religion as much, it would be hard for them to make any profits or get any customers. Even though they go for non-Islamic customers as well, it would be hard for people to start investing with this company due to the widely used religious policies.

Conclusion

Both western and Islamic banking offers financial support to the community. There are, however, differences and similarities between the two. It is upon a client to evaluate the two paradigms and know what and which to follow. They all have their critics and challenges, but all have one goal, and that is the financial support they offer to the people and, at the same time, net profits for the same.

References

Bilal, M., & Abbas, S. (2015). Comparison of Islamic banking and conventional banking: An empirical review. Studies, 4(1), 39-43.

Iqbal, M., & Molyneux, P. (2016). Thirty years of Islamic banking: History, performance, and prospects. Springer.

Jawadi, F., Cheffou, A. I., & Jawadi, N. (2016). Do Islamic and conventional banks differ? A panel data statistical analysis. Open Economies Review, 27(2), 293-302.

Lone, F. A., Aldawood, E. M., & Bhat, U. R. (2017). Comparative analysis of customer satisfaction towards Islamic and conventional banking: an empirical study from Saudi Arabia. International Review of Management and Marketing, 7(1), 273-280.