A COMPARATIVE ANALYSIS OF OPERATIONAL PRINCIPLES IN ISLAMIC AND CONVENTIONAL BANKING
Article Sidebar
Main Article Content
Abstract
This article aims to explore & compare the operational principles of Islamic Banking (IB) & Conventional Banking (CB) to enhance awareness & deepen understanding of IB, with the further goal of establishing a foundation for the development of joint IB & CB products in Latvia. The study investigates a comparative analysis of IB & CB operational principles is conducted through a systematic literature review, highlighting key similarities & differences. Data was sourced from various electronic databases, with no restrictions on selecting papers based on the authors' religious backgrounds or countries of origin. The results show four key areas of similarity between IB & CB: both are financial institutions, operate globally, adhere to principles of corporate social responsibility, & are regulated by central banks. However, nine significant differences were observed concerning: the use of interest in capital allocation, profit & loss sharing mechanisms, regulatory frameworks, the influence of religious principles, conditions for current & savings accounts, investment opportunities & types, financing & insurance practices, security requirements, and late payment charges of funding. These findings help to underst the operational principles distinguishing IB from CB. This knowledge is valuable to researchers and potential clients of IB & CB to enhance their awareness & motivation to explore IB & CB products & services, and it enables them to make informed & flexible choices between the two banking systems based on their current needs, interests, & goals. The study also explores pathways for collaboration between the banking systems, proposing a customer-centric banking philosophy.
JEL Classification Codes: E50, E58, G20, G21, G24, G29.
Downloads
Article Details
Section
This work is licensed under a Creative Commons Attribution 4.0 International License.
How to Cite
References
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). (2021). Shariah standards. Retrieved from https://www.aaoifi.com
Abdelsalam, O., Fethi, M., Matallín, J., & Tortosa-Ausina, E. (2014). On the comparative performance of socially responsible and Islamic mutual funds. Journal of Economic Behavior & Organization, 103, S108-S128. https://doi.org/10.1016/j.jebo.2012.09.014
Abedifar, P., Molyneux, P., & Tarazi, A. (2013). Risk in Islamic banking. Review of Finance, 17(6), 2035-2096. https://doi.org/10.1093/rof/rfs041
Aderemi, A., & Ishak, M. (2023). Qard Hasan as a feasible Islamic financial instrument for crowdfunding: Its potential and possible application for financing micro-enterprises in Malaysia. Qualitative Research in Financial Markets, 15(1), 58–76. https://doi.org/10.1108/QRFM-12-2020-0254
Aggarwal, R., & Yousef, T. (2000). Islamic banks and investment financing. Journal of Money, Credit, and Banking, 32(1), 93–120. https://doi.org/10.2307/2601094
Ahmad, A., & Hassan, M. (2007). Regulation and performance of Islamic banking in Bangladesh. Thunderbird International Business Review, 49(2), 251–277. https://doi.org/10.1002/tie.20140
Akmansyah, M. (2015). Al-Qur’an dan Al-Sunnah sebagai dasar ideal pendidikan Islam. Ijtimaiyya: Jurnal Pengembangan Masyarakat Islam, 8(2), 127-142.
Al-Augby, S., Majewski, S., Nermend, K., & Majewski, K. (2015). Islamic banking system as an effective element of economy. Zeszyty Naukowe Uniwersytetu Szczecińskiego: Finanse, Rynki Finansowe, Ubezpieczenia, 1, 7-18.
Ali, S. (2004). Islamic modes of finance and associated liquidity risk. Paper presented at the Conference on Monetary Sector in Iran: Structure, Performance and Challenging Issues, Tehran, Iran.
Al-Mubarak, T., & Osmani, N. (2010). Applications of Maqasid al-Shari’ah and Maslahah in Islamic banking practices: An analysis. Paper presented at the International Seminar on Islamic Finance in India (Vol. 4, No. 6).
Anginer, D., Bertay, A., Cull, R., Demirgüç-Kunt, A., & Mare, D. (2019). Bank regulation and supervision ten years after the global financial crisis. World Bank Policy Research Working Paper, 9044. https://doi.org/10.1596/1813-9450-9044
Anwar, H. (2008). Islamic finance: A guide for international business and investment. London, UK: GMB Publishing.
Arbouna, M. (2000). The operation of retakaful (Islamic reinsurance) protection. Arab Law Quarterly, 15(4), 335–348. https://doi.org/10.1163/026805500125824219
Aris, N., Othman, R., Azli, R., Sahri, M., Razak, D., & Rahman, Z. (2013). Islamic banking products: Regulations, issues and challenges. Journal of Applied Business Research, 29(4), 1145–1156. https://doi.org/10.19030/jabr.v29i4.7922
Ariss, R. (2010). Competitive conditions in Islamic and conventional banking: A global perspective. Review of Financial Economics, 19(3), 101–108. https://doi.org/10.1016/j.rfe.2010.03.002
Asni, F. (2021). The difference of Shariah risk potential and Shariah risk in personal financing products based on tawarruq munazzam contracts practised in Malaysia. Qualitative Research in Financial Markets, 14(1), 95-118. https://doi.org/10.1108/QRFM-06-2020-0110
Aysan, A. F., Disli, M., Duygun, M., & Ozturk, H. (2018). Religiosity versus rationality: Depositor behavior in Islamic and conventional banks. Journal of Comparative Economics, 46(1), 1-19. https://doi.org/10.1016/j.jce.2017.03.001
Beck, T., Merrouche, O., & Demirgüç-Kunt, A. (2013). Islamic vs. conventional banking: Business model, efficiency and stability. Journal of Banking & Finance, 37(2), 433–447. https://doi.org/10.1016/j.jbankfin.2012.09.016
Ben Amar, A., & El Alaoui, A. (2023). Profit- and loss-sharing partnership: The case of the two-tier mudharaba in Islamic banking. International Journal of Islamic and Middle Eastern Finance and Management, 16(1), 81-102. https://doi.org/10.1108/IMEFM-09-2020-0468
Bitar, M., Madies, P., & Taramasco, O. (2017). What makes Islamic banks different? A multivariate approach. Economic Systems, 41(2), 215–235. https://doi.org/10.1016/j.ecosys.2016.06.003
Bitar, M., Pukthuanthong, K., & Walker, T. (2020). Efficiency in Islamic vs. conventional banking: The role of capital and liquidity. Global Finance Journal, 46, 100487. https://doi.org/10.1016/j.gfj.2019.100487
Boumediene, A. (2011). Is credit risk really higher in Islamic banks? The Journal of Credit Risk, 7(3), 97–129. https://doi.org/10.21314/JCR.2011.125
Branco, M., & Rodrigues, L. (2007). Issues in corporate social and environmental reporting research: An overview. Issues in Social and Environmental Accounting, 1(1), 72–90. https://doi.org/10.22164/isea.v1i1.12
Carruthers, S. (2008). Canada: Islamic financial services in Canada: Recent developments and long-term prospects. Mondaq. Retrieved August 22, 2009, from https://www.mondaq.com
Central Bank of Malaysia. (2020). Islamic banking & takaful. Retrieved from https://www.bnm.gov.my
Chelhi, K., El Hachloufi, M., Aboulethar, M., Eddaoui, A., & Marzak, A. (2017). Estimation of Murabaha margin. Journal of Applied Finance & Banking, 7(5), 49–67.
Chhapra, I., Ahmed, A., Rehan, R., & Hussain, F. (2018). Consumer’s preference and awareness: Comparative analysis between conventional and Islamic Ijarah auto financing in Pakistan. Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah, 10(2), 389-402. https://doi.org/10.15408/aiq.v10i2.6944
Chiu, S., Newberger, R., & Paulson, A. (2005). Islamic finance in the United States: A small but growing industry. Chicago Fed Letter, 214, 1–4.
Chong, B. S., & Liu, M. H. (2009). Islamic banking: Interest-free or interest-based? Pacific-Basin Finance Journal, 17(1), 125–144. https://doi.org/10.1016/j.pacfin.2007.12.003
Demirgüç-Kunt, A., Klapper, L., & Randall, D. (2014). Islamic finance and financial inclusion: Measuring use of and demand for formal financial services among Muslim adults. Review of Middle East Economics and Finance, 10(2), 177-218. https://doi.org/10.1515/rmeef-2012-0028
Doumpos, M., Hasan, I., & Pasiouras, F. (2017). Bank overall financial strength: Islamic versus conventional banks. Economic Modelling, 64, 513-523. https://doi.org/10.1016/j.econmod.2017.04.012
Duran, J. J., & Garcia-Lopez, M. J. (2012). The internationalization of Islamic banking and finance: The co-evolution of institutional changes and financial services integration. International Journal of Business and Management, 7(13), 49-74. https://doi.org/10.5539/ijbm.v7n13p49
Dusuki, A. W., & Abdullah, N. I. (2007). Why do Malaysian customers patronise Islamic banks? International Journal of Bank Marketing, 25(3), 142-160. https://doi.org/10.1108/02652320710739850
El-Gamal, M. A. (2008). Contemporary Islamic law and finance: The trade-off between brand-name distinctiveness and convergence. Berkeley Journal of Middle Eastern & Islamic Law, 1(1), 193-204.
Farook, S., & Farooq, M. (2011). Shariah governance for Islamic finance: Challenges and pragmatic solutions. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1813483
Ferguson, T. (2008). Takaful 2.0: Using the power of the Web to realize the global potential of Islamic insurance. Holy Qur’an: Text, Translation & Commentary by Abdullah Yusuf Ali, Sartaj Company, Durban, South Africa, Sura II 262, 267–270.
Ganouati, J., & Essid, H. (2017). The sources of productivity change and efficiency in Islamic banking: Application of Malmquist productivity index. Central European Review of Economics & Management (CEREM), 1(4), 35–68. https://doi.org/10.29015/cerem.586
Ghannadian, F. F., & Goswami, G. (2004). Developing economy banking: The case of Islamic banks. International Journal of Social Economics, 31(8), 740–752. https://doi.org/10.1108/03068290410550652
Gunputh, R. P. (2014). Micro-credit in conventional banking: Would Islamic banking be the golden age for entrepreneurs? The Mauritius case study. Journal of Social and Development Sciences, 5(1), 14–25. https://doi.org/10.22610/jsds.v5i1.809
Haddad, A. (2023). Does the country’s religion affect the financial performance of conventional and Islamic banks? Comparative study in the international framework. Journal of Islamic Marketing, 14(2), 410–434. https://doi.org/10.1108/JIMA-04-2020-0120
Haddaway, N. R., Collins, A. M., Coughlin, D., & Kirk, S. (2015). The role of Google Scholar in evidence reviews and its applicability to grey literature searching. PLoS One, 10(9), e0138237. https://doi.org/10.1371/journal.pone.0138237
Hamedian, B. (2013). Financial performance of Islamic banks vs. conventional banks: The case of Malaysia (Doctoral dissertation, Eastern Mediterranean University).
Hanif, M. (2014). Differences and similarities in Islamic and conventional banking. International Journal of Business and Social Sciences, 2(2), 166–174.
Hasan, M., & Dridi, J. (2011). The effects of the global crisis on Islamic and conventional banks: A comparative study. Journal of International Commerce, Economics and Policy, 2(2), 163–200. https://doi.org/10.1142/S1793993311000270
Higgins, J. P., Altman, D. G., Gøtzsche, P. C., Jüni, P., Moher, D., Oxman, A. D., & Sterne, J. A. (2011). The Cochrane Collaboration’s tool for assessing risk of bias in randomized trials. BMJ, 343, d5928. https://doi.org/10.1136/bmj.d5928
Ismail, H. (2020). The legal basis of depositor's fund in banking systems: A comparative analysis. Beijing Law Review, 11(3), 602–616. https://doi.org/10.4236/blr.2020.113036
Johnes, J., Izzeldin, M., & Pappas, V. (2014). A comparison of performance of Islamic and conventional banks 2004-2009. Journal of Economic Behavior & Organization, 103, S93-S107. https://doi.org/10.1016/j.jebo.2012.06.007
Jubilee, R., Kamarudin, F., Latiff, A., Hussain, H., & Tan, K. M. (2021). Do Islamic versus conventional banks progress or regress in productivity level? Future Business Journal, 7(1), 1-22. https://doi.org/10.1186/s43093-021-00079-y
Kaleem, A., & Isa, M. (2003). Causal relationship between Islamic and conventional banking instruments in Malaysia. International Journal of Islamic Financial Services, 4(4), 1–8.
Kazmi, A. (2001). A comparative study of Islamic banking in Iran and Pakistan (Master’s dissertation, University of Tehran).
Khan, M. K., Shehzad, M. S., & Khan, M. I. (2015). Contemporary challenges confronting Islamic banking and finance. International Letters of Social and Humanistic Sciences, 55, 86–94. https://doi.org/10.18052/www.scipress.com/ILSHS.55.86
Kitchenham, B., & Brereton, P. (2013). A systematic review of systematic review process research in software engineering. Information and Software Technology, 55(12), 2049-2075. https://doi.org/10.1016/j.infsof.2013.07.010
Kumar, K., & Prakash, A. (2019). Developing a framework for assessing sustainable banking performance of the Indian banking sector. Social Responsibility Journal, 15(5), 689–709. https://doi.org/10.1108/SRJ-01-2017-0016
Lassoued, M. (2018). Comparative study on credit risk in Islamic banking institutions: The case of Malaysia. The Quarterly Review of Economics and Finance, 70, 267-278. https://doi.org/10.1016/j.qref.2018.05.009
Ledhem, M. A., & Mekidiche, M. (2020). Economic growth and financial performance of Islamic banks: A CAMELS approach. Islamic Economic Studies, 28(1), 47–62. https://doi.org/10.1108/IES-05-2020-0011
Lee, K. W., & Ullah, S. (2007). Integration of Islamic and conventional finance. International Review of Business Research Papers, 3(5), 241–265.
Lewis, M. K., & Algaoud, L. M. (2001). Islamic banking. Cheltenham, UK: Edward Elgar Publishing. https://doi.org/10.4337/9781781951425
Maysami, R. C., & Kwon, W. J. (1999). An analysis of Islamic Takaful insurance. Journal of Insurance Regulation, 18(1), 109–132.
McMillen, M. J. T. (2012). Islamic banking: Home purchase financings IV: Bai bithamen ajil and istisna’a, parallel istisna’a. Islamic Finance News, 9(5), 28–34.
Mohanty, A., & Saini, A. (2014). A comparison of Islamic banking and conventional banking system in India: A conceptual approach. Al-Barkaat Journal of Finance & Management, 6(1), 1–8. https://doi.org/10.5958/2229-4503.2014.00001.6
Munro, J. (2012). Usury, Calvinism and credit in Protestant England: From the sixteenth century to the Industrial Revolution. London, UK: Routledge.
Musa, H., & Musová, Z. (2010). Islamic finance and banking, Challenges and perspectives. Paper presented at the 5th International Scientific Conference on Managing and Modelling of Financial Risk, Ostrava, Czech Republic (pp. 269-276).
Musa, H., Natorin, V., Musová, Z., & Durana, P. (2020). Comparison of the efficiency measurement of the conventional and Islamic banks. Oeconomia Copernicana, 11(1), 29-58. https://doi.org/10.24136/oc.2020.002
Odeduntan, A. R., Adewale, A. A., & Hamisu, S. A. (2016). Financial stability of Islamic banks: Empirical evidence. Journal of Islamic Banking & Finance, 4(1), 39–46.
Ofurum, O. O., & Chinyere, I. A. (2007). Islamic financing/banking in the Nigerian economy: Is it workable? A review of related issues and prospects. Paper presented at the First National Conference on Islamic Finance, University Darul Iman, Terengganu, Malaysia.
Okoli, C. (2015). A guide to conducting a standalone systematic literature review. Communications of the Association for Information Systems, 37, 879-910. https://doi.org/10.17705/1CAIS.03743
Oladimeji, M. S., Aziz, M. R. A., & Khairi, K. F. (2015). Regulatory and supervisory Shariah governance of Islamic banking system: Comparative analysis of Malaysia and Nigeria. Journal of Islam, Law & Judiciary, 1(4), 72–90.
Patino, C., & Ferreira, J. (2018). Inclusion & exclusion criteria in research studies: Definitions & why they matter. Jornal Brasileiro de Pneumologia, 44, 84. https://doi.org/10.1590/S1678-97452018004484
Polychronidou, P., Ioannidou, E., Kipouros, A., Tsourgiannis, L., & Simet, G. (2014). Corporate social responsibility in Greek banking sector. An empirical research. Procedia Economics & Finance, 9, 193-199. https://doi.org/10.1016/S2212-5671(14)00021-0
Qaed, I., & Qaed, M. (2014). The concept of wadiah & its application in Islamic banking. Journal of Research in Humanities & Social Science, 2(11), 70–74.
Rafay, A., Sadiq, R., & Ajmal, M. (2017). Uniform framework for Sukuk al-Ijarah a proposed model for all madhahib. Journal of Islamic Accounting & Business Research, 8(3), 242–259. https://doi.org/10.1108/JIABR-03-2016-0041
Rahim Abdul Rahman, A. (2010). Islamic microfinance: An ethical alternative to poverty alleviation. Humanomics, 26(4), 284–295. https://doi.org/10.1108/08288661011093943
Rahman, A. (2007). Islamic banking & finance: Between ideals & realities. International Journal of Economics, Management & Accounting, 15(2), 149–169.
Rashid, H. (2007). The performance of Pakistani Islamic bank during 1999–2006: An exploratory study. In Proceedings of the 15th Annual Conference on Pacific Basin Finance, Economics, Accounting & Management (p. 234). https://doi.org/10.2139/ssrn.1015291
Salman, A., & Nawaz, H. (2018). Islamic financial system & conventional banking: A comparison. Arab Economic & Business Journal, 13(2), 155–167. https://doi.org/10.1016/j.aebj.2018.11.001
Santos, J. (2000). Bank capital regulation in contemporary banking theory: A review of the literature. Financial Markets, Institutions & Instruments, 10(2), 41–84. https://doi.org/10.1111/1468-0416.00053
Shaffril, H., Krauss, S., & Samsuddin, S. (2018). A systematic review on Asian's farmers' adaptation practices towards climate change. Science of the Total Environment, 644, 683–695. https://doi.org/10.1016/j.scitotenv.2018.06.107
Siddiqi, M. (2006). Islamic banking & finance in theory & practice: A survey of state of the art. Islamic Economic Studies, 3(2), 1–48.
Sobol, I. (2015). Islamic banking in the European Union countries. European Integration Studies, 9(1), 184-197.
Song, M. I., & Oosthuizen, C. (2014). Islamic banking regulation & supervision survey results & challenges. IMF Working Paper No. 14/220. https://doi.org/10.5089/9781498343875.001
Stagg-Macey, C. (2007). An overview of Islamic insurance. Kuala Lumpur: ICMIF Takaful.
Tayyebi, A. (2009). Eclipse by the crescent moon: Islamic finance provides some light in the global financial crisis. Financial Services Review, 18, 14-16.
Tolefat, A. (2006). Mixed model is best approach. Kuala Lumpur: ICMIF Takaful.
Ullah, S., & Jamali, D. (2010). Institutional investors & corporate social responsibility: The role of Islamic financial institutions. International Review of Business Research Papers, 6(1), 619–630.
Valls Martínez, M., Cruz Rambaud, S., & Parra Oller, I. (2020). Sustainable & conventional banking in Europe. PloS One, 15(2), e0228157. https://doi.org/10.1371/journal.pone.0228157
Willis, K. (2007). Applying insurance credit ratings to takaful companies. Kuala Lumpur: ICMIF Takaful.
Worthington, A., & Gait, A. (2007). An empirical survey of individual consumer, business firm & financial institution attitudes towards Islamic methods of finance. Working Papers Series, University of Wollongong School of Accounting & Finance. https://ro.uow.edu.au/commwkpapers/168
Wouters, P. (2007). Islamic banking in Turkey, Indonesia & Pakistan: A comparison with Malaysia. Islamic Finance News, 4(42), 1-4.
Yurista, D., & Ardi, M. (2020). Analysis of the role of mudharabah principle in developing Islamic financial instrument. In Conference on Islamic Studies FAI 2019 (pp. 12-21). https://doi.org/10.1109/ICISFAI.2019.00007
Zainordin, N., Selvaraja, M., Man, N., & Hoong, L. (2018). Challenges & opportunities of Islamic banking & financial institutions in Malaysia. South East Asia Journal of Contemporary Business, Economics & Law, 10(1), 1-30.