Fundamentals of Islamic Finance and Banking

CHAPTER 3Islamic Banking versus Conventional Banking

Learning outcomes

Upon completion of this chapter, you should be able to:

1. Discuss Islamic banking visàvis conventional banking, identifying similarities and differences.
2. Explain the banks' relationship to the central banks as well as the generic and specific risks faced by Islamic banks.
3. Define financial intermediation, and compare conventional and Islamic financial intermediation.
4. Describe the sources and applications of funds for an Islamic bank, including Shariah-compliant contracts and common retail and corporate products offered by Islamic banks.
5. Discuss the accounting challenges faced by Islamic banks and their status during the financial crisis.
6. Describe the international Islamic regulatory and standard setting bodies.

INTRODUCTION TO ISLAMIC BANKING

Banks are institutions licensed by the central bank and allowed to take deposits from people. They also provide a host of other products and services including giving loans, collecting cheques, drafts, transferring money, providing guarantees, dealing in foreign exchange and assisting the client to invest. From the economic viewpoint, Islamic banks have a similar role to that of conventional banks. Banks use the funds collected as deposits to provide financing to other clients and invest their own and customer deposits.

The uniqueness of the Islamic bank comes from the fact that all transactions need to be in accordance with the Islamic Shariah principles. The ...