The Foundations of Islamic Banking

The Foundations of Islamic Banking

Theory, Practice and Education

Edited by Mohamed Ariff and Munawar Iqbal

After barely half a century of experience, Islamic banking has become established as a niche industry across the world, offering new and sophisticated financial products designed to be compliant with Islamic legal principles and common law. This comprehensive book explores the theory, principles and practices underpinning this rapidly expanding sector of banking.

Chapter 8: Performance of Islamic Banks and Conventional Banks

Mohamed Ariff, Mohammad K. Badar, Shamsher Mohammad and Taufiq Hassan

Subjects: economics and finance, financial economics and regulation, islamic economics and finance

Extract

Mohamed Ariff, Mohammad K. Badar, Shamsher M. and Taufiq Hassan 1.0 INTRODUCTION In this chapter an attempt is made for the first time to assess the financial performance of Islamic banks and conventional banks by choosing a matched sample of banks to assess their financial performance across the world over a lengthy period. Islamic banking is based on replacing the prefixed-interest-based bank deposit-cum-lending activities with risk-sharing and profit-sharing principles advocated by Islam, which in turn appears to be consistent with the social norms of pre-modern societies prior to the rise of interest-based-fractioning banking in the last 200 years, which refers to the fractional-reserve banking from the close of the 18th century. Risk- and profit-share principles in financial transactions have been with humanity for a long time and they are still practiced silently in most rural non-bank lending activities across the world. They have certainly been followed for a long time in Islamic countries, where lending practices reshaped the old pre-Islamic practices across the then known world by avoiding pre-fixed interest-based lending practices in preference of risk-share–profit-share principles. The modern banking practice of fractional lending and pre-fixed interest without risk-sharing developed over the last three centuries just around 1752 AD following the papal dictate lifting the Catholic ban on interest-based lending.1 For some 45 years since 1963 the old practice of financial transaction of risk-share–profit-share lending has come back to be formally organized in Islamic banking. As at 2008 this form of banking practice has become heavily institutionalized in...

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