Islamic Banking Essay Example | Topics and Well Written Essays - 1500 words

Islamic Banking - Essay Example Islamic Banking is a type of banking that is constantly based on the Islamic or Shariah law and its implementation is through the growth of Islamic economics. This type of banking system prohibits the fixed payment interest on loaned money and it also shuns the investment in the business that cater goods and services that are considered unlawful in Islam. Today more than 200 Islamic financial institutions exist around the world (Iqbal and Llewellyn, 2002). Ahmad El Najjar pioneered the first Islamic bank that came into existence in Egypt, in 1963. Thus, when 1976 ended, there were nine banks in the country that were established on the same concept; however, previously in 1974 the Organization of Islamic Countries had established a bank called Islamic Development Bank that purely ran on the principles of Islam. Although the bank was not a commercial one, it did provide funds for the businesses in order to encourage economic growth. After recognizing the Islamic banking system, several banks came into existence, such as Dubai Islamic Bank, Faisal Islamic Bank of Sudan, and the Bahrain Islamic Bank (Shariah-Fortune, 2012). Despite the growing trend in the Islamic banking system, unfortunately the inception of Islamic Banking in Pakistan did not survive. ... The banks previously were more focused on interest free banking; however in 1985, the Organization of Islamic Conference affirmed takaful, or Islamic insurance, as Shariah compliant. Thus, this gave the Islamic banking sector a wider tangent that now covered capital markets, capital formation, and varied financial instruments and intermediaries (Shariah-Fortune, 2012). The development and growth of Islamic Banking has always been experimental. The pioneers of the Islamic Banking have faltered, failed, and learnt through mistakes over time. However, the system has been prolific to the economies. Several empirical studies entail that the performance and efficiency of Islamic banking are significantly good. One of the studies conducted by Iqbal in 2001 drew a sample from countries that had Islamic and conventional banking; he took 12 Islamic banks and 12 conventional banks from 10 countries in order to find out the productivity of the banks using a comparative framework. His study concl uded that the Islamic banking displayed higher rates of growth in key variables in comparison to the conventional banking system. It also highlighted that the Islamic banks apparently performed well and generally they yielded good profits and well capitalized; another factor that surfaced was that Islamic banks used resources more effectively, which were available to them. Moreover, when the conventional banks were studied alongside Islamic banks as a group, it turned out that they outperformed the conventional system in all areas. However, there were certain variations among the Islamic banks that surfaced during the studies in terms of growth and performance (Iqbal, 2011). Nevertheless, Samad in 1999 compared