Comparative Analysis of Islamic and Conventional Banking Systems

Comparative analysis of Islamic and conventional banking systems examines fundamental distinctions in their philosophical underpinnings, operational mechanisms and risk profiles. Conventional banking operates on an interest-based framework in which financial institutions intermediate deposits and loans by charging interest as the cost of borrowing. In contrast, Islamic banking adheres to Shariah principles prohibiting interest (riba), emphasising profit-and-loss sharing arrangements and asset-backed financing. Core Islamic contracts include mudarabah (profit-sharing), musharakah (joint venture) and murabaha (cost-plus financing). Governance in Islamic banking is overseen by Shariah boards ensuring compliance with ethical norms, while conventional banks follow statutory regulatory and supervisory regimes. Empirical research highlights that Islamic banks often demonstrate greater stability during periods of market turbulence, attributable to risk-sharing models and conservative investment strategies. However, Islamic institutions face challenges in liquidity management and standardisation of Shariah interpretation, which may affect scalability. The dual banking model, where both systems co-exist, facilitates financial inclusion by offering products tailored to diverse preferences and cultural contexts. Global significance lies in the potential for Islamic finance to enhance financial resilience, promote ethical finance and diversify capital markets. Ongoing research explores performance metrics, regulatory frameworks and the integration of technological innovations to bridge gaps between the two systems and to harness synergies for sustainable economic growth.

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Comparative Analysis of Islamic and Conventional Banking Systems publication trend

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Technical terms

Murabaha: An Islamic financing structure where a bank purchases an asset and sells it to the client at a declared cost-plus margin.

Profit-and-loss sharing: A contract model (e.g. mudarabah, musharakah) where financial institution and client share profits and losses according to predetermined ratios.

Shariah compliance: Adherence to Islamic legal and ethical guidelines governing permissible financial transactions and investments.

Dual banking system: A regulatory framework in which both Islamic and conventional banks operate concurrently in the same financial market.

Liquidity risk: The risk arising from a bank’s inability to meet short-term obligations without incurring unacceptable losses.

References

1. Heterogeneity of the MENA region's bank stock returns: Does country risk matter?. Journal of Open Innovation: Technology, Market, and Complexity (2023).
2. COVID-19 and bank performance in dual-banking countries: an empirical analysis. Journal of Business Economics (2022).
3. A comparative analysis of financial performance of Islamic banks vis-à-vis conventional banks: evidence from Pakistan. ISRA International Journal of Islamic Finance (2021).