Conventional banking involves securing deposits in
driblets from savers for
the purpose of lending or investing. This is essentially an
intermediation function where bankable propositions are financed and
investments are made either in safe treasury bonds or corporate
papers of varying qualities. Banking, principally a service
activity, has profit motive as a commercial
organization. Conventional banking thrives on public trust,
with highly leveraged positions involving about 8% as net worth and
as high as 92% of public money. It is precisely for this reason of
exceptionally high leverage that banks are regulated by central
bankers very closely to protect the interests of the depositors in
particular. The regulators expect banks to conduct their functions
on sound commercial lines, following efficient risk management
principles and complying with what are called prudential norms.
Islamic banking, on the other hand, is faith-based
banking, based on the principles enunciated by the `Shariah', essentially
targeted for the Muslim population, who account for over 1.7
billion people. However, some of the principles of this type of banking
attract non-Muslims as well, though not in good numbers.
Islamic banking prohibits payment or receipt of interest. It does not
allow lending to commercial activities based on vices, like gambling,
pornography drinking, smoking and drug trafficking thereby
making it ethically well rooted. It discourages excessive financial
leverage and highly speculative activities. |
