Role and Functions of the Central Bank under the dual banking system

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Islamic Financial Institutions and Markets
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Role and Functions of the Central Bank under the dual banking
system (Conventional and Islamic Banking) – Case of Maldives
Introduction
The banking system in Maldives is guided by the central bank. The
central bank of Maldives is also known as Maldives Monetary Authority
(Habib Bank Limited (HBL), 2019). This body was propounded in 1981. Its
formation was under the Monetary Act called the Maldives Monetary
Authority Act of 1981 and it is found in Male the capital city of Maldives. The
governor of the Central bank of Maldives is called Ahmed Nasser who is
being assisted by his deputy called Aishath Zahira (Habib Bank Limited,
2019).
The Maldives Monetary Authority subscribes as the member of Asian
Clearing Union. Islamic banking is at time called banks without interests.
Islamic banking is guided by the sharia rules and is majorly engaged in
sharing of profits and losses and proscribes the interests collected from the
lenders and some investors. This Islamic banking acquires its profits through
engaging in ownership shares or equity in the bank (Habib Bank Limited
(HBL), 2019). There are several commercial banks in Maldives which give
services of banking to customers. These banks operating under the Islamic
banking include; Maldives Islamic bank among others. Islamic banking was
initiated long ago in the seventh century (Dhivei, 2017). Most of the Muslim
communities in the world used to rely on Islamic banking with special

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attached guidelines and regulations. Such rules were reserved following
Sharia principles of Hadith and Quran. The management of Islamic type of
banking always aims at providing services with the aim of not deviating away
from the principals of Quran and Hadith.
The main objective of Islamic banking is to provide banking services to the
clients without charging interests. However, the banks do give loans ton
people without interests attached but instead shares the profits made from
the loan given to the businessmen. This can be evidenced by the scenario in
Egypt which happened in 1963. When Islamic banking as introduced in Egypt
in the city of MitGhmar, the banks were giving loans at interest rates but
sharing on the profits acquired by the businessmen and this was attained
without any default of loans, thus showing the purpose of Islamic Banking in
the whole world.
Also, there is Conventional type of banking in Maldives. Conventional
banking refers to the banking system which is run by the guidelines of the
owners of the banks (Salman and Nawaz, 2018). Conventional banking
always aims at profit maximization through putting interests on loans to
customers high. This system of banking can even make customers acquire
loans even when they lack collateral securities. Collateral securities can be
either in form of liquid or real assets. Conventional banking charges interest
rate and fines to the defaulters of loans with high interest rates to be paid
back. The system of banking allows banks to increase the interest rates in
case inflation affects the economy (Maldives Islamic Bank Private. Ltd,2011).