Comparative Analysis of Banking Systems: Saudi Arabia vs West

This report provides a comparative analysis of banking systems, focusing on the differences between Sharia and Western banking models. It explores the fundamental principles, operational practices, and financial management strategies employed by each system. The analysis highlights the key distinctions, such as the Sharia system's adherence to Islamic law, including the prohibition of interest (riba) and profit/loss sharing, compared to the Western system's focus on profit maximization and risk minimization. The report examines the impact of these differences on various aspects of banking, including customer relations, risk assessment, and the facilitation of internal and international trade. The conclusion emphasizes that while both systems aim to provide financial services and generate profits, the ethical and religious principles underlying Sharia banking significantly shape its operations and priorities.

Running head: COMPARITIVE ANALYSIS OF BANKING SYSTEMS
COMPARITIVE ANALYSIS OF BANKING SYSTEMS
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Introduction
The concept of banking refers to the operations of financial transactions, maintaining
credits and deposits of individuals or groups of individuals. In this regard, it may be noted
that banking systems play a very important role in determining the development of the
economy of a country. It is so because it enables the creation and distribution of capital
thereby aiding the growth of the economy form a micro as well as a macro level. The banking
systems of countries are utilized by not only individuals and households but also the business
organizations, and even the governments (Valdez, 2015). From the perspective of the nation
as whole, banking systems aid in facilitating internal as well as international trade through the
system of credits. There are various modes and methods of banking and banking systems that
may be adopted by different countries. In this regard, it may be noted that the country of
Saudi Arabia has adopted a Sharia system of banking, which is significantly different from
the traditional or widely recognized western system of banking and financial management.
The essay will further provide a detailed account of the comparison between the two
mentioned forms of banking and financial management systems, through an assessment of
the opportunities and challenges of each.
Discussion
An important consideration to be made with respect to the Sharia banking system and
financial management as well as the western baking system and financial management is that
both the systems operate to perform the same functions. However, the laws governing the
operations of the two systems of banking are significantly different from each other. In order
to identify the essential factors of difference between the Sharia system of banking and the
Western system of banking, the financial management of both the systems may be evaluated
from a broad perspective. In this regard, it may be identified that the Islamic banking system

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like such operative in the country of Saudi Arabia are based on the establishments of the
Sharia laws (Mayes & Alqahtani, 2015). Following the Sharia laws, the Islamic banking
systems are also identified as non-interest banking systems. The main principles involved in
this Islamic system of banking is the provision of sharing of the profits and losses as well as
the prohibition of payment or collection of interests by the investors and lenders. The system
of prohibition of interests is also known as ‘riba’ (Tahir, 2017).
The Sharia system of banking is based on the Hadith and the Quran and structured
according to the guidance and instructions of the Prophet Muhammad (Hilman, 2016).
Therefore, deviating from these principles are considered to be unacceptable in the Islamic
banking system. In this regard, it may also be mentioned that due to rapid globalization
throughout the world, the vast differences between the Sharia system of banking and Western
banking system have been bridged to a certain extent in order facilitate the smooth
functioning of international trade.
The primary objective of the western or traditional system of banking is maximize the
profits through regular operations, without the exercising of any prohibitions. Furthermore,
the western banking system also prioritizes on the minimization of risks so that the
entrepreneurs do not have to incur any significant losses during the operations of their
business activities (Alharbi, 2015). On the other hand, however, the Islamic banking system
is strictly dependent on the laws established by the Islamic religious texts. The mandates of
these texts lays down certain important prohibitions pertaining to the system of interests as
well as the manner in which the customers must be dealt with (Said, 2016). Furthermore, in
terms of prioritization of risk minimization the system of Islamic banking is significantly
different from that of its western counterpart. It is so because the system of no-interest
enables the Islamic banking organization to bear the risks involving financial transactions that
may not turn out to be profitable.

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An evaluation of the differences between the two banking systems shows that the
concept of profit is an underlying factor in the operations of both the Sharia system of
banking as well as the western system of banking and financial management. However, the
degree to which the organization directs its business operations towards the acquiring of such
profits is different in each of the cases. In the case of the Sharia system of banking and
financial management the mandates of the religions Islamic texts provides the guidelines for
the business operations and activities. Hence, the priority of the Islamic banking organization
lies in the abiding of these guidelines. However, on the other hand there are no such strict
regulations guiding the business operations of the western banking organizations. In this case,
it has been observed from the previous discussion that the western baking systems function
according to the organizational targets of achieving maximum productivity and profitability
in terms of its business operations (ElMassah, 2015). In order to successfully achieve such
profits, the organization focuses on a careful evaluation of its business environment and
integrates it key stakeholders in a manner so as to identify the opportunities available to the
organization and the threats or challenges of losses that it may be faced with. Therefore, on
such an analysis the company aims to successfully prevent any significant discrepancy of
business operations through risks of incurring losses.
Conclusion
From the above discussion about the comparative analysis of the Islamic and western
banking systems and financial management it can be deduced that the fundamental principle
underlying the operations of the two systems are different. However, the similarity between
the two systems of banking and financial management is that these systems function so as to
provide effective financial services to its customers and earn significant amount of profits.
The major factor that differentiates the two systems of banking is the strict code of ethics and
principles that is maintained by the Sharia system of banking based on their religious texts.

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These principles are mandated in regards to the aspects of sharing of risks, profits and losses
with the customers.

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References
Alharbi, A. (2015). Development of the Islamic banking system. Journal of Islamic Banking
and Finance, 3(1), 12-25.
ElMassah, S. (2015). Banking sector performance: Islamic and conventional banks in the
UAE. International Journal of Information Technology and Business
Management, 36(1).
Hilman, I. (2016). The factors affecting Mudharabah Deposits of sharia banking in Indonesia.
Mayes, D., & Alqahtani, F. (2015). Underpricing of IPOs in Saudi Arabia and sharia
compliance. Journal of Islamic Accounting and Business Research.
Said, M. (2016). An analysis on the factors affecting profitability level of Sharia banking in
Indonesia.
Tahir, P. (2017). Development and Legal Basis of Sharia Banks in Indonesia. International
Journal of Scientific and Research Publications, 7(8), 100-7.
Valdez, S. (2015). An introduction to Western financial markets. Springer.

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