Assignment III: Islamic and Conventional Banking Resilience Analysis

This report provides a comprehensive comparison between Islamic and conventional banking systems, focusing on their resilience during financial crises. It begins with an introduction to Islamic banking, highlighting its principles and key differences from conventional banking, including the prohibition of interest and the use of equity participation. The report then delves into the growth of Islamic banking globally, with a specific focus on the UAE as a pioneer in this sector. The core of the report involves a literature search to assess the resilience of Islamic banks compared to conventional banks during financial crises, supported by figures and charts that display the growth of Islamic banking assets. The discussion section analyzes the factors contributing to the resilience of each type of bank, citing relevant sources. The report also includes an overview of various Islamic financial instruments such as Murabahah, Ljarah, Sukuk, Musharakah, and Mudarabah. The findings suggest that while Islamic banks may be less liquid in the short term, they often demonstrate greater resilience in the long term due to their focus on real assets, strategic locations, and less exposure to the factors that caused conventional bank failures. The report concludes with a summary of key findings, providing a clear comparison of the two systems and highlighting the strengths of Islamic banking in maintaining investor trust.

Running head: ISLAMIC AND CONVENTIONAL BANKING
ISLAMIC AND CONVENTIONAL BANKING
Name of the Student
Name of University
Author Notes

2ISLAMIC AND CONVENTIONAL BANKING
Table of Contents
Assignment III: Individual Research Project..............................................................4
References..................................................................................................................................9
Section B..................................................................................................................................10

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Assignment III: Individual Research Project
Islamic banks perceives that charging interest is wrong i.e. haram
therefore they are working on the concept of equity participation and
profitability. On the other hand, conventional banking is a type of banking
system, which charges interest to their customers based on the taken
loan amount.
The comparison between Islamic plus conventional banking is
provided in the explanation part which will aid to understand the change
between the two lending system. Islamic banking system has gained
popularity from scholars and authors as their system is different from
other banking methods. The remarkable growth of Islamic banking is
provided below.
Explanation
Non-interest banking system is referred and known as Islamic
banking system which acts on principals of Islamic or sharia law as well as
follows the guidance of Islamic economics. Islamic banking gathers profit
by equity participation other than interest. The borrowers provides share
of profit to the bank rather than interest of the loan to the bank.
Conventional banking is the basic banking business, which runs on
interest from borrowers, and it does not have any relation with the Islamic
banking system.
The difference between the two banking system is given below.

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Fig 1: Islamic banking vs conventional banking
The growth of Islamic banking is perceived globally however UAE is the pioneer and
frontline for promoting Islamic banking and finance. In 1975, Dubai Islamic Banking was
established. It was the commercial bank, which was established in UAE. The federal law no.
(6) of 1985 is regarding Islamic banking, financial institution and investment companies.
Institutions offering Islamic Financial Services (IIFS) are listed below:
Islamic Bank - 8
Islamic Windows - 26
(Local Banks - 13)
(Foreign - 13)
Islamic Finance Companies - 12
Islamic Investment Company - 1
Total = 47
As per the report of the Global Islamic Economy Report 2016/17. UAE rank 2nd in the Global
Islamic Economy Indicator (GIEI)

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Displaying the Islamic Banking Assets:
Fig 2: Global Islamic banking asset
Fig 3: UAE Islamic banking assets

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The Islamic banking growth since 2009 till 2016 is perceived from the bar chart given
below.
Fig: Islamic banking system
Discussion
This is where you carry out a literature search to find support or evidence one way or
the other. If Islamic banks are more resilient clearly identify the reasons that make them more
resilient and if conventional banks are more resilient also explain why. Make sure to cite your
sources appropriately in the text/discussion.
Please refer to the answer given below.
Explanation
The resilient bank enjoys the confidence of its customers and investors. Resilient bank
receives funds from retail and wholesale at effective price even the period of stress.

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The Islamic financial industry is a notable part of the Qatar financial system and Islamic
banks does not allows investments in the kind of instruments that affected the conventional
banks which resulted in global crisis. Conventional banks are generally larger than the
conventional banks however Islamic banks are more resilient than conventional banks. This
is because
 Islamic financial institutions owing to excess liquidity and as a result of limited
permissible option of investments.
 Islamic banks are backed by real estate and tangible assets.
 Islamic banks remains more resilient during future crisis as its occurrence affects the
real economy of the country.
 Most of the Islamic banks were situated in economies that were not subject to
financial crisis of 2009 therefore Islamic banks follows strategic locations and less
exposure to contagion effect.
Conventional bank's failure at ethical and investor confidence frontiers generated a
greater expectation from Islamic Finance owing to its just and equitable regime and
preservation of investor trust. From several studies, it has been found that that the Islamic
banks are less resilient in relation to liquidity in the short term and more resilient in the long
term than Conventional banks.

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References
https://home.kpmg/qa/en/home/media/press-releases/2019/11/
islamic_banks_more_resilient_than_conventional_banks.html.
https://www.researchgate.net/publication/
321918162_Financial_Resilience_A_comparative_study_of_Islamic_and_Conventional_Ban
king

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Section B.
1. Murabahah
This method is non PLS method popular in trade and asset financing. The buyer gets
commodities from seller on a cost-plus basis. In this process, the seller discloses the cost of
the commodity to the buyer and thereafter the seller adds the mark-up price, which is profit.
The mark up price can be stated as lump sum amount as well as a percentage of the original
product of the commodity. Besides, the seller also measures the liability of the commodity
and the payment of the product has been done after the delivery of the product however, in
most cases the payment has been deferred to a later date agreed by both parties. The buyer
once signed in case of late payment cannot alter the amount of the contract. Penalty can be
only charged if the buyer intentionally defaults the payment of the commodity.
2. Ljarah
This PLS method grants the parties to use the asset for a specific period of time. The
lessor of the asset still owns the ownership right in case the lessee defaults the payment. The
lessor maintains and repairs the assets unless the damage is caused by lessee’s negligence to
the asset. Ljarah may take the form of a hire purchase contract (the lessee assumes ownership
of the asset at the end of the period with the rental payments being converted into purchase
price), a operating lease, a financial lease and a combination of hire purchase agreement and
operating lease.
3. Salem
Salem is a non PLS contract where the seller receives the payment of the commodity but
defferes the date of delivery. The price of the item must be valid out in full at the time of
initiating the contract to make it valid. The contract of Salem indicates the price, quantity and

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delivery place and date. If the seller fails to honour his obligations and deliver the item, the
buyer is entitled to receive a full refund of the price he paid for the commodity.
4. Financial lease
A financial lease or a combination of an operating lease & a hire purchase agreement.
5. Sukuk
Sukuk is basically Sharia-complaint bond. The buyer is issued of a Sukuk with a
certificate from the seller. The income from this sale is used to purchase a pre-determined
asset to which the holders of the certificate has a partial ownership. The issuer of Sukuk
basically does not have any obligation related to debt. The buyers only staking claim to
partial ownership of the underlying assets and any revenue it generates. Earnings generated
from the underlying asset basically distributed amongst the buyers.
6. Musharakah
This is PLS joint partnership agreement where parties comes together to jointly finance a
project or purchase an asset. The agree beforehand how they distribute the profit from the
asset as well as any losses are shared based on proportion based on capital contribution. This
ownership can be permanent or diminishing.
7. Mudarabah
In this PLS contract, one party finance the project while the other party acts as agent and
provides management advertise with the aim of generating profit. The profits are distributes
as the two parties perceives it. The financer bears all of losses that occurs unless they arise as
a result of management negligence or misconduct. Under the agreement, the role of the
financial party is generally restriced to provide capital unless stated in the agreement.