Islamic Banking Operations and Instruments - Research Paper Example

Culture has been traditionally related to society and its intervention in economic life has been rather unexpected. Islamic banks follow specific rules. These rules mostly reflect Islamic law, also known as Sharia law. Following these rules is considered obligatory for Islamic financial institutions. However, it is possible for additions to be made, according to the needs of the local market and always within specific limits, as explained below. The differences between Islamic banks and conventional banks, meaning Western banks are many.

These differences are analyzed in the sections that follow. The paper focuses on all aspects of Islamic banking, including the principles and types of their daily operations but also the instruments that these financial institutions use for aligning their activities with the rules of Islamic law. The review of the literature published in the particular field has led to the following assumptions: a) the operational rules of Islamic banks are rather difficult to be implemented and monitored; it is possible for this reason that failures are not avoided but are kept at rather low levels if compared to the rate of failures of the western banks, b) the Islamic banking system has a significant advantage compared to the conventional banking system: it is not based on borrowing but rather on deposits.

This fact makes Islamic banks more capable of facing strong financial crises. The lack of severe failures in Islamic banks worldwide during the recent recession of 2008 proved that the specific characteristic of Islamic banks is a key element of their competitiveness; c) the performance of Islamic banks may not reach the high levels of performance of western banks. However, this fact should not cause worries. More specifically, the high financial status of western banks is often the result of extensive borrowing by organizations operating at the state level, meaning especially the Central Bank of each state.

Securing funds for expanding their activities and for supporting their financial projects, western banks often give the impression of increased power towards financial institutions of different characteristics, such as Islamic banks or building societies. Still, if their financial statements are carefully reviewed then it is made clear that the level of their performance is low, even if their cash flow is high because the level of their liabilities can be significantly higher compared to their assets.

The paper has been divided into three main sections. In the introductory section, the key elements of the issue under discussion are presented. The various aspects of the paper’s subject are analyzed in the second section which has been divided into sub-sections so that each thematic unit is made clearer. A conclusion is provided aiming to summarize, as possible, the findings of the literature review, as presented analytically in section 2. It should be noted that the particular subject has been chosen mostly because of the significant expansion of Islamic banking as a mode of banking contributing to the stability of the economy and the avoidance of major economic turbulences.