The Prohibition Against Riba and Gharar and the Promotion of Zakah with Islamic Banking Systems - Literature review Example

Economists have argued that Islamic banks’ focus on asset-backed financing is safer than conventional banks (Parashar & Venkatesh, 2010: 54). Another distinguishing characteristic of Islamic banking giving way to the debate is the Islamic banking system’s prohibition against interest and its philosophy of risk-sharing (Olson & Zoubi, 2008: 45). Ultimately, the characteristics of Islamic banking are directed by the Shariah which in turn commands that Islamic banking institutions are Shariah compliant.

Islamic banks, particularly in the Gulf Corporate Council (GCC) states performed well during the 2008 global financial crisis, compared to conventional banks (Awwal, 2009, p. 8). Awwal (2009: 8) suggested that Islamic banks in the GCC performed particularly better than conventional banks because of its ability to sustain growth, its restrictive regulatory regime and the adherence to Islamic philosophies of social justice. This research study analyzes the perception that Islamic banks are safer than conventional banks and more particularly whether or not these perceptions are supported by the relatively better performance of Islamic banks over conventional banks during the 2008 global financial crisis.

It is argued that while some features of the Islamic banking system provide a safety net against financial crises, on the whole, Islamic banking systems are not safer than conventional banking systems. They each have their weaknesses and perhaps they can both learn from each other and the experiences of 2008 financial crisis.