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The differences between islamic banking and conventional banking-system - Essay Example

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Banks are major actors in the financial system, and their principle role is to direct funds from depositors to borrowers in a systematic manner. Banks provide different kinds of financial services,…
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The differences between islamic banking and conventional banking-system
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The differences between islamic banking and conventional banking-system

Download file to see previous pages... s that act as safe deposits of people’s savings without which they will have no place to save and will also face the risk of keeping all money at home. Banks also facilitate lending and people can borrow any amount of money they require in any convenient manner. Banks essentially act as intermediary between depositors who lend money to the band and borrowers to whom the banks lend money. The amount that banks pay to the depositors and the amount that they received from the borrowers are both called interest. Both depositors and borrowers can be individuals, families, organizations, governments and so on. Since at any point of time some depositors withdraw their money, many others do not. This provides the banks opportunity to convert short term deposits, which are their liabilities to long term loans which are their assets. The interests that banks pay to their borrowers are less than the interests that the banks pay to their depositors. This difference serves as income of banks all over the world.
Although banks play a crucial role in the management of money from depositors and lending money to the needy, banks are also indispensable for national and international payments system. Banks also create money. Individuals, organizations or governments do not only need banks as safe custody of their money, but they all also need to circulate their funds like money getting transferred from “buyers to sellers or employers to employees or taxpayers to governments” (Gobat). In this case too banks play a prominent role. They handle payments like issuing personal cheques to making electronic payments of large amounts between banks. The payments system is a “complex network of local, national, and international banks and often involves government central banks and private clearing facilities that match up what banks owe each other” (Gobat). In today’s era of international trade, most payments are administered instantly. An efficiently managed system of payments is ...Download file to see next pagesRead More
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