Difference etween Islamic and Conventional Banks - Term Paper Example

Dubai Islamic Bank (UAE), Sharjah Islamic Bank (UAE), are two Islamic banks in the GCC region and they have more or less the same identical approach to financial and banking practices based on the principle of Haraam(forbidden) as expounded in the Shariah Laws. On the other hand conventional banks in the GCC region such as HSBC (Middle East), National Bank of Abu Dhabi (UAE), mainly functions and operates under the manmade principles. The concept has acquired a multiple dimension of importance in the context of modern conventional banking practices that place emphasis on interest for the use of money while Shariah Laws forbid it.

This study has particularly identified how the risk associated with lending has been misinterpreted by Islamic banking practices to such an extent that risk-bearing debtor is converted into a risk distributing agent while at the same time enjoying all the benefits associated with risk-free borrowing. Islamic finance has variously defined by scholars in the recent past. However, almost every definition centers on the total or near-total absence of interests. In other words, Islamic finance acquires dimensional variations across a broader spectrum of strategic operational and risk management parameters in comparison to conventional banking.

However, a conventional finance and banking environment is much more complex and equally diverse in its strategic operational and risk management setting thus leading to totally different growth trajectory in respect of both evolution and diversification. On the other hand Islamic banking practices have invariable being influenced by the Islamic religious tenets as expounded by the Sharia laws and practices. Sharia laws are determined by some of the basic social and economic tenets enshrined in Islamic teachings which in turn are based on Quranic principles.

Conventional banking practices, on the other hand, have evolved from a statistic environment of antiquated banking habits to the modern-day dynamic and risk-prone banking culture.