Islamic banking and finance: the benefits of Sharia Compliant financial services and products Essay

On one side, is the very craving dream of development while on the other side is faith. Moreover there is a sufficient number of experts who think and expound that prohibited means usury (additional amount charged on consumption loans) and not interest (marginal amount charged on production loans) being charged by modern commercial banks.

The current global financial crisis has not only create suspicions on the proper functioning of conventional Western banking, but has also diverted the attention towards Islamic banking. As some observers have signaled towards their better performance during the crisis, (Dridi and Hasan, 2010). Policy makers had pointed out the benefits of Shariacomplaint financial services and products. The incompatibility of shortterm (demandable deposits contracts) to match with long term uncertain loans can be mitigated by equity and risk sharing products and services. Moreover, Shariacomplaint services/products are very enticing for portions of the population that ask for financial services and products that are in line with their existing religious beliefs.

In brief, Shariacomplaint financial assets only comprise segment of total global banking assets (1.5%) at present. Their worth has been rising at a very increasing rate, and not only In Islamic countries, which has been observe between 2006 and 2011.The total worth of Shariacomplaint financial institution have doubled to US $900 billion (Financial times, 2011).Therotically, Islamic Finance differs significantly from conventional finance. Specifically, Shariacomplaint finance does not allow for the charging of interest payments (riba) as only goods/services are allowed to possess a price and also does not allow for speculation, and prohibits financing of illicit activities. At the same time, Shariacomplaint finance depends upon the concept of profit and loss sharing. The main problem lies which kind of products determine the preference of customer in selecting a banking system keeping in view the working behavior of both Islamic banks and conventional banks.

1.3. Objectives and Significance of the study

Both Islamic banks and Conventional banks are offering differentiated products of same nature. At one hand Conventional banking is excelling in terms of customers, high rate of return, and large number of branches and so on. On the other side Islamic banking is enjoying the benefits of being the representative of Islam based financial institute. Majority of the customers of Islamic banking are Muslims whereas Conventional banking customers belongs to diverse religion and culture. The products offered by both banking system has very influential impact on customer preference of selecting a banking system. This research paper will identify the main attributes of product that has likely to have decisive influence customer choice.

CHAPTER 2 LITERATURE REVIEW

2.1. Inception of Islamic banking

The begining of Islamic Banking started in between 1970s and 1990s with a network covering 60 countries with estimated net worth of more than $160 billion (M. Kabir Hassan 2001). Islamic banking system is a system based on Islamic principles (Shariah), an interestfree system, which strives for moral and practical implementation of procedures for achieving an Islamic economy (SBP, 2010).

2.2. Products of Islamic banking

In