Why Islamic banking is better than conventional

Why Islamic Banking is Important Banking
A bank is a financial institution that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets.

Banking in its modern sense evolved in the 14th century in the rich cities of Renaissance Italy but in many ways was a continuation of ideas and concepts of credit and lending that had its roots in the ancient world. In the history of banking, a number of banking dynasties have played a central role over many centuries. The oldest existing bank was founded in 1472.[1]

Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans, and by investing in marketable debt securities and other forms of money lending.

Islam & Interest

The Holy Quran has strongly condemned the practice of promoting and adopting usury (su'd or riba) as a means of amassing unlawful riches
"Allah has permitted Trade (commercial deal) and forbidden usury. Those who, after receiving Direction from their Lord, desist, shall be for given for the past. Their case is for Allah (to judge). But those who repeat (the offense) are companions of the Fire. They will abide therein for ever. Allah will deprive usury of all Blessing, But will give increase for deeds of charity. For He loveth not creatures (who are) un grateful and wicked (Surah Baqar(2) : Verse 275-276).

Conventioal vs Islamic

Conventional System

Based on the concept of loaning on a fixed rate of interest. The longer the borrower takes to pay; the more he will have to pay. One type of loans is Adjustable Rate Mortgages (ARM) that allow banks to increase the interest rate during payment. Another type of loan is “sub-prime”, which is a loan given to people who do not meet the prime requirements for a loan. Banks also resell loans to other parties to acquire more cash to lend. The borrower will payback to the new owner of the loan.

Islamic System

Islamic banking is asset based banking which means that it’s transactions must be backed by some assets. Interest or Riba is prohibited in Islam therefore it is also prohibited in Islamic banking operations.

Islamic banking must stay within the limits of Islamic law and Shariah in all actions and transactions. Islamic banking is done by laws and regulations which are defined in the Quran and Sunnah in which the product or services are not introduced by the Islamic banks which contradicts the Islamic values. These banks also introduced tax and Zakat system according to the Islamic values.

IMPORTANCE OF RISK AND PROFIT SHARING

Islam lays great stress on the fact that anybody who want to earn from any activity must bear the risk relating to that. Islam does not allow one party enjoys all benefits and other party takes the risks. Only risk sharing does not make transaction according to Shariah but rationale and motive has to be in accordance with the principal of Shariah.

For details study books on islamic banking written by scholars should be studied. So many questions can be solved that we ask both are same only names are changed. There is logic behind it and we should study in details.