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Shariah and Western Banking Compared

A Contractual Assessment

 

STUDENT PAPER

By Sarah Bennani Kemmoun

SKEMA Business School

Paris, France

 



Abstract

This paper explains and analyses the main differences between western and Islamic banking in terms of revenue stream generation, risk, approach and ethics. The financial crisis in 2008 disturbed the western banking as households and organizations are seeking for alternatives. This paper will try to answer all the possible questions in order to help choosing a financial institution over another.

To do so, we compared the steps of both methods based on experts’ speeches, official bank services and MADM (Multi-Attributes decision making) tool to assess the risk from the customer perspective.

The results showed that in terms of risks the Islamic banking is more keen to assist customers in their financial decisions and choices as both parties hold a partnership as opposed to the western banking which is more of a borrower/lender relationship. Therefore, in case of absence of payments both parties are put in risk while for the western banking all the risk is transferred to the customer regardless of the level of difficulty he might be in.

Even though the Islamic banking is the risky for customers it has still some work to do to gain in credibility and affirm itself in the market. With 1% of the global financial activities, Islamic banking is still weak when compared to the western banking that has been around for centuries.

Key words: Islamic banking, western banking, Shariah law, Haram- halal, Interests based activity, ethics

Introduction

After the 2008 financial crisis, the world of finance has been disturbed as the conventional banking, that has been around for centuries, has shown some weaknesses. This left room for another type of financial structure which is referred to as Islamic banking. In fact, it offers customers a new way of seeking financial help.

The western and Islamic banking both have fundamental similarities and differences with a common objective which is to provide a financial solution to households, small ecosystems, but also organizations, large ecosystems.

The core DNA of Islamic banking is related to the Shariah law that prohibits paying interests, called Riba in Arabic, and also prohibits getting involved with organizations that deal with sinful or haram products and activities such as pork or pornography. Western and Islamic banks structure their financial products differently as, unlike Islamic banking, western finances don’t filter the industries they provide help to. In fact, as long as there is a profitability with an assurance that the other party will pay the settlements, there is no reason to reject the financial help request.

This paper has been undertaken to identify the core differences and similarities of both banking systems regarding a home ownership plan.  In fact, it will explain the different attitudes towards risks, the responsibilities of both parties when there is a failure to payments and also it will identify the revenue stream of both financial systems in order to highlight their differences and similarities.

In addition, this paper will also provide clarifications regarding the offers each institution has for large organizations that need finance for entrepreneurial investments. In fact, it will explain the relationship both parties have, how it is implemented and when does it end. It will also clarify the procedures and explain how they are different from one type of banking to the other.

Finally, ethics and cultural influences will also be discussed in order to show how both financial systems have evolved within the same environment and how they have affected each other.

The mission of this paper is to provide the reader with a clear idea of the methodologies and procedures undertaken by each banking types, highlighting their main differences and similarities. It will provide sufficient information to enable the reader to identify its banking interests and conveniences.

This will result in a clear idea of the objectives and targets of the western and Islamic banking insisting on their ethics and success factors.

To summarize, this research paper has been undertaken to answer the following questions:

  1. How do Western and Islamic banking differ?
  2. What is the ethic behind each banking type?
  3. How are both types of contracts legally represented?

More…

To read entire paper, click here

 

Editor’s note: Student papers are authored by graduate or undergraduate students based on coursework at accredited universities or training programs.  This paper was prepared as a deliverable for the course “International Contract Management” facilitated by Dr Paul D. Giammalvo of PT Mitratata Citragraha, Jakarta, Indonesia as an Adjunct Professor under contract to SKEMA Business School for the program Master of Science in Project and Programme Management and Business Development.  http://www.skema.edu/programmes/masters-of-science. For more information on this global program (Lille and Paris in France; Belo Horizonte in Brazil), contact Dr Paul Gardiner, Global Programme Director [email protected].

How to cite this paper: Kemmoun, S. B. (2018). Shariah and Western Banking Compared: A Contractual Assessment, PM World Journal, Volume VII, Issue VI – June. Available online at https://pmworldjournal.net/wp-content/uploads/2018/06/pmwj71-Jun2018-Kemmoun-shariah-and-western-banking-compared.pdf



About the Author 


Sarah Bennani Kemmoun

Paris, France

 

 


Sarah Bennani Kemmoun
is a Master’s degree student in Project management and Business development at Skema Business school, Paris, France. She spent four years in London, United Kingdom where she graduated with honours with a BSc Management. London city shaped her personality and mind-set which made her a strong, goal-focused and ambitious woman. Her social skills have enabled her to open to other cultures, environments and people in general which has helped her broaden her horizon and made her a more considerate and respectful person.

Moreover, her internships in the consultancy industry and the manufacturing sector have highlighted her organisation skills, multi-tasking capabilities, strong adaptability to any type of situation or context, her analysis skills as well as her evaluation abilities.