International Banking Essay Example | Topics and Well Written Essays - 2000 words - 2

International Banking - Essay Example Studying the prospects and challenges for Islamic banking could reveal useful lessons for a reorientation of Western conventional banking. A key feature of the conventional banking system as practiced today is that it is based on interest. This is an amount of money that is paid on deposits at banks and levied on the loans they provide. This system is designed to benefit money lenders whereas borrowers are made to bear the risks entirely. Consequently, this system facilitates exploitation and many borrowers become burdened by rising values of their debts. Occasionally the problems become so extensive that financial crises occur. The Islamic financial system is characterized by the strict prohibition of riba, which is the charging, paying and receiving of interest on money loaned. The Quranic injunction is in chapter 2, verse 275, which states, â€Å"Allah has allowed the sale and has prohibited interest†. The prohibition extends to both the lending and taking of money involving interest or partaking in any other way in an interest based transaction. The justification is that the charging of interest results in an imbalance and it therefore promotes exploitation whereas the Islamic system is designed to ensure balance, fairness and justice (‘adl) in all financial dealings. Actually, Islamic finance is not unique in its prohibition of interest but it has perhaps developed the most sophisticated system to help implement interest-free banking. As Lewis (2007) noted, usury was prohibited in all the major religions but people then made it acceptable. For example, it is also prohibited in Exodus (22:2 5). In addition, the shariah (Islamic law) advises to avoid gharar (uncertainty), qimar (speculation) and greed. In short, shariah compliant financial products and services do not involve any interest and speculation and uncertainty is minimised as far as possible. Instead, the Islamic system of finance is based on the principle of shirakah, which