Free Essay Sample: Islamic Banking

Islamic banking and finance refer to banking activities that involve Islamic law and its compliance with Islamic Sharia law through the development of Islamic economics (Hanif, 2014, p.11). There has been significant growth in the Islamic banking sector over the past few decades and therefore, the paper focuses on finding out the challenges it has faced over the years as well as the differences that are there between Islamic banking and the normal conventional banking sector.

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One of the major differences between Islamic banking and conventional banking is the structure of the banks. They possess two very different structures in that, in conventional banking, the main purpose of the bank is to give out loans and to collect and deposit money for its clients whereas, on the Islamic banking side, there is no distinct function (Hanif,2014, p.18). This means that it consists of a single function where bank clients either deposit cash into the bank or put it in bank investment pools and are used for investments. The Islamic bank clients, therefore, earn through the returns that come from the investment the bank makes. In other words, they work on a profit and loss sharing structure, unlike the conventional banking sector. Another key difference in relation to the investments done by banks is that for Islamic banks, an investor can invest in whatever portfolio they desire whereas in conventional banking, all the investment decisions are made internally and the clients cannot make a decision on where their money is invested (Siddiqi,2002, p.36). In Islamic banking, the most important thing is the credibility of a project and therefore, tests are conducted to determine the feasibility of the projects before Sharia law is applied on the loan. In conventional banking, on the other hand, they are more interested in the credibility of the borrower than the actual project they are undertaking. In terms of the economic risks that an investor will face, there is a far much bigger risk in Islamic banking since the invested funds may be poorly managed resulting to major losses while in conventional banking, there is little to no risks to the investor as the returns are set at a fixed rate regardless of the performance of the bank. Finally, as a major difference and disadvantage, there is a far much greater need for the creation of awareness on the Islamic Sharia laws to the public for them to understand how the Islamic banking System works. Conventional banking is available worldwide and it has been accepted by masses as their preferred mode of banking (Hanif, 2014, p.77).

Islamic banking has been experiencing numerous challenges over the years in trying to penetrate the global banking industry. One of these challenges is that the Islamic bank system adds an extra burden of management to the bank itself in that, they have to manage and supervise the project they are financing and if the enterprises that are under them do not maintain a proper book of accounts then they will end up getting losses adding an extra unwanted cost to the table (Iqbal et al., 1998, p.17). Secondly, since the bulk of the money customers put into Islamic banks are used for investments, there will always be a need for them to have money to finance their day-to-day activities, and therefore depending on these investments to bring out profit might be a challenge. Individuals prefer conventional banks since they can be able to access loans for personal consumption and therefore this will attract a larger mass as compared to Islamic banks thereby hindering their growth and development (Iqbal et al., 1998, p.56). The Islamic banking industry has also not embraced the use of media to advertise its services and help push its brand and this, therefore, causes a major problem because even some Muslims are not aware that Islamic banking is being practiced in the world (Iqbal et al., 1998, p.98). Finally, another major challenge facing Islamic banks is having to invest in only projects that have quick returns due to the fact that they have to pay out profit annually to its clientele. This may pose a major problem since, conventional banks take up both long term and quick returns investments and therefore, if Islamic law is to be accepted in developing countries, for example, they should be able to provide loan facilities that can finance long term infrastructural projects because if they don’t then a majority of these countries will still be depending on conventional banks for loan facilities to finance their projects (Iqbal et al., 1998, p.115). The average size of Islamic banks' assets is still small as compared to conventional banks despite their being a rapid increase in the number of Islamic banks. Larger financial institutions in terms of assets have a higher chance of gain due to economies of scale, lower funding costs, and as well as efficiency of the organization (Hanif, 2014, p.122). This is a benefit that Islamic banks cannot benefit from due to their small size. In terms of liquidity, Islamic banks are operating with a limited set of short-term traditional instruments due to lack of markets to sell financial assets of the bank and therefore, Islamic banks are not operating at their full potential making conventional banks better in terms of their liquidity. Another disadvantage of Islamic banking is concentrated banking in terms of deposits and assets. Different Islamic banks deal with different economic sectors and therefore this causes them to lack diversity as conventional banks do and therefore, they are more to risks of losing depositors to other banks (Hanif ,2014, p.160).

Virtual Banking in Australia

Virtual banking is the act of being able to access the services offered at a bank and other related services without necessarily having to go to the bank through the use of technology. There has been a recent rise in the need of virtual banking services with the increase in technology and therefore this research is focused on finding out the advantages and disadvantages virtual banking possesses (Adapa et al., 2010, p.43). Besides that, it seeks to focus on virtual banks in Australia and businesses that have been licensed to operate through virtual banks in Australia.

86400 is one of the prominent neo-banks in Australia that has recently been licensed to operate (Adapa et al., 2010 p. 72). It provides a wide range of services including home loans, a savings account, and a transaction account. It is the first neo-bank in Australia to launch home loans and therefore this has been a big step in terms of increasing the demand for neo-banks. The bank has no monthly fees and its rates are great. Besides that, it is governed by the same rules all other physical banks in Australia are governed by giving its clients surety that in any case, anything happened to 86400 banks, then their money would be guaranteed by the Government of Australia (Adapa et al., 2010, p.77). Virtual banks come with numerous advantages and 86400 is one of them. They include competitive interest rates and little or no monthly fees. Unlike regular banks, virtual banks tend to have higher interest rates thereby having a tendency of attracting a larger clientele. There are a lot of fees that are paid in regular traditional banks which are not being paid by these neo banks making it more attractive to its customers. The fact that an individual can make their payments and transact money through their phone is also one very big advantage of neo banks. 86400, for example, allows you to access loan facilities online, you can as well transfer and save your money online all at the comfort of your home making it a very big plus for virtual banking (Adapa et al., 2010, p.97). Through their apps, you can as well track your spending and saving habits as they provide an in-depth analysis of how you have been spending your money and saving them as well all at the touch of your screen. In an aim to retain their customers, virtual banks usually have a more advanced level of web technology having more online tools and advanced web features.

Virtual banks are different from traditional banks as they offer higher interest rates as compared to traditional banks and therefore saving with them is more beneficial to the customers than it is in traditional banking (Mia,2007, p.74). From their scope of banking, neo banks generally concentrate on retail banking whereas conventional banks handle a huge range of banking services. Most of virtual banks do not require an individual to maintain a minimum balance as this is a characteristic trait of most conventional banks making it a more convenient way to bank for individuals who use up all their money from the bank (Mia,2007, p.98). Aside from the benefits, one gets from virtual banks, there are also disadvantages to using this kind of banking system. First off, there is no face-to-face customer service meaning that all the grievances a customer might have may either have to be addressed over the phone or through email correspondence which may take time as compared to actually talking to someone in person (koskokas,2011,p.55). There are numerous benefits that a face-to-face conversation can make to an institution in terms of retaining its clients and acquiring more clientele. The capabilities of these virtual banks are also limited as they mostly only offer retail banking and therefore, they cannot fully appeal to the markets making them prefer the traditional banking system since they provide the full package. A major problem that is faced by these virtual banks is technology issues and insecurity of their banked money (koskokas,2011,p.101). In terms of technology, there are numerous times when the neo bank app will fail or need a new update for it to operate well hence causing an inconvenience to the user. Insecurity issues arise through cybercrime as it is easy for someone to access your details online if you are using public Wi-Fi as hackers can access your information and use it to devise ways of stealing from you. Therefore, this also brings out the problem of data as you always have to have internet access for you to transact through these neo banks and so this will be an extra cost to the neo bank user as your banking activities completely depend on the availability of data unlike in traditional banking where you can just walk into a banking hall and the services you so much need will be provided to you (koskokas,2011,p.124). Finally, it is easier to make transactions through traditional banking that it actually is to deposit money into these virtual banks. Most of these banks have no way of depositing money directly and therefore clients have to deposit money into other accounts first before they transfer them into their own accounts making this a big inconvenience.

References

Hanif, M., 2014. Differences and similarities in Islamic and conventional banking. International Journal of Business and Social Sciences, 2(2). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1712184

Siddiqi, M.N., 2002, April. Comparative advantages of Islamic banking and finance. In Harvard University Forum on Islamic Finance (Vol. 6).

http://www.siddiqi.com/mns/Advantages.html

Iqbal, M., Amad, A., and Khan, T., 1998. Challenges facing Islamic banking (Vol. 1). Jeddah: Islamic Research and Training Institute.

http://ierc.sbu.ac.ir/File/Book/Challenges%20Facing%20Islamic%20Banking_46947.pdf

Adapa, S., Rindfleish, J., Cooksey, R. and Valenzuela-Abaca, F., 2010. An Investigation of Factors Influencing the Continued and Frequent Use of Internet Banking by Australian Consumers.