Islamic Banking
HISTORY OF CONVENTIONAL BANKING
Around 2000 BC, banking was initiated by farmers and traders in Babylonia whereby, grain loans were made. Later, this new mode of ‘trading’ spread to Greece. Some developments were emerging as deposits and money exchange were initiated.
Modern banking took birth in Italy in the 14th century and the most famous conventional bank was Medici Bank. The bank system spread to Europe, in Amsterdam in the 16th century where much innovation took place, in London in the 17th century and finally to the rest of the world.
Today, major changes and development have occurred and banks are leaders in any country’s financial system.
PROPERTIES OF CONVENTIONAL BANKING
Conventional banking, also known as commercial banking, has its own unique properties. 1. Interest based banking:
Conventional banks are business firms, and their primary aim is to make profits. These are financial institutions that bridge the gap between surplus and deficits units. They accept funds from the public and place them into current, savings or fixed deposit accounts. The lenders earn interest on their investment. Banks also grant loans to needy people and the latter pays a rate of interest to the institutions. The difference in the borrowers’ and the lenders’ interest rates is the profit of the bank. 2. Creditworthiness of borrowers:
Commercial banks will only accept to deal with a customer and grant him loan, if and only if, the latter is creditworthy and has some sort of collateral, such as a house or shares in a company. Business plans are surely studied, but even if a project seems to be promising, but the customer lacks of collateral, the loan will not be granted. 3. Legal framework:
In Mauritius, all banks are supervised by the Bank of Mauritius and they abide to the law of the Banking Act. There is a rigid and strict framework and all banks must adhere to the regulations to ensure fairness. 4. Socio-economic objectives:
Banks have been called
Around 2000 BC, banking was initiated by farmers and traders in Babylonia whereby, grain loans were made. Later, this new mode of ‘trading’ spread to Greece. Some developments were emerging as deposits and money exchange were initiated.
Modern banking took birth in Italy in the 14th century and the most famous conventional bank was Medici Bank. The bank system spread to Europe, in Amsterdam in the 16th century where much innovation took place, in London in the 17th century and finally to the rest of the world.
Today, major changes and development have occurred and banks are leaders in any country’s financial system.
PROPERTIES OF CONVENTIONAL BANKING
Conventional banking, also known as commercial banking, has its own unique properties. 1. Interest based banking:
Conventional banks are business firms, and their primary aim is to make profits. These are financial institutions that bridge the gap between surplus and deficits units. They accept funds from the public and place them into current, savings or fixed deposit accounts. The lenders earn interest on their investment. Banks also grant loans to needy people and the latter pays a rate of interest to the institutions. The difference in the borrowers’ and the lenders’ interest rates is the profit of the bank. 2. Creditworthiness of borrowers:
Commercial banks will only accept to deal with a customer and grant him loan, if and only if, the latter is creditworthy and has some sort of collateral, such as a house or shares in a company. Business plans are surely studied, but even if a project seems to be promising, but the customer lacks of collateral, the loan will not be granted. 3. Legal framework:
In Mauritius, all banks are supervised by the Bank of Mauritius and they abide to the law of the Banking Act. There is a rigid and strict framework and all banks must adhere to the regulations to ensure fairness. 4. Socio-economic objectives:
Banks have been called
References: Annual reports of the Standard Chartered PLC for years ended 31st December 2006,2007 and 2008 Annual reports of the Islamic Bank of Britain for years ended 31st December 2006,2007 and 2008 http://www.imf.org/external/pubs/ft/survey/so/2010/res100410a.htm