The core business objective of ordinary commercial banks is to make a profit. Banks lend money at interest rates, and at the same time, they encourage customers to deposit funds at an agreed rate. The deposits are ways through which banks access legitimate funds to lend at higher interest rates. Islamic banking operates in a very unusual manner, whereby they do not receive interest in lending. This follows an Islamic injunction against lending interest (Martin & Heiko, 2008). Islam preaches against interests on whichever loan no matter what its purpose is. The elimination of interest on loans originally came because Muslims felt interests were exorbitant on ordinary people hence it was exploitative especially when it is a non-commercial loan. Muslims have popularized their non-interest banking policies, and the number of banks complying with the Muslim policies has increased over the past ten years. For fifteen years now, Islamic banking has gained a strong ground and made progressive growth. Currently, there are over fifty Banking institutions worldwide, which are operating in the Islamic banking system. The question that lingers in many people’s minds is how the Islamic banks make a profit without levying interests on lending.
This research is a vital tool in showing the difference between commercial banks and Islamic banks. Islamic banks are only suitable for Muslims since they operate based on the laws in Quran. People belonging to other faiths, therefore do not fit in these banks. Examples of Islamic banks are First Community Bank, Bank of Dubai, and Gulf Bank (Monzer & Tariqullah, 2003). Unlike Islamic banks, other commercial banks are open to people from all faiths. Nevertheless, some of these commercial banks have introduced certain interest-free products to attract the Muslims Community amidst tight competition. Islamic banks have operated successfully in many regions in the world leading to an increasing interest in the financing techniques of Muslim banks. Islamic banks essentially do not have any new product to offer to the Banking market. They do not perform any special function or any complex technique different from the universal commercial banks. Their products are essentially the same as those of commercial banks such as loans, overdrafts, credit cards and salary advances. The difference comes in the sense that Islamic banks do not accrue interest income from credits. Their methods of control also differ from commercial banks since they punish credit defaulters using the laws of the Quran rather than using bank policies (Anwar, 2000).
Muslim Banks operate to make a profit rather than interest, a matter that rather contradicts the idea of interest-free banking. They have a boundary between interest, which Quran prohibits, and profit, which Quran accepts. They have diverse ways of earning profit without linking the sources directly to loan interests. The banks also earn profit from foreign exchange margins. At the same time, Islamic banks do not prohibit lending since Muslims articulate the fact that people in the society do not have equal endowments in terms of resources (Hanif, 2011). They lend as a matter of benevolence rather than lending with an anticipation of interest. Islamic banks not only lend resources in cash form, but they also sell items on credit without charging any extra payment above the marked prices. This topic satisfies the research objective since Muslim banks operate differently from conventional commercial banks, yet they operate consistently.
This study intends to investigate the details of contrast that exists between Islamic banks and ordinary commercial banks. It seeks to expose the mechanisms, which Islamic banks use to perform their normal banking functions, their core objectives and whether or not they are better in service than the interest-charging banks. It will also examine the difference between the customer satisfaction index between the Islamic banks and the commercial bank. In the whole analysis, the research paper would like to evaluate whether indeed Islamic Banks satisfy the qualifications of banks or they are just charitable fraternities.
Formulation of a hypothesis
This paper explores a hypothesis: “It is possible for a bank to operate without charging loan interest.” As it can be seen, this is a deductive hypothesis, and a detailed investigation indicates a positive co-relation between this thesis questions to the practical situation in practice. One critical revelation from Islamic laws that the paper will deal with is that there is a difference between making sales for profit, and lending finances for interest return. On this ground, when an Islamic bank sells any of its products, it is considered as a profit but not an interest. For commercial banks, interest is one of their sources of income (Yahia, 2001). In essence, to know whether an income is an interest or profit depends on the classification of the bank by the aspect of faith.
Research methodology or strategy
The project will require data collection for examining the validity of research question and for testing the preference of Islamic Banks over commercial banks. The ideal methods for data collected here will be a mix of both quantitative and qualitative methods with the use of a questionnaire as a data collection technique. The quantitative data will include the number of people borrowing money from sample selected Islamic banks and commercial banks, the volumes of lending and the frequency of bank usage. Qualitative data will be the elements of customer satisfaction and reaction for both the Commercial banks and Islamic banks. Data collection will involve recording data in spreadsheets for analysis and presentation.
The first step will be the formulation and issue of questionnaire to relevant resource persons followed by data analysis in spreadsheet and presentation in slideshows. Out of the presentation, the next step will be to document an interpretation and description of data results. The whole sequence will have to take a maximum of five months. The data collection will cover two regions, one being a Muslim-Dominated area and the other being an evenly distributed population.
Clarification of concepts and terms
- Hypothesis: The preconceived idea, which the paper seeks, to validity based on the key question
- Defaulters: Loan borrowers who do not pay their loans within the agreed period
- Customer satisfaction Index: The measure of customer reactions towards services they receive
- Qualitative Data: Data items which are intangible and immeasurable, such as characters and happiness
- Quantitative Data: Data items which are measurable, such as the amount of money, lengths, and number of people
The research will follow a schedule aiming at a target deadline to ensure each activity gets a proportional timeframe for its completion. The schedule will be as in the following table:
|Data Collection||One Month|
|Data Analysis||One Month|
|Data Interpretation||One Month|
|Data Presentation||Three weeks|
|Data Reporting||Four Weeks|
Anwar, M. (2000). Islamicity of Banking and Modes of Islamic Banking. Malaysia: International Islamic University.
Hanif, M. (2011). Differences and Similarities in Islamic and Conventional Banking. Islamabad, Pakistan: International Islamic University.
Martin,C. & Heiko H. (2008). Islamic Banks and Financial Stability: An Empirical Analysis. USA: International Monetary Fund.
Monzer, K. & Tariqullah, K. (2003). Principles of Islamic Financing: A survey. Malaysia: Islamic Research and Training Institute.
Yahia, A. (2001). Islamic Home Financing in the United States. USA: American Finance House.