Islamic Banking System and its Advantages Over Conventional Banking (Research Paper Sample)

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Islamic Finance as Conventional Finance
Introduction
The Islamic bank invests money using the sharia law of profit-loss sharing. If money is invested through musharakah and mudarabah, the realized profits are shared based on pre-determined ratios. In case losses occur, the loss is equally shared. However, the banking system does not accept interest (ribs) because the religion of Islam prohibits it. According to Khan (2002), riba means addition, excess, or increase. In the case of a conventional bank, riba would mean the additional money placed on the money lent by a bank or the interest (Khan 5). The Islamic banks prohibit this type of transaction based on the Quran belief. The scripture notes, “Those who earn from usury stand only like one who is struck by the devil’s touch. That is because they claim that usury is a form of trade. But Allah permits trade, and prohibits usury.” (Islamic Foundation UK par. 2). The verse prohibits the inclusion of interest in any banking transaction. A reason for this prohibition is that the lender does not take any risk in the money borrowed. Instead, he benefits from the money he gives out without the risk of losing anything. This means that there is often an opportunity for loss in any business under the Shari’ah system, a concept that does not apply to interest-based loans. According to Hussain, Shahmoradi, and Turk (2015), when a person engages in mudarabah transactions, they get to share the profit of the business, rather than enjoy the interest. In this case, an individual agrees to offer capital to another, and if profits are made, it can be shared equally among them (p.4). The Islamic system operates on this baking approach to eradicate a debt-based economy and replace it with an equity-based economy. This paper argues that Islamic financing can be considered an alternative to conventional banking as it provides a variety of products that meet the needs of various clients, has a relatively low risk, has excellent profit-sharing arrangements, and has equitable principles. 
Variety of products 
One of the benefits of Islamic banking is the associated variability of products and services. Islamic financial system offers a variety of financial products, including profit and loss sharing and non-sharing products. The profit and loss sharing category constitutes products that adhere to the principles of participation and equity while also creating a link to economic activities and equitable distribution of income (Ariss 106). One of the products includes the musharakah, which entails a partnership to share losses and profits of an investment. It is a venture that includes