Comparative Analysis Of Conventional And Islamic Banking: Importance Of Market Regulation

Unlike conventional banks, whose main goal is maximizing profit based on loans, Islamic banks comply with the Islamic law (Shariah), which strictly prohibits the use of interest. Because of this is precise characteristic of Islamic banks, many were skeptical when the first Islamic banks were established, considering that interest-free banking can’t survive. Despite this skepticism, Islamic banks are one of the fastest growing financial industries. Interest-free banking doesn’t meanbanking without profit, but a more stable and secure ethical alternative, because instead of interest, Islamic banks receive fees and commissions for their services, participate in a profit(loss)-sharing with their clients and they are protected with contracts. The purpose of this paper is to identify and analyze the similarities and differences between conventional and Islamic banks and draw conclusions about the stability and efficiency of conventional and Islamic banks before, during and after the crisis. In obtaining these results, special attention was given to the phenomenon of the banking sector regulation, highlighting the advantages of regulation over Adam Smith̕̕ s "invisible hand" as one of the key reasons for the last economic crisis. From the example of conventional and Islamic banks, it becomes clear that any regulation policy needs to be carefully adapted to the specific conditions of individual industries, and that the same basic principles and uniform legal solutions for all market participants will not achieve desired results, as pointed out by the Nobel laureate, Jean Tirole.