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Islamic Banking and Economics: Concepts and Instruments, Features, Advantages, Differences from Conventional Banks, and Contributions to Economic Growth

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  • Nasir Ababulgu Abasimel

    (Wollega University)

Abstract

The aims of the paper is to narrow the knowledge gap on Islamic banking and economics through analyzing concepts, instruments, features, significance, and contributions to economic growth and its difference from conventional banks. Islamic Banking is guided by shari’a law which derived from the holly Qur’an (Allah’s revelation) and Sunnah of the prophet Muhammed (Peace be up on him). Definitions, concepts, and instruments guiding Islamic Banking are clearly presented in this paper. The characteristics features of Islamic banking are divinely sourced, shari’ah compliant banking system, rich with numerous financial concepts, riba (usury) free banking system, garar (uncertainty) free banking system, prohibits injustice, and enjoys benevolence in transactions. Islamic banking is also advantageous over conventional one due to its more efficiency in operations, stabilize the economy, less moral hazard, and conveniences in poverty alleviation. Islamic banking is different from conventional one, with its emphasis on risk sharing and, for certain products, collateral-free loans, is compatible with the needs of poor and microentrepreneurs which promotes entrepreneurship, and hence, expanding Islamic banking to the poor could foster development under the right application. Islamic banking also offers loan products based on intangibles such as a businessperson’s experience and character. Bonds both Islamic bonds (sukuk) and conventional bonds are another deal of this paper. The sukuk market is the fastest growing area of Islamic finance. A major difference between the two kinds of bond is that conventional bond issuers pay interest to investors at regular intervals, whereas sukuk issuers share profits and losses with the parties to the business transaction. In addition, Islamic banking contributes more for economic and business growth like other conventional banks especially in rapidly growing interest of using Islamic banking due to its services.

Suggested Citation

  • Nasir Ababulgu Abasimel, 2023. "Islamic Banking and Economics: Concepts and Instruments, Features, Advantages, Differences from Conventional Banks, and Contributions to Economic Growth," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 14(2), pages 1923-1950, June.
    • Handle: RePEc:spr:jknowl:v:14:y:2023:i:2:d:10.1007_s13132-022-00940-z
    DOI: 10.1007/s13132-022-00940-z
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    References listed on IDEAS

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    1. Asyraf Wajdi Dusuki, 2008. "Understanding the objectives of Islamic banking: a survey of stakeholders' perspectives," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing Limited, vol. 1(2), pages 132-148, June.
    2. Asyraf Wajdi Dusuki, 2008. "Understanding the objectives of Islamic banking: a survey of stakeholders' perspectives," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing Limited, vol. 1(2), pages 132-148, June.
    3. Asyraf Wajdi Dusuki, 2008. "Understanding the objectives of Islamic banking: a survey of stakeholders' perspectives," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing Limited, vol. 1(2), pages 132-148, June.
    4. Munawar Iqbal & Philip Molyneux, 2005. "Thirty Years of Islamic Banking," Palgrave Macmillan Studies in Banking and Financial Institutions, Palgrave Macmillan, number 978-0-230-50322-9, September.
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