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Conventional bank and Islamic banking as institutions: similarities and…
Conventional bank and Islamic banking as institutions: similarities and differences
The historical overview
During the Umaiyyah Empire, the landscape of financial institution had changed because of the establishment of Baytulmal (known as the first IFI). There are three main function which are :
1)The administrations of taxes.
2)Distribution of zakat.
3)The management of government expenditures.
The provincial treasury was also established to manage provincial revenue and expenditure and to remit the net proceeds. A separate account department was established to do the bookkeeping and accounting. The major sources funding Baytulmal were received from concord terretories, zakat, jizya and kharaj. Secondary sources were sadaqah and any other funds or properties that had no owners.
The insight of financial institution theory
There are two types of financial institution :
1) Conventional financial institution
2) Islamic financial institution (IFI)
The economics of financial institution
Their roles are multiple including to mobilize the fund and facilitate financial matters to the economy, enhance the performance of the market by reducing the transaction cost, transfer the risk and advisor of the inequality of information between parties and create wealth.
Legal invironment
There are four major legal systems in the world which are:
1)Common law
2)Civil law
3)Social law
4)Shariah law
The political aspects of an institition
For IFIs, Shariah advisory as the middleman of Shariah supervision becomes backbone of the industry. There are 3 bodies that provide international Shariah governance :
1) The Acounting and Auditing Organization of Islamic Financial Institution
2) The Shariah Board
3) The Organization of Islamic Countries(OIC) Fiqh Academy.
Financial institution in the context of institutional economics theory. There are 2 main branches
:
1) institutional environment (macro variant)
2) institutional arrangement (micro variant)
Economic rules
IFIS are developed because of the wealth creation. The structures of IFIs are parallel to the objective of Shariah or known as Maqasid al- Shariah.
Law origin
1)The activities of IFIs must comply with Shariah and must be both lawful and ethical to please Allah (SWT).
2) Shariah prohibits the fixed or floating payment or acceptance of specific interest or fees(riba/usury) for loans of money.
3) Shariah universal, complete and applicable in all times.
Supervisory risk
They have grouped stakeholders into 8 bodies:
1) Shareholders
2) Board of directors
3) Executives level managers
4) Depositor and investors
5) The public
6) Shariah board
7) Internal auditor
8) External auditor
Some implication :
1) Financial institution with multi-contract
2) Financial design with dual system