# An Islamic Banking Perspective of Loans and Interests

## Data Analysis

The study involved the use of quantitative analysis, which is the use of questionnaires, and qualitative analysis. There were two areas of study, one being predominantly Muslim and the other a distributed population. The tool of analysis employed was SPSS. It adopted the one tailed test method to assess if at all there is a difference between the two banking systems.

The target population was all the people living in the two areas, including children since there are some of them who hold bank accounts. However, the accessible population was the men and women in these categories, aged between thirty and forty years. The target group is preferable because they have gained focus in life. To get the sample, I used a formula in which the standard deviation is 1.96, as the standard normal deviate at the required level of confidence (Kyeongâ, Piao & Nam, 2012). A difference had to be detected in mean, in at least 2% of the population, with significance level of 5%. Assuming a 1% rate of refusal, there were 120 participants.

The following formula derived the sample size:

n=Z2 pq/d2 thus,

n= (1.96)2 (0.02) (0.98) / (0.05)2

= â30 (Abdul, 2000).

The respondents are a total of 120 people per gender, per area. To come up with the required age bracket, a purposive random sampling design was crucial. There was a further reorganization of the list to give two strata of males and females. Consequently, stratified random sampling obtained a diversified group of respondents. From the reorganized final list, systematic random sampling was essential since it provides equal chances of inclusion, minimizes bias, and has immense potential to analyze large numbers. There was a division of the population (p) of each stratum, by the number needed from each stratum (120).

K= N/n, where K is the skip/term selected in the population size, n is the sample size. From the sample, every 200th person was crucial for the research. The total number of respondents from each stratum was proportionate to the total number within the stratum. This ensured correct data for analysis during the research (Kyeongâ, Piao & Nam, 2012).

## Interpretation

Islamic banking is the method of banking that pertains to the strength, philosophy, and the norms of Islam and the Shariah laws. They also adhere to the laws governing finances in their countries (Jamaldeen, 2012). Approximately, the growth rate stands at fifteen percent annually. Their principal aim is to steer clear of transactions that have their basis on interest, which the Shariah forbids. They also prevent unscrupulous and disreputable behavior to other people (Jamaldeen, 2012). Thus, it can be termed as interest devoid, yet based on chattels. As a result, they operate three main types of accounts. Investment accounts have a foundation on contracts, where fund handling is common on behalf of the depositors, and agreements rely on the mode of sharing, whether it is the profit or loss. The investment runs for a preset amount of time. Second, current accounts are short term investments that are similar to those of the commercial banks. Third, savings accounts operate differently from one Islamic bank to the other.

The philosophy adopted by the Islamic banking is that they should shun from dealing in any transactions that create uncertainties, caused by little information. This is in regard to a contract, also known as Gharar, or participating in a gamble known as Maiser. In addition to this, they should not take part in anything that is illegal also known as Haram before Islam. As a result of this, every Islamic bank has a board that ensures the implementation of Shariah.

The six vital tenets are; inviolability of a contract, sharing of risks; whether profits or losses, interest prohibition, focus on development thus support of economic activity, equality and integrity, and respect for the letter and spirit of the Quran. This banking relies on four ideologies; excluding usury, shunning assumptions, circumventing from laying bets, and ethical process of investing (Jamaldeen, 2012).

They get good returns despite not charging interest on loans. One fact is that a business collapses if they cannot meet their aims. This is a means to prove that Islamic banks are successful. These banks fix their attention on tools of investment, which are in tandem with the Shariah. These are through Mushraka, Mudarabah, and finance based on an approximated return rate. The Shariah connects the benefit on capital with how the capital varies. They share risks. They always strive to ensure that the profit is comparative to the risk. Moreover, the banks engage themselves in various economic activities that in turn benefit themselves and their clients, in accordance with the terms of agreement. A disclaimer is that investments with these banks rarely fails since they get directly involved with the customer, to ensure success in the long run.

According to Kyeongâ et al (2012), the Islamic banking is more balanced and unwavering, as well as supremely considerate. They have a simpler finance structure than other banks, thereby exposing them to fewer risks. Another means of ensuring returns is by trading with the clients. This can be done through rack up, letting out for a period, hire purchase and lending. Here, the banks charge a service feel but do not extort interest. They also have loans to grant to the poor. Additionally, they give overdrafts devoid of charge.

According to Muslim scholars, interest relies on both utilization and business loans. This cuts across all religions and not Muslims only when it comes to their banks. Study shows that there are a number of differences between Islamic banks and commercial banks. They include; the latter believes that money is an article of trade that can be used to generate amounts above its principle while the former disagrees with that. The former looks at an investment as that which is dependent on the transaction or possession of assets, with money simply being a means to facilitate this (Jamaldeen, 2012). The latter charges interest based on time that elapses for a loan, while the former obtains its profits from a profit accrued from a product or service. Islamic banks share both profits and losses while commercial banks charge the creditor despite losses incurred, and vice versa. Finally, while signing contracts for a disbursement, exchanges in kind are acceptable in Islamic banks while commercial banks deal in money terms only.

One of the shortcomings of Islamic banking can be attributed to the profit and loss system. This is especially on investments, which hold capital for a long period, and proves treacherous for the banks. It creates a lot of uncertainty and higher risk levels since there is no guaranteed capital on savings. This is unlike commercial banks that obtain their capital regularly from installments. Hence, this fact makes it less preferable when it comes to that. One innovative fact that makes Islamic banking shine is the means of finance where everyone participates (Abdul, 1995). However, despite this, more customers admire the Islamic banking system.

One recommendation is that research should be conducted on the viability of the profit and loss basis in this system of banking. Another recommendation is the adoption of assurance of capital in the savings accounts. This would make it more preferable to the non- Islamic, as well as Islamic clientele.

In conclusion, we realize that the fact that Islamic banks do not charge interest on loans does not make them less a bank. They are not charitable banks as some people may purport since they adopt most of the benchmarks other conventional banks use. However it should be noted that, in less Islamic countries such as the UK and the USA, Islamic Banks are not seriously recognized (1995). Truth be told; people save to get some profit. In economic terms, the non- Islamic customers would rather comply with the interest rule as they know they would benefit in lieu. A study done by Kyeongâ et al found out that Islamic banks experience a decrease in risk degrees and an increase in profits, compared to commercial banks. Therefore, this confirms the hypothesis that it is possible for a bank to operate without charging interest on loans.

## References

Abdul, M.L. (1995). Interest Free Commercial Banking: Islamic Banking. Malaysia: International Islamic University.

Abdul, M.L. (2000). Riba Free Commercial Banking. Groningen, the Netherlands: Edward Elgar Publishing.

Jamaldeen, F. (2012). Four ways Conventional and Islamic Commercial Banks Differ. Northampton, MA: Edward Elgar Publishing.

Kyeongâ, R.P., Piao, Z.S., & Nam, D. (2012). A Comparative Study between the Islamic and Conventional Banking Systems and its Implications. Scholarly Journal of Business Administration, 2(5), 48-54.

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