Comparative study on Islamic banks and convential banks

This paper intends to present a comparative study on the performance of traditional Islamic banks and commercial banks of UAE. Based on this discussion, it has been found that Islamic banks of UAE have been able to reach to the maximum number of the customers. Furthermore, the efficiency of the Islamic banks in UAE is more compared to that of the commercial banks.
The financial institutions have been experiencing fast-paced competition across the borders in recent years. One of the fast growing banks is the Islamic ones. It has been recorded that there are about 160 Islamic institutions worldwide. Every bank in developed nations has begun to tap the demand of Islamic banks products. The market share of Islamic banks all over the world has increased by 15% in the last decade (Rizvi, 2013). One of the countries, where demand for the Islamic bank products is huge, is UAE. However, there have been evidences that the market share of Islamic banks in UAE is smaller relative to that in other countries. Though UAE is a Muslim country, yet people there preferred conventional banks over Islamic ones. The Islamic banks in UAE have performed well over the years and have established a respectable position among all the national banks. The main difference that exists between the performance of Islamic and conventional banks in UAE is that the latter follows interest based principle and the former follows principle related to interest free and profit and loss sharing.
Due to the severe financial crisis, there has been high demand of the Islamic bank products in UAE. The growth in demand of the Islamic banks in UAE forced three of the national banks to convert into Islamic ones and they concentrated on providing Islamic products and services to the people in UAE. The development of Islamic banks has been compared with performances of the conventional banks in this research paper by elaborating different functions of the both. The difference or similarities between the products offered by Islamic and conventional banks in UAE are highlighted in order to evaluate efficiency of the both (Dubaibusiness, 2014).
Islamic Banks Vs Conventional Bank products in UAE
The conventional banking system of UAE comprises a number of banks with respect to the Islamic banks. Islamic banking constitutes a small part (about 16%) of the UAE banking sector. The Islamic banking system in UAE identifies the spirit of Islamic legal code i.e. Shari’a. The banks are providing services and products to customers, which are in accordance with Shari’a principle. It has been seen that the products of Islamic banks are affected by the agency problem, which arises due to the difference in information between the borrower or investor and lender. It is well-known that the Shari’a principle does not support charging of interest payment and the products and services are permitted to carry price (Ghose, 2013). The principle rather relies on profit and loss and risk sharing, which is levied on both asset and liability. It has been noticed that the Islamic scholars have tried to develop products, which resembles those of conventional banking and is devoid of interest payment as well as discounted with fees and payments for contingency. The leasing products are also quite famous among the Islamic banks as they are directly related with the real sector transactions (Dalakian, 2013). The equity style products add up to the agency problem risks in Islamic bank structure. There is little difference between the two banking system in terms of cost efficiency, orientation and stability. However, differences can be portrayed with respect to both the banks. The Islamic banks in UAE are more cost effective than the conventional ones.

Comparative study on Islamic banks and convential banks

Type: Coursework
Domain: Banking
Words: 2000
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