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THE FINANCIAL PERFORMANCE OF INTEREST (Raw Data)
THE FINANCIAL PERFORMANCE OF INTEREST (Raw Data)
1 Introduction
The industry of Islamic financial services is taking a part in this modern period and rising
quickly. Financial institutions making experienced and competitive environment. The key
feature of success of Islamic banking is developing new strategies, which forces the market
to take interest in the new Islamic banking concepts. Attractive product and services held
fast providing competitive product offerings to meet the more various and differentiated
needs of consumers and businesses.
1.1 Background
Islamic banking has been started for 45 years, and took place in the market about since last
30 years. Now the Islamic banking has extended in whole the world, according to some
studies and research Islamic banking industry assets growing rapidly. The Islamic banking
describe the banking system which apply the Islamic law also called shariah. The main
motive of Islamic banking is supported by shariah, Shariah acquiescent is defining
characteristic of Islamic finance compared to the conventional system. The main difference
between conventional (Banking system which earn and increase wealth by charging
interest) and non-conventional (Banking system which earn or increase wealth without
Riba (interest free), Maisir (gambling), Gharar (Speculative Trading) are prohibited. The
many Islamic finance concepts which are being used are Mudharabah (profit sharing),
Ijarah (Leasing), Musharakah (Partnership) and Diminishing Musharakah (House
Financing). Many Islamic economics studies have discussed in depth about the rationale
behind the prohibition of interest (Chapra, 2000) and the importance of profit and loss
sharing in Islamic banking (Dar and Presley, 2000). Additionally, Dar (2003) classified
four types of financing acting as alternatives of interest; investment-based, sale-based, rent-
based and service-based.
This study could be a primary effort to examine the financial performance of Islamic banks and
make comparison with conventional banks
1. To compare the performance of Islamic vs. conventional banks using; capital adequacy,
asset quality, management quality, earnings and liquidity as performance determinants
in Pakistan.
2. To test for any significant differences in the performance between Islamic
Banking and Commercial Banking.
3. Literature Review
Islamic banking system elements that is constant with Islamic laws and its principles
(sharia). These principles comply with Islamic laws and make Islamic economies. Islamic
laws strictly prevent earning interest on lending money so Islamic banks not agree or accept
to pay interest during business but conventional banking system are total opposite to the
Islamic banking system. According to statement and comparison between conventional and
nonconventional banking system to the efficiency of Islamic banking system point of view
that how it is efficient in this period in rural areas of Pakistan. Furthermore, a review on
the previous studies undertaken to highlight the comparative performance and Islamic and
conventional banks and the determinants of their profitability and financial performance.
Kettel (2011) asserts that in the uttermost belief of all Muslims, Islam is the religion
revealed by Allah to his last messenger Prophet Mohammed (Peace Be Upon Him) to earth.
It is a complete religion comprising all aspects of human life in this world and hereafter
world. Islam is alleged as comprising of three broad concepts:
Aqidah: which concerns all forms of faith and belief by a Muslim in Allah and his will,
from the fundamental faith in His being to the ordinary beliefs in His commands.
Sharia'a: which concerns all forms of practical actions by Muslims manifesting their
faith and belief, including man-to-man activities (Muamalat); which comprise all mankind
activities (political, economic and social).
Akhlaq: concerns behaviour, attitude and work ethics, within which Muslims perform
their practical day-to-day activities. Sharia'a or Islamic Law , at times referred to Islamic
Jurisprudence, is the instigating foundation of Islamic Banking. As illustrated in the table
below, a significant portion of Muamalat is the conduct of economic activities which
constitute banking and financial services that form the founding principles of Islamic
Banking.
There are several key principles of Islamic Banking, with the central tenet being prohibition
of interest (Riba) as revealed in Quran (Al-Baqarah,2:275) "Allah has permitted trade and
has forbidden riba". Geelani (2005) assets that Riba refers to any predetermined payment
above the actual amount of the loan principal; this is contrary to conventional banks that
charge fixed interest rates on both deposits and loans. Uncertainty and speculation (gharar)
are also forbidden, since any transaction the bank enters should have well-known outcomes
that all contracting parties must have perfect knowledge of as cited in Kahf and Khan
(2007).
Similarly, " the depositor, the bank and the borrower all share the risks and rewards of
financing a business venture" as elaborated by Chapra and Ahmed (2012). Kettel (2011)
also declares that Islamic banks promote risk sharing between providers of funds
(investors) and users of funds (entrepreneurs), while their counterpart conventional banks
assure the investor a predetermined rate of interest and pass all the risk to the entrepreneur.