In this chapter an attempt is made for the first time to assess the financial performance of Islamic banks and conventional banks by choosing a matched sample of banks to assess their financial performance across the world over a lengthy period. Islamic banking is based on replacing the prefixed-interest-based bank deposit-cum-lending activities with risk-sharing and profit-sharing principles advocated by Islam, which in turn appears to be consistent with the social norms of pre-modern societies prior to the rise of interest-based-fractioning banking in the last 200 years, which refers to the fractional-reserve banking from the close of the 18th century. Risk- and profit-share principles in financial transactions have been with humanity for a long time and they are still practiced silently in most rural non-bank lending activities across the world. They have certainly been followed for a long time in Islamic countries, where lending practices reshaped the old pre-Islamic practices across the then known world by avoiding pre-fixed interest-based lending practices in preference of risk-share–profit-share principles. The modern banking practice of fractional lending and pre-fixed interest without risk-sharing developed over the last three centuries just around 1752 AD following the papal dictate lifting the Catholic ban on interest-based lending.1 For some 45 years since 1963 the old practice of financial transaction of risk-share–profit-share lending has come back to be formally organized in Islamic banking.
|Title of host publication||The foundations of Islamic banking |
|Subtitle of host publication||Theory, practice and education|
|Editors||M Ariff, M Iqbal|
|Publisher||Edward Elgar Publishing|
|Number of pages||26|
|Publication status||Published - 2011|