Why Islamic Banking Institutions Were A Global Economic Downturn - Research Paper Example

Basically, both Islamic banking and conventional banking have a similar rationale in their operations save the former differs in the manner it carries out its transactions as stated by Banaji (2007). Further, Islamic banking expects the customers to bear losses and profits equally while at the same time avoiding charging excessive interest (Cameron, 2007). In dealing with Islamic mortgage transactions, banks operate by purchasing the items buyers want from sellers instead of giving loans in form of money (Anderson, 2001).

These items are then sold back at a higher price to the buyer at the discretion of paying in installments (Hamel, 2002). However, Bryman and Bell (2003) state that the bank is not mainly concerned with making a profit and as such does not charge any extra levies for delayed settlement. The bank ensures that it is cushioned against default by asking for strict collateral as stated by (Avery et al, 2000). To authenticate the transaction, the bank lists the goods under the buyer’s name at the start of the transaction.

Another approach of transacting in Islamic banking is in real estate leasing where case studies show that operations are similar to mortgage transactions. In this system, therefore, it is illustrated that the bank charges the item more expensively and maintains custody of it until the debtor settles the loan fully (Clement and Rodney, 2008). Research has also indicated that some banks handle home loans in a very different approach. Abdelal (2003) explains that the bank and borrower sign a partnership entity in which case the two raise the required capital on favorable terms to each other to buy the asset.

The borrower leases the asset from the partnership entity and then rents it at a fee (Ennew and Waite, 2006). The proceeds from this transaction are shared out between the bank and the borrower based on their capital share contribution. Studies show that the borrower in the partnership entity can terminate the partnership only after acquiring full ownership of the equity on paying the bank’s claim on the property (Clement and Rodney, 2008).