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Islamic Financial System

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CHAPTER ONE
INTRODUCTION
1.1. Background:
Financial stability and economic growth is the concern of any country that looks for the welfare of its people. Therefore, the banking sector and its role of intermediation between savers and borrowers is the target of regulators in every country to enhance stability, soundness and economic growth. The banking sector is one component of the financial system and its importance stems from the importance of the financial system as a whole.
1.2. 1.2 Financial Systems
The financial system is defined by Gurusamy (2008) as a system that aims at establishing and providing a regular, smooth, efficient and cost effective linkage between depositors and investors (ISBN 0-07-015335-3).
Researchers such as Levine …show more content…
1.2.1. ISLAMIC BANKS Vs CONVENTIONAL BANKS
C Fohlin (1998) distinguishes between two types of banking systems: commercial banking and universal banking system. He explains that commercial banks undertake intermediation activities plus trade services such as letters of credits and guarantees, while universal banks combine all phases of finance in one entity, thereby yielded economies of scope and greater efficiency in terms of increased volume, and reduced cost of finance, as they are equipped to deal with information asymmetry.
Calomiris (1995) agree that universal banks are combination of activities more than intermediation, including trust services, equity holding and underwriting.
In this context, Hassan (2004) argues that Islamic bank’s work is similarly not confined to financial intermediation; it is a universal bank whose objectives are much broader than profit maximization. According to him an Islamic bank is expected to be a socially responsive institution (SRI) with social, cultural and other responsibilities besides profit …show more content…
Llewellyn, (2001) lists these differences by examining the mix of contracts on the liabilities side of the balance sheet; the quasi-equity nature of investment deposits implying that some depositors share in the risk of the bank; a wider variety of modes of financing and asset portfolio of banks, the risk sharing characteristics of the contracts issued and who bears risk.
Al-Jarhi (2002) looked at the difference between Islamic and conventional banks by comparing items on their balance sheets. He argues that while Islamic Banks are essentially partners with entrepreneurs and borrowers through equity-type profit–and-loss sharing (PLS) arrangements and purchase- sales (fee-based) transactions. the balance sheet of a conventional bank include on the liability side demand saving and time deposits guaranteed by the bank assets, and assets on the other side composed mainly of debt instruments whose quality depend heavily on the ability of the bank’s debtors to repay and the types of collaterals hold by the

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