Banking System Online Tutoring
Part A:
- Differences between Islamic Banking Sector and Conventional Banking Sector (Basha, 2017):
| Islamic Banking Sector | Conventional Banking Sector | |
| Assumption Differences: | ||
| 1 | Laws are already established by the sovereign of the world, the Almighty Allah. | The laws are made by individuals. |
| 2 | The sector follows policies and laws by the government as well as the Sharia. | The sector only follows policies and laws stated by the government. |
| 3 | In order for the businesses to take loan from this sector, the company should be legal and in accordance with the Sharia Law. | The businesses should be legal in the specific country. |
| 4 | The key function of the sector is the collection and distribution of Zakat. | The sector doesn’t collect any religious concessions. |
| 5 | Money is not considered as a product because of which trading isn’t allowed but is a medium of exchange and store of value. | Money is considered as a product as well as medium of exchange and store of value due to which trading is allowed. |
| 6 | The money kept in this sector is invested in the business functions. | Borrowing and lending of money is done at the cost of paying back the interest. |
| 7 | The risk is distributed with the customers. | The risk is only suffered by the bank. |
| Operation Differences: | ||
| 8 | The sector acts as an agent for the customers who want to deposit their money in the bank, then the bank distribute the money to the users. | The conventional sector performs as a borrower of money to earn interest. |
| 9 | The money that is deposited in the bank is seen as quasi. This refers to equity rather than a debt because of profit and loss sharing. | The deposit is determined as liability of the sector that is debt. |
| 10 | The award to the depositors is profit and loss sharing in accordance to the agreement | The reward to the depositors in interest. |
| 11 | The sector tells the depositor about the utilization of h/her deposits in the account for instance, the depositors would know where their money is being invested | The sector doesn’t enable the information regarding the utilization of the depositor’s money that is its investment and other activities. |
| Investment: | ||
| 12 | The deposits made within a bank doesn’t provide interest as a reward | The sector does provide interest a reward in case of deposits made internally. |
| 13 | The sector doesn’t permit to invest in bonds, money or short term loans as they are all based on interests | The banks in this sector does allow to invest in bonds, call money or short term loans because the bank would earns interest. |
| 14 | The investment in derivatives is prohibited due to interest. | The investment in derivatives is allowed. |
| 15 | The sector meets the needs of liquidity through sukuks, Murabaha, Ijara and much more that are easy to trade in the external security market | The sector meets the needs of liquidity through the investment in marketable securities. |
| 16 | The banks in this sector can only borrow money from other banks if the loan is provided on the bases of Shariah Law. | The banks in the sector can easily borrow money from other banks. |
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- Challenges of Islamic Banking Sector:
- Fatwa (Shah, Raza & Khurshid, 2012):
The Shariah Law about any banking function is taken from fatwa, this allows to better understand the different Islamic notions regarding economic and financial that are not easily understandable through Quran or Sunnah. Fatwa is crucial in Islamic banking; it is normally a religious governance regarding Islamic policies and regulations that are not clarified in Shariah. The main issue with this is that there is not present a sole authority that administers the Financial Sector of Islam. There are many Shariah Scholars that provide their suggestions on how to conduct banking activities but all of them have different opinions and suggestions. The banks in the Islamic Financial Sector have their own Shariah Scholars who entitle the banks with their own understanding of religion and banking functions. There is an increasing amount of variation among the scholars of Shariah that leads to uncertainty among the consumers and investors. Moreover, the stakeholders are hesitant about the utilization of the products or employ any banking function within the limits of Islamic Banking. Not only, there is unclarity in the rulings of banking sector according to Shariah Law but there is an issue of interpretation of those rulings. There are multiple sects in the religion due to which every sect follows their scholar who interprets the ruling according to their own beliefs. There is a probability that a Shariah ruling interpreted by one sect can completely different by another one.
- Limited Knowledge of Islamic Banking among the Individuals (Afshar & Muhtaseb, 2018)
Islamic Banking Sector is not that famous among non-Muslims, some of them do not have a clue what does this sector refers to. Not only non-Muslims but Muslims are confused regarding the sector, they don’t understand how does this sector conducts its banking functions among its customers. There isn’t a concise meaning of the word Islamic Banking, Islamic Financial banking or its products. The Shariah Boards all around the world has a main role in raising awareness about the knowledge of Islamic Banking sector. The individuals in should be correctly educated about how the Islamic Banking sector functions, what is allowed and what is not while borrowing or lending.
- Lack of Skilled Employees in the Islamic Banking Sector:
This is also major challenge, there are not enough skilled labours in the sector at a functioning level along with there are also not enough skilled scholars who provide appropriate suggestions in accordance to the Shariah Law. The labours in non-Islamic Banking Sector can understand the functions of the Islamic Bank but cannot develop a product because that product should be according to the Shariah rules and regulations (Shah et al., 2012). There is a lack of Shariah Scholars in the sector with appropriate understanding of banking functions. Moreover, there are about two hundred to three hundred Shariah scholars in the world today (Ainely, Mashayekhi, Hicks, Rahman & Ravalia, 2007). This can be a major set back for the banking sector because the scholars thar are few in number aren’t even in harmony in deciding which function of the Islamic Banking is permissible and which isn’t. This can confuse the consumers and investors.
Part B:
- What are Neo Banks? An example of an Australian digital bank along with its services.
Neo bank is sometimes termed as a “smart bank”, this type of a bank purely conducts its banking function online via an application on a smart phone. This type of a bank isn’t physically present but is present virtually and provides the same service as a traditional bank does (Waraker, 2020). Globally, there has been introduction of many virtual financial institutions but mostly in the developed countries. In Australia, digital banking institutions have been introduced like Xinja and 86400. However, not evert virtual bank has been granted virtual banking license. Nevertheless, Xinja has been granted virtual banking license by the country. The online banking institution help the Australians to deposits their money and borrow from the startup. The banking sector in Australia is dominated by four main financial institutions that are Commonwealth Bank of Australia, Westpac Banking Corp, Australia and New Zealand Banking Group and National Australia Bank. However, the online banking institutions would provide easy access of the banking functions to the citizens (Reuters Staff, 2019). The products that the online financial institution offers are savings account, the customers can deposit their money into their accounts and home loan. The financial institution can create an account for the customers with zero paperwork, is secure, there aren’t any pre requisite conditions for the customers to deposit their money and provides a competitive interest rate (Barry, 2020). Virtual banking is the future of banking sector, through the utilization of technology correctly the online banking institution can provide easy access of conventional banking services like deposit, withdrawal, savings account and much more on a consumer’s smart phone. This will change the face of the banking sector and minimalize the cost of travelling to a physical bank for the consumers.
- Digital Banking Advantages (Nedumaran & Baladevi, 2018):
- Agility: the major advantage of a virtual banking is that the services of this type of financial institution can be availed anywhere. For instance, an individual can use the application while sitting on a sofa or during a vacation. The only thing that a customer must have is a secure internet connection through which h/she can use the application. Digital banks like Xinja in Australia has provided an application through which the customers can deposit their money, create an account as well as a savings account. This has made banking easier and the individuals doesn’t have to worry about visiting a physical branch of a bank or any other banking function that must be done face to face.
- Convenience: A digital bank is convenient for conducting different banking services for the customers. For example, if a customer wants to deposit a certain amount h/she doesn’t have to travel all the way to the physical bank and have to submit a cheque but the customer can deposit an amount through the mobile application. Moreover, the customer can avail the services of the digital bank at any time either its 3 AM in the morning or during the day as a physical bank has fixed timings that are from 9 AM to 5 PM. The digital bank saves time and cost of travelling of the customers that is suitable for the individuals who doesn’t have their bank’s branch near their residence.
- Payment of Bill on the Application: Bill payment is important for individuals to avail basic necessities that the country provides them like electricity bill, phone bill, gas bill and much more. Payment of bills has to be done at the end of every month, this can be set up on the customer’s mobile application of the virtual bank. This will permit the individuals to never miss any payment and they don’t have to visit the physical banking institutions to pay their bills. This will save travelling cost as well as this will save the customer to go through the whole process of payment.
- Challenges faced by the Virtual Banking Institutions:
- Security: The online banking institutions doesn’t provide paper less services that do not require cheques or paper currency while depositing the amount. This can create privacy and security issues for the customers, there is an alarming threat on the disclosure of personal information of the customers that include the total money that have in their accounts, their personal data and passwords. If someone breaches the firewall of the virtual banking institution than customers’ account can easily be hacked and utilized for illegal means (Uddin, Shawon & Nayeem, 2017).
- Transaction Problems: For an intricate banking situation, there is a need for the customer to solve the issue face to face with the banking officer. A conventional bank allows the individual to visit the premises of a bank to solve the problem of the customer. Online banks don’t provide the service of solving complex issues face to face that can create unlikeliness of the virtual bank by the customer. Not only this, transactions done abroad can also be nuisance or can be difficult with physical banks (Nedumaran & Baladevi, 2018). This can cause problems for the customers and can force the individual to not employ the services of the virtual banks.
- Absence of some Services: the physical banks provide multiple services to its customers like withdrawal of the money, insurance, brokerage account or even provide some authentic suggestions that the customers can really benefit from. Moreover, online banks don’t provide signature assurance to its customers that is necessary for international or legal transactions. Furthermore, traditional banks provide additional services to the customers that helps the institution to uphold loyalty of the customers but a virtual bank provides only few services that doesn’t attract the customers easily.
References:
Basha, SN 2017, The hundred differences between Islamic and conventional banking systems. International Journal of Scientific Research and Management, vol. 5, no. 9, pp.7093-7106.
Uddin, B, Shawon, SS & Nayeem, AB 2017, Challenges and opportunity of online banking services and products: an empirical study in Bangladesh, International Journal of Advanced Engineering and Management Research, vol. 2, no. 5, viewed 23 September 2020 https://www.researchgate.net/publication/328280777_Challenges_and_opportunity_of_online_banking_services_and_products_An_empirical_study_in_Bangladesh
