November 2016 Vol. 4 No.4

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Review

Practical Operations of Islamic and Conventional Banking Systems: Cost of Financing (Qard Al-Hassan) Analysis

Muhibat Ayoni Oladimeji

Lecturer, Crescent University Abeokuta, Ogun State, Nigeria / Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia (USIM), 71800, Bandar Baru Nilai, Malaysia

E-mail: muhibatoladimeji@gmail.com

Accepted October 17, 2016

Abstract

The major issue for current study is practical application of theoretical discussion on riba, what constituted riba (interest) itself in the practical operations of Islamic banks. For instance, Islamic bank is a business or commercial entity, how this entity is going to survive in business, if it cannot involve in receiving interest from or paying interest to its clients. This paper is both descriptive and exploratory with aims to contribute to the understanding of the operations of Islamic and conventional banking. Therefore, this study tries to make use of Cost of Borrowing (known as Cost of Financing in Islamic banking context: Qard Al-Hassan) to examine and critically analyses the operations of Islamic and conventional banks in practice. Some issues in estimating CoB/F under the two systems as well as illustration on (CoB/F) computation were analyzed. Reasons why CoB/F is allowed to be charged by the Islamic bank and to be paid by the customer is also examined and illustrated. The study will have policy implication to the policy makers and the practitioners in the area of Islamic and conventional banking system. It will also be a source of reference for the academicians, students, and other interested parties.

Keywords: Conventional banking, Cost of Borrowing/ Financing (Qard Al-Hassan), Islamic banking, Practical operations, Riba