The Underlying Factors Contributing to Retail Banking and Foreign Exchange Divisions

Abstract

Islamic banking, for its profit-loss sharing character, is conceived as more production oriented and growth promoting than its conventional counterpart. This is because the bank's earnings are directly linked to the earnings generated from the venture financed by it. Further, replacement of interest with the principle of profit-loss sharing increases the horizon of investment opportunity in an economy. It also promotes efficient allocation of financial resources, ensures equitable distribution of income and Promotes stability in the economy. Thus, Islamic banking is efficient from most of the macroeconomic measures of efficiency.

For an expanding economy, a developed and efficient banking system is indispensable. Among others, it helps transfer of financial resources from surplus units to deficit units and, hence, helps accelerate the pace of development by securing uninterrupted supply of financial resources to people engaged in numerous economic activities. The tremendous development that the world economy has experienced in the last few decades was contributed by several factors among which, growing institutional supply of loan able funds must have played the pivotal role. The role of banking is comparable to what an artery system does in the human body. Both commercial banks and other development financial institutions provide short, medium, and long-term credits to business and entrepreneurs who usually take the lead in ventures of economic development

Institutional supply of credit has been made possible by a system of financial inter mediation organized in a way where conventional banks collect small savings from the public by offering them a fixed rate of interest and advancing the loan able funds out of the deposited money to enterprising clients charging relatively higher rates of interest. The margin between these two rates is the bank's income. In addition, banks also provide many other services to the public for which it receives service charges. Despite the outstanding contribution of the conventional banking system (interest-based), several ancient and modern economists are critical about its efficiency level. Some economists consider the role of interest in the conventional banking mechanism as a major negative factor that contributes to cyclical fluctuations in the economy. Specifically, the ineffectiveness of interest rate as a stabilization tool during the period of the great Depression is a case to note.

The second half of the 20th century witnessed a distinctly separate line of thinking on banking. This was institutionalized at the end of quarter and subsequently emerged as a new system of banking called Islamic Banking [also called profit-Loss Sharing Banking (PLS)]. The world has now been experiencing operation of as many as 250 Islamic banks and financial institutions in more than 50 countries, Muslims and Non¬-Muslims. There are religious as well as economic reasons, which have contributed to the emergence of PLS-banking as an alternative to its conventional counterpart. It is the prohibition of 'Riba in the Quran that, according to the proponents of the PLS-system, was the source of inspiration for establishing banks in line with Islamic Shariah. The basic intense. Behind establishing Islamic banks was the desire of Muslims to reorganize their financial activities in a way that do not contradict the principles of Shariah and enable them to conduct their financial transactions without indulging into Riba. These writers consider rate of interest in the conventional banking mechanism banking mechanism synonymous to Riba, the term as used in the Quran. One of the reasons for this is that the cut come of the productive effort is uncertain, and so interest necessarily involves an element of gharar, that is, uncertainly. On this religious ground, proponents of the PLS-system urge the Islamic community to avoid all transactions with institutions that are interest-bases. Thus, Islamic banking such as Shahjalal Bank Limited emerged as a response to both religious and economic exigencies. While religious exigency calls for avoiding any transaction based on interest, economic exigencies, on the other hand, provide a new out look to the role of banking and adding stability to the economy. Shahjalal Bank Ltd. perceive as an improved system in all dimensions.