Perspectives of Islamic Banking and Its Place in Economic Theory: Empirical Evidence from Saudi Arabia

Abstract

The study investigateswhether Islamic banks have unique modes and principles of their own, different from those of conventional banks and to find out the salient perspectives of Islamic banking in Saudi Arabia. The study concludes that Islamic Banking is based on Shariah (Islamic law) which prohibits dealing with riba (usury interest), gharar (uncertainty and speculation), debt-financing, gambling, alcohols, adultery and pork. Consequently, Islamic banking has its unique financial principles and modes which make them distinguished from those of conventional banking. Such modes include Murabaha (cost plus), Mudaraba (trading at agreed prices), Ijarah (leasing), Musharakah (equity participation) and Sukuk (Islamic bonds based on assets). The Saudi banking system is dual where Islamic and conventional banking may work side by side. In view of the foregoing findings from this study, it is hereby recommended that the use of  Islamic banking in western countries as a complementary to conventional banking to serve their clients, having new innovative Islamic financial products and hedging instruments besides developing the Islamic banks to be cost-effective providers of high quality financial services.