Investigation on Functions and Product Structure of Islamic Banking vs. Conventional Banking in Sri Lanka: a Case Study

Abstract

Islamic banks (IBs) were originated to satisfy the financial needs of Muslim community by rejecting interest and following Profit-Loss sharing paradigm while conforming to Shariah principles. IB is increasingly gaining attention across the global financial environment due to its unique framework relative to Conventional banks (CBs). But the public still lack the comprehensive knowledge about how actually IBs differ from CBs. Hence, there is a lack of participation of the public with the IBs for banking transactions. The objective of the study is to explore 'how' and 'why' IBs differ from CBs with giving special reference to the functions and products. Hence, this research would fill the knowledge and empirical gap in the Sri Lankan context. The study adopts interpretative methodology and multiple case study strategy. Primary and secondary data were collected through interviews, observations, reports and websites. Major findings of the study concluded that IBs and CBs enclose differences as well as similarities in their framework. The major differences were identified connecting to the framework of IBs as they need to follow interest free paradigm, Profit and Loss Sharing (PLS) paradigm and Shariah principles in performing the banking functions comparing to interest based CBs. However, still both IBs and CBs function as financial intermediary carrying out similar functions. Similarly in terms of product and services, IBs offer similar saving and financing solutions to banking customers as of CBs, but still their products tend to be unique as they adhere to above principles and variety of Shariah product concepts such as Mudharaba in forming savings accounts and Mudarabah, Musyarakah, etc in offering financing products. Likewise similarities and differences can be observed in investments and financing structure between two systems. Thus it is evident that IBs and CBs enclose differences as well as similarities in their product and working structure. Accordingly the major principles of interest free paradigm, Profit and Loss Sharing paradigm and Shariah principles have influenced for the emergence of unique structure that differentiate an IB from general CBs though few similarities can be observed between two systems. Thus these results are consistent with the findings of other researchers in the similar areas.