Conventional banking and the non-interest bearing finance
(ABSTRACT)
A banking system is one of the most important aspects of any developed and flourishing economy and financial system.  A fully functioning efficient banking system helps to create a more successful and efficient society.  Conventional banking systems serve different purposes.  Banks facilitate in the transfer of resources from those who have excess to those that require additional resources to run their various business activities.  A bank, like any business, is in the business to make money.  A banks’ major source of income or profit is the difference in interest rates at which they pay to depositors and the rate at which they lend to companies and entrepreneurs.
Practically, under the Shari’ah system, depositors’ returns are governed not by a predetermined fixed interest rate, but instead by the size of the bank’s return on its investments.  When disbursing loans, the bank functions in the same way as an investment bank, whereby both the investor and the bank not only bring in the benefits of high returns on investments, but also share the losses.  If return on investment is high, the bank will take a percentage of the investor’s profits.  This is impossible for conventional banks, which merely receive the interest that they themselves fix at the time the loan was made.
The modern banking system was introduced to Muslim countries in the late 19^th century, a time when they were politically and economically weak.  The main banks in the home countries of the imperial powers established local branches in the capitals of the subject countries and they catered mainly to the import/export requirements of the foreign businesses.  The banks were generally confined to the capital cities and the local population remained largely untouched by the banking system.  The local trading community avoided the “foreign” banks both for nationalistic as well as religious reasons.  However, as time went on, it became difficult to engage in trade and other activities without making use of commercial banks.  Even then many confined their involvement to transaction activities such as current accounts and money transfers.  Borrowing from the banks and depositing their savings with the bank were strictly avoided in order to keep away from dealing in interest, which is prohibited by their religion.
The methodology of study is primarily analytical, collected from published sources. In order to achieve meaningful results, we strive to obtain as much as information as reasonably possible.
In this paper, we generally cover what interest-free banking is and how it works.  We will also discuss what Riba, or interest, is and why it’s prohibited in the Islamic community.  From a strictly banking aspect, we will discuss US Services to the Islamic community through the HSBC Bank, the two main types of mortgages that are offered for Muslims, and a comparison of interest-free banking and conventional banking.