The rapid rise of the Islamic banking can be interpreted as a sign of frustration to the clients by conventional banks. In the past decade, Islamic banking has witnessed a tremendous growth despite the financial crises happening around the world. The issue has fascinated finance experts attempting to find a solution to the failing banks and economies. Although Islamic banking has not grown to a significant proportion of the conventional banking system, it holds valuable issues that can be used to transform other business in various industries.
Lack of morals has been credited as the primary cause of the troubles in the banking sector. In the conventional world, investors use the capitalist ideologies where they create as much wealth as possible for themselves regardless of the circumstances in the market (Lewis, 2013). Such an act can be described as greed. The greed in the financial sector has spread to banks, mortgage companies, and all other institutions. Banks intend to earn more income and, therefore, develop many products which may not meet the required standards. Products that require no documentation or collateral are particularly risk and put all the parties in the transaction at a higher risk. Banks have also been accused of misleading the customers or failure to offer advice when offering then loans or other products. The consequence of this is that the customers end up in financial crises and hence a challenge to the entire sector. However, Islamic finance is based on various principles that discourage greed. For instance, the seller of commodities must disclose to the buyer the costs incurred in producing the commodities and the profit earned from the sale, thereby ensuring that buyers get value for their money. As such, Islamic Finance encourages the establishment of free markets
A keen study of the operations of the Islamic financial system can offer valuable insights to Wall Street and other conventional financial systems. Wall Street is a symbol of the success of the traditional banking. However, the challenges it has experienced over time have proven that the system needs adjustments in its control mechanisms to make it resistant to manipulation and economic challenges. An initial step in achieving this could be appealing to the participants in the market to be moral and make profits that are valid (Evans, 2015). However since this is impossible, the institution should establish laws to curb the immoral practices such as negligence and misguided advice.
The issue of transparency in financial transactions is a critical issue that the Wall Street can learn from the Islamic financial system. Many of the operations conducted by the institution have hidden details that make them more expensive than they appear. The objective of including hidden features is to make the transaction more appealing to the customer (Lewis, 2013). Islamic finance, however, calls for the full disclosure of all the costs involved in a transaction. Revealing all the details gives the customer an opportunity to make an informed decision and plan effectively for a particular investment or project. The Wall Street should, therefore, encourage the traders to reveal essential details regarding a product they are selling in the market.
There are issues that the Islamic finance advocates for that cannot be applicable in the Wall Street or the conventional banking system (Evans, 2015). Speculation is fundamental in the existence of the traditional financial system. Speculation gives a trader the chance to earn more profit for venturing in a more risky business. It is, therefore, impossible to eliminate it from the market. However, Islamic banking prohibits speculation, which it refers to as gharar. According to Al-Yousef (2005, p. 4), Islam views speculation as a form of gambling and the Quran, which is the Islamic religious book, outlaws all forms of gambling.
The sales of shares by brokers help increase efficiency in the firm. The Wall Street is an essential source of capital to companies in the conventional finance. It is impossible to demand that brokers purchase the shares so that they may have possession since such a move would require a high amount of funds. Brokers serve as agents for stock owners who wish to trade. It is impossible to isolate them since the shareholders might lack the expertise or time to engage in trading.
The principle of demand and supply conflicts the issue of certainty of price as advocated by the Islamic finance (Lewis, 2013). The setting a fixed price for a particular product without considering the demand of the product can lead to a shortage in the market if the demand is very high. The principle of certainty in price may, therefore, not apply in the case of a convention bank.
The primary reason bank clients are seeking services from Muslim financial institutions is because of the transparency exhibited by those organizations in their operations. Although the institutions may not offer high returns as compared to the conventional banks, they have a low level of risk which is a great factor by the clients. Wall Street can adopt the practice of transparency and morality advocated fro by the Islamic bank in its operations. The institutions could, therefore, combine the elements of its highly efficient system to earn the confidence of the traders in the market and as well as generate capital for companies. The Wall Street cannot, however, afford to adopt the entire strategy by the Islamic finance since it could involve massive layoffs of brokers and other players in the system leading to adverse social problems.
- Al-Yousef, Y. (2005). Speculative Capital: An Islamic View (1st ed.). Retrieved from http://www.darussalam.ae/magazine/SpeculativeCapital.pdf
- Evans, M. (2015). Can Wall Street Learn Something from Islamic Finance. Exinfm.com. Retrieved from http://www.exinfm.com/board/islamic_finance.htm
- Lewis, M. (2013). The Rise of Islamic Finance. Youtube.com. Retrieved from https://www.youtube.com/watch?v=P_cVuLpD_rs
