Comparative Analysis of Investment in Capitalistic and Islamic Banking Systems Under Certainty and Risk Conditions

Banks perform, in general, two functions; one is to collect deposits and the other is to issue loans. In the traditional banking system depositor would be guaranteed a predetermined return on the nominal value of the deposit by the bank; furthermore, in most cases the deposits, themselves, are insured (FDIC is an example). Loan users in return pay a predetermined return on the amount of fund used; besides, the user has to provide a safe collateral in order to guarantee the principal and the interest. Hence it can be safely said that these banks play a passive role in the economy in the sense that their operations are quite inflexible in the face of any economic fluctuations. As the result it has rightly been said that in these banks “…since the nominal value of deposits is guaranteed … shocks that can lead to banking crisis can cause divergence between real assets and real liabilities and it is not clear how this equilibrium would be corrected and how long the process of adjustment would take.” This is the real essence of fund intermediary function of a traditional (capitalistic) bank.