Evaluating the Advantages of Islamic Banking over Conventional Banking in Terms of Deposit Insurance

There are some fundamental differences between Islamic banking and conventional banking. These differences cover several areas including depositor's participation in investment, risk-sharing, interest rates, depositor's knowledge of the fate of deposit, and deposit insurance. These differences can be used to challenge the performance and efficiency of deposit insurance systems in the two aforementioned banking systems. Thus, the present article is aimed at investigating the need for deposit insurance schemes in both conventional and Islamic banking systems. The investigation is carried out by analyzing the differences between the two banking systems and comparing them in terms of their deposit insurance schemes. The results show that deposit insurance is more necessary in usury based banking system compared to the Islamic banking system. In addition, based on our study the Iranian banking system is more similar to the usurious banking system than its Islamic counterpart. This was indicative of the necessity of having a deposit insurance system in the Iranian banking system.