Stability and Efficiency of Islamic Financial in Comparison with Conventional Financial

Islamic banking practice, which started in early 1970s on a modest scale, is based on one single belief, i.e Riba is prohibited. Having set that, there lies a question. i.e. in comparison with conventional financial system, does Islamic banking have any advantage? The answer to this question gets more important if we consider the various crises the conventional system has faced in the last 4 decades. The most recent (and probably most important) of them is the financial crisis in the housing market of the U.S. economy. This crisis has provided a great opportunity for Islamic scholars to rethink and reconsider the distinguishing features of interest-free Islamic finance at the macro-economic level. This paper addresses some of these features, Which are stability and efficiency. The results show that Islamic finance is conducive to greater stability and more efficiency than conventional finance. It is a fairer arrangement capable of leading human society to greater equity and higher growth. One of the reasons for greater stability in an Islamic financial system is synchronization between payment obligations and revenue accruals. Another reason is that there will be far less scope for unhealthy speculation in the Islamic system because of absence of the rate of interest and reduced volume of debt. This will also contribute towards stability. Finally a better incentive structure in islamic banking is the clue for higher efficiency.