Comparative Analysis of Islamic Banking with Its Conventional Counterparts

The capitalist system increases the wealth of the rich and makes them stronger. This is why class differences have become so widespread in our societies. The market economy system is usually confused with the ruthlessness of the capitalist society. The two however are very different. The phenomenons of supply and demand are the same in both capitalist and socialist economies. Many different researchers have conducted research on the social problems being caused the world over by the capitalist economic system. According to many studies, the current international banking system is the reason that many third world countries are not able to even sustain themselves (Diwany, 2002).The basic problem in current banking principles when it comes to the social aspect is the close and emphasized relationship between risk and return. The relationship is negatively correlated. Thus as the risk with an investment increases so does the return. Therefore it can be said that this phenomenon sometimes totally ignores the social aspect as people with high risk are charged a higher return. The risk which affects the risk to such an extent is called the Default Risk Premium (DRP). DRP or risk of being defaulted is usually very high with nations in economic trouble which are usually the third world countries. Therefore although their financial troubles are already very high the rate charged to their loans is increased many times over. Moreover, as the rates are increased they have no chance or very little chance to pay back those loans. The phenomenon of compounding means that an interest rate is charged on accumulates interest rate income. This compounding increases the original loans many folds, therefore, trapping them in a continuous cycle of servicing debt. There are many different examples of these types of arrangements where nations are taking loans at high rates only to service debt.