Banks are defined as a business organization that performs services in relation to money. Specifically is the process of keeping money for customers and paying it out on demand, in the form of deposits, borrowings and exchanges. It has become a clich to note the revolutionary impact of information technology (IT) upon any industry, but the real upheaval lies just ahead. As experts back in the 90s stated, "If the number-crunching mainframe computers of the 1970s formed the childhood of IT, and the flowering of personal computers during the 1980s marked its youthful adolescence, then the 1990s seem likely to see the passage of IT into adulthood".
As it has been foreseen, during the 21st Century, technology became directly related to almost every single activity and function of a bank. Deposits, withdrawals, loans, transfer of capital and updating are just some of the functions that are carried out electronically, as computers support communication networks or ATMs.
In the late 1990s, banks have come to realize even more and understand better the importance of technology since they have tried to take advantage of its progress. The computer sciences and all aspects in telecommunications, with particular emphasis on the Internet capabilities, constituted one of the most profitable areas banks decided to invest. These two fields of technology have had the greatest potential for growth and profitability.
Currently, as the banks anticipate the rapid IT growth potentials, they continue to give a lot of emphasis on the technology of e-banking-the transactions with banks through Internet-and e-commerce of products and services. Noticeable is the fact that almost every bank in the globe currently offers e-banking services via their Internet links.
During the past ten years, a trend has emerged as major banks or groups of banks have formed alliances with companies in the telecommunications and computer sciences fields, or in other diverse industries. For example, in the UK, two Scottish banks have joined up with major supermarket chains in order to provide an outsourced banking function for the so-called supermarket banks. The motive for such kind of strategic decisions was the profit from a dynamic field that showed revenues increasing in a rapid rate.
Furthermore, it is true that the Banking Sector throughout Europe has gradually restructured itself in order to be able to meet the challenges provoked by the unification that has recently reached the milestone of twenty-five member states.
Operating in this new environment, banks have to confront some major issues, such as the intensification of competition, the technology breakthroughs referring to transactions, the globalism of capital and money markets, the development of management and administration, the extensive use of derivatives, the development of international transactions and the introduction of financial innovations.
Thus, EU banks in order to cope with the fundamental forces mentioned above, are trying to find ways to improve their productivity and effectiveness, reduce their costs, upgrade the quality of the services they provide, intensify their presence in new markets, reduce the exchange risk, and finally achieve great macroeconomic stability.
Experts state that the upcoming changes will also force banks to reconsider their position in terms of effective bank size, economies of scale in the new environment, creation of a new powerful capital base, globalisms of the activities as well as of the wide variety of product/service lines they provide to customers.
According to the estimations of "International Monetary Fund" and the "Organization for Economic Co-operation and Development", it is a fact that the banks have already invested significant capitals to new technology applications, while most have already introduced "personalized" services for their European or global customers.
Yes, we can shop around but at the end of the day, they're all in it for profit, gained by ever fluctuating interest rates. They also take risks investing our money without our knowledge and we are susceptible to those investments failing.
However, with the diverse mix of cultures in every country these days it is not that unusual to see a different banking system coming into play.
The Shariah, or Sharia, system of finance has been set up by the Islamic community to comply with their strict laws on banking in accordance with the Qur'an. Sharia law covers all aspects of everyday living for the Muslim community.
Banking and finance are issues that are covered in depth, from personal finances to business banking. Working on a shared profit and loss system makes this system quite different to Western banking. This prevents the bank from monopolising the economy and is less risky to the borrower.
This way, the borrower is more secure, more businesses succeed, more money is borrowed, thus keeping the whole system afloat and everybody from borrower to lender benefits.
Sharia law prevents the collection and payment of interest. So, how do the banks make money?
If a Muslim wishes to utilise a loan to purchase items, the bank actually make the purchase and re-sell to the buyer for a profit that is agreed between the two parties. That profit is set without alteration and it is essential that it is very clear upon the agreement.
No extra charges can be enforced on this loan, even if payments are late. However, rights to the items purchased remain with the bank until the loan is paid in full.
The same principles apply to mortgages. The house is purchased by the bank and resold at an agreed profit to the buyer. Repayments are made in instalments but without the worry for late payment charges. However, a Muslim is expected to meet his repayments without taking advantage.
The land and property will be in the name of the buyer from the outset of the agreement for the security of the borrower but for protection the bank will ask for strict collateral.
As far as business banking is concerned, an individual can borrow interest free money to set up his own business. As with all loans an agreed profit is decided upon from the outset and repaid in instalments.
The borrower provides the labour while the bank provides the finance thus reflecting Islamic law of profit and loss sharing with no one party carrying all the burden of risk/cost of failure.
Money can be lent to businesses, whether existing or new. It is specified that the business must not contradict Muslim beliefs, such as the selling of alcohol or pork, or be involved in any media business which deals in gossip columns or pornography.
Business banking is not free and neither is there any interest imposed. Money is lent on a floating rate interest loan. This means the floating rate is dependent on the company's individual rate of return.
The banks profit on the loan is equal to a certain percentage of the company's profits - the profit sharing side of Sharia law. Once the original agreed amount has been repaid, the profit sharing arrangement ends.
So, money can be lent to businesses and it will be dependent on the individual business as to what the repayments will be. Therefore, any business can afford a loan.
Interest is not paid or collected on current accounts so overdrafts are not permitted. However, there is always the option of Hibah (Gift). This is a voluntary payment by a creditor or debtor in return for a loan. This is usually practiced in Islamic banking but is discretionary.
Both Jonathon Hardcastle & Shaun Parker are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.