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Differences Between Islamic Banks

The key differences between conventional and Islamic banks are: Conventional banks operate based on man-made principles and provide predetermined interest rates, while Islamic banks operate according to Shariah principles and promote risk-sharing. Islamic banks also aim to maximize profit within Shariah restrictions and serve functions like zakat collection. Instead of interest-based lending, Islamic banks engage in partnership-based financing and give greater attention to project viability. The status of an Islamic bank is as partner rather than creditor, and profits are based on profit/loss sharing rather than fixed interest rates.

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Fatima Ali
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181 views

Differences Between Islamic Banks

The key differences between conventional and Islamic banks are: Conventional banks operate based on man-made principles and provide predetermined interest rates, while Islamic banks operate according to Shariah principles and promote risk-sharing. Islamic banks also aim to maximize profit within Shariah restrictions and serve functions like zakat collection. Instead of interest-based lending, Islamic banks engage in partnership-based financing and give greater attention to project viability. The status of an Islamic bank is as partner rather than creditor, and profits are based on profit/loss sharing rather than fixed interest rates.

Uploaded by

Fatima Ali
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Differences between Conventional &

Islamic Banks
Difference between Conventional and Islamic Banks can be under as: Dors Feline

The

functions

operating

modes

conventional

banks

and

The functions and operating modes of Islamic


banks are based on the principles of Islamic

of

Shariah.

are

based on fully manmade


principles.

The investor is assured of a


predetermined

rate

In contrast, it promotes risk sharing between


provider of capital (investor) and the user of funds

of

(entrepreneur).

interest.

It

aims

profit

at

maximizing

without

It also aims at maximizing profit but subject


to Shariah restrictions.

any

restriction.

It does not deal with Zakat.

In the modern Islamic banking system, it has


become one of the service-oriented functions of the
Islamic banks to be a Zakat Collection Centre and
they also pay out their Zakat.

Lending money and getting

partnership

business

is

the

have to understand our customer's business very

interest is the fundamental


of

in

fundamental function of the Islamic banks. So we

it back with compounding

function

Participation

well.

the

conventional banks.

It can charge additional

The Islamic banks have no provision to charge any


extra money from the defaulters. Only small

money

(penalty

compounded interest)

and

amount of compensation and these proceeds is

in

given to charity. Rebates are give for early

case of defaulters.

settlement at the Bank's discretion.

Very often it results in the


bank's

own

becoming

It gives due importance to the public interest. Its


ultimate aim is to ensure growth with equity.

interest

prominent.

It

makes no effort to ensure


growth with equity.

For

interest-based

commercial

For the Islamic banks, it must be based on a Shariah


approved underlying transaction.

banks,

borrowing from the money


market is relatively easier.

Since income from the

pay greater attention to developing project appraisal

advances is fixed, it gives


little

importance

developing
project

Since it shares profit and loss, the Islamic banks

and evaluations.

to

expertise
appraisal

in
and

evaluations.

The

conventional

banks

The Islamic banks, on the other hand, give greater


emphasis on the viability of the projects.

give greater emphasis on


credit-worthiness

of

the

of

bank,

in

clients.

The

status

conventional

relation to its clients, is that


of creditor and debtors.

The status of Islamic bank in relation to its clients is


that of partners, investors and trader, buyer and
seller.

A conventional bank has to

Islamic bank can only guarantee deposits for


deposit account, which is based on the principle

guarantee all its deposits.

of al-wadiah, thus the depositors are guaranteed


repayment of their funds, however if the account is
based on the mudarabah concept, client have to
share in a loss position..

Money is a commodity

Money is not a commodity though it is used as a

besides

medium

of

medium of exchange and store of value. Therefore,

exchange

and

of

it cannot be sold at a price higher than its face value

store

value. Therefore, it can be

or rented out.

sold at a price higher than


its face value and it can
also be rented out.

Time value is the basis for

charging interest on capital.

Interest is charged even in


case

the

Profit on trade of goods or charging on providing


service is the basis for earning profit.

Islamic bank operates on the basis of profit and loss

organization

sharing. In case, the businessman has suffered

suffers losses by using

losses, the bank will share these losses based on the

bank funds. Therefore, it is

mode of finance used (Mudarabah, Musharakah).

not based on profit and loss


sharing.

While

disbursing

cash

The execution of agreements for the exchange of

finance, running finance or

goods & services is a must, while disbursing funds

working capital finance, no

under Murabaha, Salam & Istisna contracts.

agreement for exchange of


goods & services is made.

Conventional banks use


money as a commodity
which leads to inflation.

Islamic banking tends to create link with the real


sectors of the economic system by using trade
related activities. Since, the money is linked with
the real assets therefore it contributes directly in the
economic development.

The End

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