TABLE OF CONTENTS:

INTRODUCATION:

Conventional banking system……………………………………………………………4

Islamic banking system…………………………………………………………………..4

CONTENT:

Difference between Islamic and conventional banking…………………………………..4

Modes of conventional banking……………………………………………......................6

Modes of Islamic banking………………………………………………………………...6

Ijarah and Leasing………………………………………………………………………...7

Musharaka & Profit & Loss Sharing Account……………………………………………8

MURABAHAH & Cost Plus…………………………………………………………….8

Qarda-E-Hassana & Loan………………………………………………………………..9

Salaam &Agriculture loan………………………………………………………………...9

References………………………………………………………………………………..11

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Acknowledgement:

All praises for God Almighty the most Merciful who guides us in the lacerate and
congenial circumstances with out his help once cannot reach at his destination.

It gives us great pleasure to place before you history of Conventional and Islamic
banking and modes of Conventional and Islamic banking with differences and suggestion.
I am thankful to my instructor Madam SAIRA for guiding us through our project
report with lot of learning involved in it.

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Executive Summary:

Islamic banking is growing phenomena of the current financial situations of the world
today. People have stared to tap into the potential of Islamic banking. Islamic banking
provides people with an interest free economy. In this project you will see how Islamic
banking differs from the conventional system that has really usurped the market today. You
will find the major difference in the structure of the system where profit and loss are
equally shared both bank and the customers. It’s our nature to compare our alternative we
have compared our options regarding the tools used by Islamic banking and the
conventional banking systems. The prominent thing is that Islamic banking is a cultural
oriented banking. Which focus on the well being of the people? Inertest is prohibited in
Islam and Islamic banking focuses on the issue. The leasing facilities such as ijara provides
interest free leasing compared to the usual interest demanding leasing of the Islamic
banking, that in profit & loss sharing account, people with loan that has no interest & the
profit charged does not change, that the investor should bear the losses of his investment on
his own rather than entrepreneur, & lastly that the creditors charges the already fixed
instead of getting more than what he expects. This project focuses on it.

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CONVENATIONAL BANKING SYSTEM:

The banking system which based on the debtor and creditor relationship between the
depositor and the bank on one hand and between the bo rrows and the bank on the other
interests is consider to be the price for creditor reflecting the opportunity cost of money.

A bank or any business is in the business of making money. A bank major source of
income or profit id the difference in the interest rate at which they pay to depositor and the
rate at which they lend to companies and entrepreneurs. It includes the following major
activities.

1) Deposit creation

2) Financing

3) Agency Services

4) Advisory Services

Islamic banking also provides the following services but on shariah based. Lending money
and getting it back with interest on interest is the fundamentals function of conventional
banking.

HISTORY OF CONVENATIONAL BANKING:

The modern banking system was introduced in Muslim countries in the late 19th
century. The branches of conventional banking are opened firstly in the capitals. The local
trading community avoided the foreign banks for nationalistic as well as religious reasons.
However as time passed it becomes the most popular banking all over the world.

ISLAMIC BANKING:

Financial services that meet the requirements of SHAIRAH, or Islamic LAW, while
designed to meet the specific religious requirement of the Muslim.

Difference between conventional banking & Islamic banking:

One must refrain from making a direct comparison between Islamic banking and
conventional banking (apple to apple comparison). This is because they are extremely
different in many ways. The key difference is that Islamic Banking is based on Shariah
foundation. Thus, all dealing, transaction, business approach, product feature, investment
focus, responsibility are derived from the Shariah law, which lead to the significant
difference in many part of the operations with as of the conventional.

The foundation of Islamic bank is based on the Islamic faith and must stay within the limits
of Islamic Law or the Shariah in all of its actions and deeds. The original meaning of the

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Arabic word Shariah is 'the way to the source of life' and is now used to refer to legal
system in keeping with the code of behavior called for by the Holly Qur'an (Koran).
Amongst the governing principles of an Islamic bank are:

* The absence of interest-based (riba) transactions;

* The avoidance of economic activities involving oppression (zulm)
* The avoidance of economic activities involving speculation (gharar);
* The introduction of an Islamic tax, zakat;
* The discouragement of the production of goods and services which contradict the Islamic
value (haram)

On the other hand, conventional banking is essentially based on the debtor-creditor

relationship between the depositors and the bank on one hand, and between the borrowers
and the bank on the other. Interest is considered to be the price of credit, reflecting the
opportunity cost of money.
Islamic law considers a loan to be given or taken, free of charge, to meet any contingency.
Thus in Islamic Banking, the creditor should not take advantage of the borrower. When
money is lent out on the basis of interest, more often that it leads to some kind of injustice.
The first Islamic principle underlying for such kind of transactions is "deal not unjustly,
and ye shall not be dealt with unjustly" [2:279] which explain why commercial banking in
an Islamic framework is not based on the debtor-creditor relationship.
Lastly, for the interest of the readers, the unique features of the conventional banking and
Islamic banking are shown in terms of a box diagram as shown below:-

Conventional Banks Islamic Banks

1. The functions and operating modes of 1. The functions and operating modes of
conventional banks are based on fully Islamic banks are based on the principles of
manmade principles. Islamic Shariah.
2. The investor is assured of a 2. In contrast, it promotes risk sharing
predetermined rate of interest. between provider of capital (investor) and
the user of funds (entrepreneur).
3. It aims at maximizing profit without any 3. It also aims at maximizing profit but
restriction. subject to Shariah restrictions.
4. It does not deal with Zakat. 4. 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.
5. Lending money and getting it back with 5. Participation in partnership business is the
compounding interest is the fundamental fundamental function of the Islamic banks.
function of the conventional banks. So we have to understand our customer's
business very well.

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6. It can charge additional money (penalty 6. The Islamic banks have no provision to
and compounded interest) in case of charge any extra money from the defaulters.
defaulters. Only small amount of compensation and
these proceeds is given to charity. Rebates
are give for early settlement at the Bank's
discretion.
7. Very often it results in the bank's own 7. It gives due importance to the public
interest becoming prominent. It makes no interest. Its ultimate aim is to ensure growth
effort to ensure growth with equity. with equity.
8. For interest-based commercial banks, 8. For the Islamic banks, it must be based on
borrowing from the money market is a Shariah approved underlying transaction.
relatively easier.
9. Since income from the advances is fixed, 9. Since it shares profit and loss, the Islamic
it gives little importance to developing banks pay greater attention to developing
expertise in project appraisal and project appraisal and evaluations.
evaluations.
10. The conventional banks give greater 10. The Islamic banks, on the other hand,
emphasis on credit-worthiness of the clients. give greater emphasis on the viability of the
projects.
11. The status of a conventional bank, in 11. The status of Islamic bank in relation to
relation to its clients, is that of creditor and its clients is that of partners, investors and
debtors. trader, buyer and seller.
12. A conventional bank has to guarantee all 12. Islamic bank can only guarantee deposits
its deposits. for deposit account, which is based on the
principle 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..

MODES OF BANKING SYSTEM:

There are two types of banking system conventional and Islamic banking system. We will
discus only five modes of each which are as followings.
Modes of Islamic banking:
There are only five modes of Islamic banking are given as under.
 Ijara
 Musharika
 MURABAHAH
 Qard-e-Hasan
 Salam

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Modes of Conventional banking:
There are only five modes or tools of conventional banking are following as under.
 Leasing
 Profit & loss Sharing Account
 Cost Plus
 Loan
 Agriculture Loan

A) Ijara:
Ijara is a form of leasing. The word used for leasing is ‘IJARA’. It involves a contract
where the bank buys and then leases an item – perhaps a consumer durable, for example –
to a customer for a specified rental over a specific period. The duration of the lease, as well
as the basis for rental, are set and agreed in advance. Islamic Bank of Britain retains
ownership of the item throughout the arrangement and takes back the item at the end.
1Leasing:
Leasing is an old method of financing which is now gaining popularity almost in whole
world. Under leasing there are two parties, one is the owner or lesser of the asset. Other is
the lessee or the party that make the asset on lease. The lessee takes the asset rests with the
lesser but it is in the possession of lessee and rights of use are also transferred to lessee.

Difference between Ijara & Leasing:

Under Ijara the wages are fixed but in leasing the rentals ate not fixed, under Ijara we can
guarantee conservation of capital but in leasing.

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B) Musharaka:
It is a non-interest based mode of financing. It means the agreement between two or more
parties. (Usually a bank and a company or enterprise) who agrees to invest any legitimate
(HILAL) business and to share profit in mutually agreed terms.

2.Profit & Loss Sharing Account:

Profit & loss sharing account are based on the principle of Islamic teachings.
There were started as a step to eradicate interest from the economy. Profit & loss sharing
account are similar in operation with the ordinary interest earning saving account. the only
different is that instead of earning interest at affixed rate, depositor of PLS saving account
share profit and loss with the bank.

Difference between Musharika & Profit & Loss Sharing Account:

In musharika the term for profit and loss are predefined whereas the profit & loss sharing
account does not ensure the same, if someone invests less he will have to bear less
expenses of loss however the profit could be more than his investment.

3)MURABAHAH:

Murabahah is one of the most commonly used modes of financing by the Islamic bank. It is
a particular kind for sale where the seller expressly mentions the cost of the sold
commodity he has incurred and sells it to another person by adding some profit. Murabahah
is not a loan given on interest it is a sale of commodity for cash. In Murabahah the subject
of sale must exist at the time of the sale thus any thing that is not present at the time of sale
cannot be sold. The subject matter should be in the ownership of the seller at the time of
sale. If he has some thing that he has not acquire himself then the sale become void. The
subject of the sale must be in the physical possession of the seller when he sells it to
another person. Physical possession means a situation where the possessor has not taken
physical delivery of the commodity yet it has come into his control and all rights and
liabilities of the commodity are passed on to him including the risk of destruction. The
subject matter should be having value thus the good having no value cannot be sold or
purchased. The subject of sale should not be a thing used for un-Islamic purpose. The
delivery of the sold commodity to the buyer must be certain and should not be depending
on chance.

C) Cost Plus:

It is the particular kind of sale where the sellierexpressly mention the cost of the sold
commodity he has incurred and sell it to another person at interest fix at the time of
contract. If the person wants to buy the commodity on credit than he has to pay the interest
fix the contracts time. In cost plus the existences of sale is not must the sale can be
occurring at the absences of commodity. The sale can be in the intangible from and in the
cost plus the subject of the sale can be for un-Islamic purpose. The selling objects can be
un-Islamic.

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Differences between Murabahah & cost Plus:

Simply Murabahah includes unconditionally sales but in cost plus there are many
conditional in sales which may be against the favor of the costumers.

D)Qarda-E-Hassana:
This is a loan extended on a goodwill based and the debtor is only requires to repay the
borrowed amount. However the debtor may have to pay an extra amount beyond the
principal amount of the loan. In case that that the debtor does not pay an extra amount to
the creditor this truncation is true interest free loan. Some Muslim consider this to be the
only types of loan that doesn’t violate the prohibited on Riba.Qarda-e-Hassana cannot be
used for UN Islamic activates. For example this amount cannot be invested to open the
dancing club or open the bear bar. Amount must be invested in the Islamic based
businesses.

4.Loan:

Money browses from the conventional bank and to be repaid at the agreed date usually with
the interest. The interest rate is specified in a loan agreement, if debtor gets late to pay back
money on time the additional interest rate will be charged. There is n retraction for
investing amount. The amount can be invested in any business it may be the dancing club
or bear club there is no restrictions.

Differences Between Qarda-E-Hassana & loan:

Qarda-e-Hassana is truly interest free loan there is no interest involved. However with the
conventional banking system of loan the interest has to be paid it’s like the giving of
money on rent.

E) Salam:
This mode of financing specially agriculture sector. In Salam the seller undertakes to
supply specific goods to buyer at a future date in exchange of an advanced price fully paid
at spot. The price is in cash but the supply of purchased goods is deferred. Only those
goods can be sold through Salam contract in which the quantity and quality can be
specified .it is necessary for the validity of Salam that the buyer pays the price in full to the
seller at time of sale. The seller at the time of delivery deliverers the commodity and not
money to buyer. The contract can not be cancelled unilaterally.

5: Agriculture loan:-
In conventional bank that loan is paid on the basis of interest, formers have to make a
contract that they will pay back the loan with pre determined interest rate. Former has
provided the grantee by giving the rights to sale the farms in condition if they not pay the
loan plus interest at given date.

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Difference between salam and Agriculture loan:
In salam the bank get the commodity of crops against what they pay to former, then sell it
in market and get profit at the other hand in loan the former have to pay the amount plus
pre determined interest . in salam the full price has to be paid in advanced and in
agriculture loan they provide money in installment. In salam if crops are destroyed by
natural disaster the former do not pay back the amount the bank bear the loss but in loan
former have to pay back loan plus interest in any condition.

Conclusion:-
Islam is a complete religion, it provide us a complete line of direction in all aspect of life.
Islamic economic system was the most powerful tool to run the nation, in past Islamic
rulers follow this so that’s why the were the successful economies systems of the world at
that time. As my all research about the Islamic modes of financing and comparison with the
conventional banking tools show that the Islamic economic and banking system is the best
for our country. During days whole world facing great trouble either they are socialist are
capitalist economies. If they really want to be successful economies of the world they must
follow the Islamic banking system.

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References:
Www.Google.com
Www. Islamic-bank.com
Www.Islamicbanking.com
Www. Zaharuddin.net

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