Differences Between Islamic Banks & Conventional

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Differences Between Islamic Banks & Conventional

Differences Between Islamic Banks & Conventional

Thursday, 22 February 2007 18:02 Hits: 39978

(94 votes, average 4.56 out of 5) Differences Between Islamic Bank and Conventional By : Ust Hj Zaharuddin Hj Abd Rahman 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 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 behaviour 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. The other principle pertaining to financial transactions in Islam is that there should not be any reward without taking a risk. This principle is applicable to both labor and capital. As no payment is allowed for labor, unless it is applied to work, there is no reward for capital unless it is exposed to business risk. Thus, financial intermediation in an Islamic framework has been developed on the basis of the above-mentioned principles. Consequently financial relationships in Islam have been participatory in nature. 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

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1. The functions and operating modes of 1. The functions and operating modes of Islamic conventional banks are based on fully manmade banks are based on the principles of Islamic principles. Shariah.
Outside Malaysia

2. The investor is assured of a predetermined 2. In contrast, it promotes risk sharing between rate of interest. provider of capital (investor) and the user of funds (entrepreneur).
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3. It aims at maximizing profit without any 3. It also aims at maximizing profit but subject restriction. 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. So function of the conventional banks. we have to understand our customer's business very well.

6. It can charge additional money (penalty and 6. The Islamic banks have no provision to compounded interest) in case of defaulters. charge any extra money from the 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 a borrowing from the money market is relatively Shariah approved underlying transaction. easier.

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9. Since income from the advances is fixed, it 9. Since it shares profit and loss, the Islamic gives little importance to developing expertise banks pay greater attention to developing in project appraisal and evaluations. project appraisal and evaluations.

10. The conventional banks give greater 10. The Islamic banks, on the other hand, give emphasis on credit-worthiness of the clients. 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 its relation to its clients, is that of creditor and clients is that of partners, investors and trader, debtors. buyer and seller.

12. A conventional bank has to guarantee all its 12. Islamic bank can only guarantee deposits for deposits. 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..

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| More... COMMENTS
1 2 3

#63 Mr. Milad DEAR SIR/MADAM.

2011-07-05 23:47

MY NAME IS MILAD AND I AM WRITING A PAPER ABOUT THE PERFORMANCE OF ISLAMIC BANKING VS THE CONVENTIONAL BANKING, PLEASE IF YOU HAVE ANY INFORMATION THAT YOU CAN PROVIDE OF ME THAT WILL BE WONDERFUL. THANK YOU, MILAD Quote

#62 Mr. Milad Dear Sir/Madam.

2011-07-05 23:45

I am writing my thesis about performance of Islamic Banking vs conventional banking please help me if you have any ideas or articles for me to read about. Thank you for your advance help. Milad Quote

#61 Student Haroon its realy very very helpful.

2011-05-14 21:17

+1

Quote

#60 benefits of islamic banking with regars 2 conventional banking Masters student in n 2011-04-27 20:13

am writing a seminar on "interest rat free banking vs conventional banking" 2 b presented in a weeks time but i don't know which variables to major since Islamic banking is not yet practiced in Nigeria. i need a theory and how 2 go about my methodology to be precise Quote

#59 common feature of islamic and conventional banking Adeel ismail 2011-04-12 19:50

+1

dear sir... i really like ur article and it help me very well.. now pls help me to find similarities between islamic and conventional banking. thank you somuch. ADEEL SHEIKH Quote
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#58 need your project annu

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AKTIVITI SEMASA

2011-04-01 16:03

i need your project am studying islamic and conventional banking. i will w8 hope u ill help. jazakallah Quote

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Monday, 11 July 15:00 10:00 Talk Show @ MOBTV Shariah Meeting @ Yasmin Tuesday, 12 July Wednesday, 13 July My Wife's Birthday 08:30 19:30 Meeting 10:00 Shariah consultancy meeting @ sri hartamas Kursus solat jemaah & terawih Kuliah Magrhib @ Kelana Jaya

#57 gud anika

2011-03-09 20:44

thanks it helped me alot Quote

#56 Diff.between islamic & conventional Bank Akinyele Adeniyi kabir

2010-10-01 19:25

Thursday, 14 July

salam,guess my masters program as exposed me to the benefits of islamic banking because i can now see the difference between the two banks.we need more of Non-interest bank in the world.... thanks alot. Quote

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PALING POPULAR

#55 history of islamic banking lerato

2010-09-09 02:44

STATISTIK

salam ustaz would you please help me about the history of islamic banking Quote

#54 life insurance A. Hamzah Assalamualaikum Ustaz,

PELAWAT

2010-08-02 06:33

Now online: 58 guests

I have read your book and it is very insightful and informative. Thank you. I still have some questions that remain though, particulatly about life insurance. A few years back, my friends and I took up a life insurance policy from etiqa-twins special. The policy states that The premium shall be payable monthly in advance during the lifetime of the life insured. This policy shall participate in profits. Surrender value shall be granted after policy has been inforce for 3 full years should the insured not make any claims. Just to be sure, is this haram ustaz? Is it riba? Because they pay me RM 1500 every three years. Should I terminate this policy? I also bought a house which is under construction now. At the time I did not know this was gharar. Now I am worried. I've taken a government loan. If I default on it they may ask for the full payment and I don't have the money for that. What can I do? Please help me ustaz. I have no one else to turn to. Thank you for your time and attention. Quote

#53 salam ustaz Deela Shari

2010-07-30 19:42

+1

i am doing this islamic banking and takaful subject for my final year course..i came across to one point that, all products of IB (islamic banking) need to be approved by Shariah Advisory Board of the bank and Shariah Supervisory Council of BNM. Wheares in CB (conventional banking) this is not su much required.. what is your view about this ustaz? Quote

#52 could u send me ur copy of ur PROJECT.. mr wan

2010-07-26 23:15

Salam.. Dear Sarmad Manzoor, I'm also a student of BBA like u.. and i'm doing a reasearch about SELECTION FACTORS THAT MOTIVATE CUSTOMER TOWARDS ISLAMIC AND CONVENTIONAL HOME FINANCING PRODUCTS. Do u still save a copy of your PROJECT OF CONVENTIONAL VS ISLAMIC BANKING. If u still have it, could u send it to my email, "mrhazwan ymail.com" because i really need some information to make my research more clear when I'm presenting it to my lecturer. Tq for your time and help.. really appreciate it.. ^_^ Quote

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#51 salam anish mastura

2010-07-22 06:18

thanks ustaz for the information given. i have presentation about the difference between conventional & islamic banks. certainly i have never learned islamic banking subject deeply, so your information really help me.. thanks. Quote

#50 Appreciation! Sanni Taoheed

2010-07-04 00:20

As an undergraduate of the University of Abuja, writing a project on the: Comparative Analysis between Islamic and Conventional Banking System, I found this article very important for my research work. I am greatly indebted to the writer. Thank you! Quote

#49 request to reply maria

2010-04-03 23:34

salams im 4m pakistan, plz help me in sending info about difference between products offered by islamic and commercial banks Quote

#48 salam ieda

2009-11-30 19:36

sy tertarik ngan article nie...sy nak bwt research tntg performance between islamic banking and conventional banking but i haven't idea which conventional bank should i choose.... u suggest to me please.... Quote ...can

#47 thx ANONYMOUS

2009-10-28 01:01

thanks a bunch for your information.. this info help me a lot in my final year project!! Quote

#46 MONEY MARKET :ISLAMIC AND CONVENTIONAL ella

02:47

2009-08-13

salam uztaz,,,, sya telah mndpt satu tjuk projek yg di atas,,, tapi sya dn kawan2 tidak tahu apa yang ptt kami buat untik tajuk tersebut,,, kami tidak tahu apa yang pensyarah kami mahu,,, apa yang ptt kami buat spya tajuk n isi projek kami tu menarik

UZAR : Buka link ini ( iimm.bnm.gov.my/ ) dan sememstinya anda akan berasa lega. InshaAllah Quote

#45 assalamualiakum jay-j

2009-07-17 04:33

-1

thanks ustaz...siap jg my assignment ne mlm... Quote

#44 time kaseh miza

2009-07-15 06:36

-1

artikel n idea ustz bantu sy paham n blaja ntk meminati islmc bnkg huhu Quote

#43 great article/blog andrew

2009-06-24 14:22

+1

i m a final year banking and finance student and this article really helped me to complete my
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Differences Between Islamic Banks & Conventional

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assignment and also to understand the subject Islamic Banking better.. great work thanks again Quote

#42 thaks raja wajahat zeb khan

2009-05-13 06:17

thank u very much for giving that sort of clear information about islamic and conventional banking i am bba student and i am very much clear about these two topics.thank u again Quote

#41 Takaful and conventional insurace asim

2009-04-30 21:13

What are the actual functional difference between Takaful and conventional insurace above the definitions. What steps to be taken to convert a conventional insurace system into Takaful. Any helps please.. Quote

#40 project marry thnxxxxxxx 4 the useful information

2009-04-24 23:14

+1

Quote

#39 THANKS SARMAD MANZOOR

2009-04-01 07:07

SLAAM I'M STUDENT OF BBA AND MY PROJECT OF ISLAMIAT IS CONVENTIONAL VS ISLAMIC BANKING.I GET MORE HELP FROM YOUR SITE ABOUT MY PROJECT. Quote

#38 conventional bank eunice

2009-03-13 04:53

sir,may i noe more detail about the point dat u listed in d table about the conventional bank..i mean can explain it more abt everyone of point dat u put in the table of conventional bank n islamic bank? can u email to eunice_cs86@yahoo.com.sg for me.. thank u... UZAR : You can get the details in my book titled "money, you and islam" Quote

#37 Research topics Faraz Ahmed Nasim

2009-03-01 04:19

Thanks for your very important information, please send some research topics related to islamic banking UZAR: Please purchase the book "money, you and islam' Quote

#36 history of islamic banking amalia

2009-01-21 23:15

sir/miss...may i know how islamic banking system can exist in this world??? and how can conventional system can be adopt in the banking system? like everyone know, islam is the best way of living..... Quote

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#35 MBA student Fady

2009-01-09 15:46

Hello Sir Thank you for your useful information you are presenting. Please may you give us 2 balance sheets for Islamic and conventional banks to see the differences ? We became greedy after we red your article Regards UZAR : YOU CAN EASILY DOWNLOAD THEM FORM ANY ISLAMIC BANK'S WEBSITE YOU LIKE..please look for it in the internet Quote

#34 Master Student Fady Mikati

2009-01-09 15:35

Thank you sir for your useful information, but please may you give us a balance sheets sample of Islamic and conventional banks to see the differences ? Sorry we became greedy after we red your article Regards Quote Refresh comments list RSS feed for comments to this post ADD COMMENT Name (required) E-mail (required, but will not display) Website Title (required)

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