Differentiation Between Islamic Bank and Conventional Bank

Topics: Fractional-reserve banking, Riba, Asset Pages: 2 (630 words) Published: December 15, 2012
Different between Conventional bank and Islamic bank
There are many differences between conventional and Islamic bank. In conventional bank, money is a product besides medium of exchange and store value. The design of conventional bank is based on interest. They are charging higher interest rate on capital. The functions and operating modes of conventional banks are based on fully manmade principles. In conventional bank, they thought that interest rate give biggest profit for them. They assume that the interest rate is lawful and valid. Conventionally, interest or the excess (increase) in loan is the consideration or compensation for the period of re-payment of loan. The difference between the maturity value of old and new debt amounts to riba. It may be noted that the conventional system of time-based compounding of debt clearly falls in this category. (Obaidullah, 2005) In Islamic bank, real asset is a product and money is just a medium of exchange. Profit on exchange of goods and services are the basis for earning profit. So, they not charge interest (riba). Literally, riba means increase or addition, expansion and growth. Riba is prohibited in Islam. In the other words, riba refers to an increase in the amount of debtor owes his creditor due to passage of time. DEPOSIT

On the other hand, based on deposit, the only difference in conventional and Islamic banking lies in sharing of risk and reward. Under conventional system total risk is born by the bank and total reward belongs to it after servicing the depositors at fixed rate. Conventional bank provides fixed deposit account. This fixed deposit is to earn high interest rates while withdrawing money. The bank uses the depositor money to invest and earn profit from it. While, under Islamic bank mudharabah is a core deposit product. The product is based on the concept of mudharabah. Mudharabah contract where owner of capital (depositor) entrust his fund to an entrepreneur...
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