Islamic Banking vs. Conventional Banking

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Islamic Banking vs. Conventional Banking
In most Islamic countries, they tend to practice two types of financing in banking industry which are conventional and Islamic banking. The country like in Malaysia has successfully developed an Islamic banking system that operates in parallel with the conventional banking system. There is similarity between conventional banking and Islamic banking which helps to promote economic growth provided financing services such as credit facilities for business activity, mortgage, securities, etc. in order to achieve their same ultimate profit objectives. However, there are also having differences in practicing financial services due to most investors having their own preferences on their investments and business activities which they may involve in Islamic banking or conventional banking. The three main differences between Islamic bank and conventional bank are in term of rules and regulations, concept of money lending and products and services. “Malaysia is one of the unique countries which operate a dual banking system where the Islamic banking system operates in parallel with the conventional banking system” (Haron & Azmi, 2008, p.619). By the way, Islamic bank has more restrictions on rules and regulations compared to conventional bank. Islamic banking principles are unique and based on Islamic Shariah law which to ensure activities are done according to the Islamic Syariah principle (Al-Tamimi, Lafi & Uddin, 2009). According to Investopedia (n.d.), Shariah is defined as “Islamic religious law that governs not only religious rituals, but aspects of day-to-day life in Islam”. There are two primary sources of Shariah law: the precepts set forth in the Quran, and the example set by the Islamic prophet Muhammad in the Sunnah. Shariah is interpreted by Islamic judges with varying responsibilities for the religious leaders. In other hand, conventional banks activities are conducted by referring to guidelines set by central bank according to Banking and Financial Institutions Act 1989 (Bank Negara Malaysia, 2013). The objective of BAFIA 1989 is to ensure safety, soundness and robustness of the financial institutions to achieve a higher level of efficiency and effectiveness in performing the bank activities. The objective of conventional bank is to maximize profit without any restriction. However, Islamic bank also aims at maximizing profit but subject to Shariah restrictions. Both Islamic bank and conventional bank are supervised by central bank (Bank Negara Malaysia, 2013). In general, conventional banking principles are fully manmade whereas in Islamic banks principles and rules are based on Islamic Shariah. The main principle practicing by Islamic banks in their transactional activities is mainly based on profit and loss sharing. According to Shahzad (2012), interest rate is main source of earnings for conventional banks. Besides, riba (interest), gharar (uncertainty) and masyir (gambling) are prohibited in Islamic banking whereas conventional banking is involved in interest and speculation activities (Hut, 2010). Mean that, conventional banks can involve in any transactions as they like. However, Islamic Shariah law only allows Islamic banking activities that are lie in the framework of protecting public interest and safeguarding it. For instance, transaction activities that deal with alcohol, tobacco and pig made products are prohibited in Islamic banking based on Islamic Shariah principles. Concept of money lending gives another way of comparison between conventional bank and Islamic bank. These gives rise to the Islamic bank which has provided better alternatives to give flexible borrowing charges to borrower compare with fixed interest charges in conventional bank. According to the definition concept lending of money in Islamic bank is regulated by Islamic law which based on risk sharing whereas conventional bank is based on risk transfer under regulation of BAFIA act (Timur Kuran,...
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