Similarities and Differences Between Islamic Banking and Conventional Banking

Topics: Bank, Finance, Islamic banking Pages: 11 (3160 words) Published: February 1, 2013


How Islamic banking system is different from conventional one?1

Maintenance of CRR/SLR:4

Project appraisal and evaluation:4

Basis for collection of deposit5

Moral Dimension5

Emphasis on Productivity as compared to credit worthiness5

Scope of the activities:6

Guarantee for deposit:6

Distributive justice and economic stability:7

Allocate Efficiency:7

Stability of banking system:8

Growth of the banking system:8

Emphasis on the character of the loan applicant:8




Banking system plays a very important role in the economic life of the nation. The health of the economy is closely related to the soundness of its banking system. In a developing country like Bangladesh the banking systems as a whole play a vital role in the progress of economic development. Modern trade and commerce would almost be impossible without the availability of suitable banking services. Islamic Banking is an integral part of Islamic Economics and thereby an Islamic way of life. Islamic Banking is a special nature of financial intermediary which has not involve in any way with interest. The introduction of interest-free and equity-based financing by the Islamic banking system is based on the principles of Islamic economics. 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.

How Islamic banking system is different from conventional one?

Islamic Bank system & conventional Bank system can be compared by identifying similarities and differences between both of the banks.

a) Similarities
➢ Both are governed by the general rules of the regularity authority covering establishment, control and general operations. ➢ Both operate within the context of professional efficiency cost effectiveness and lost / benefit. ➢ Both are directed towards useful employment of resources for the society. ➢ Both are usually established as shareholding companies. ➢ Both types of banks give incentive to increase the level of savings in the country. ➢ Provide training facilities to their employees.

➢ Motive of profit maximization is same for both banks. ➢ Both banks try to maximize the utility of their customers to attract and increase their client. ➢ Both banks increase investment modes of financing.

➢ Both try to prevent the crisis & stabilize the economy. ➢ Both provide the security services like lockers for the ornament etc, to their customers. ➢ Providing loan to customers is the main function of both banks, despite their difference in operation. ➢ Both promote business activities in a country.

b) Differences
➢ Islamic bank has a different moral basis i.e. jurisprudence (Shari’ah) ➢ Consequently, targets, objectives and mode of operations are different. ➢ Islamic bank is universal “comprehensive” bank where as in conventional framework; there is commercial, investment, merchant or specialized bank. ➢ Structures of assets and liabilities i.e. sources and uses of funds are different and consequently the earnings and expenses structures are different. ➢ In Islamic Banking, Bank play a role of a trader or an entrepreneur but in conventional banking system, bank just play a role of issuing loans to customers, Modern Banks issue loans and they are not very much interested in what the borrower will do with that money. That’s why, there is always a risk of not getting back the loan but it is not so in Islamic banking. As it provide Finance on participatory basis or it directly links Finance to the economic activity so in this case both the lender and borrower has to share risk equally. It also increased the...
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