There are clear differences between the Islamic principles and conventional principles in the financial system. However, one must refrain from making a direct comparison between Islamic system and conventional system. This is because they are extremely different in many ways. The key difference is that Islamic system 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.
When we talk about financial system, we normally refer to the banking system. The foundation of Islamic banking 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 banking system 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 system 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