Facebook5 This article defines financial instruments and highlights some of the prohibited elements in conventional financial instruments.
The philosophy of Islamic banking and finance is a set of theories and ideas related to its understanding. In this paper, the rules of Islamic law from which the very idea of Islamic banking has been drawn are explained. One of the objectives of Islamic Law is protection of wealth or property by prohibition of rate of interest as Riba.
Although, both banks and customers are aware about prohibition of Riba, the customers generally think that the Islamic banks are not much different from conventional banks in the final outcome.
This paper considers these two systems and their behavior and main differences are compared and clarified. The paper concludes that there is a strong reason behind prohibition of Riba, to make the Differences between islamic and conventional financial system healthier.
Increasing the share of equity and reduction of the share of debt can make the financial system more stable.
Keywords— Islamic Banking, Conventional Banking, Finance, Rate of Interest, Deposit Introduction Banking system is considered as very important for the development of an economy in all societies. Islamic banking was introduced in Islamic countries about four decades ago, and todays Islamic banking is growing in various parts of the world and has moved from a mere theoretical concept to a practical reality, therefore it is confronting some new challenges on the theory and practical issues.
Islamic finance is currently practiced in more than 50 countries worldwide. In some Muslim countries, such as Bangladesh, Egypt, Indonesia, Jordan and Malaysia, Islamic banking co-exists with conventional banking and it is not limited to Islamic countries.
These two finance system are operating in the same society and perform all those functions which are expected from a financial institution, Sadoghi, S. During the past four decades, however, Islamic banking has grown rapidly in terms of size and the number of players.
What is Islamic banking and what are the differences between Islamic and conventional banking system?
There is no standard way of defining what an Islamic bank is, but broadly speaking Islamic banking is a financial system which is consistent with principles of Islam and all its activities are according to the Islamic law.
Islamic and conventional banking have many similarities and differences. The main and critical difference between these two systems is Interest Riba which plays a key role in conventional banking system. From a theoretical perspective, Islamic banking is different from conventional banking because Riba is prohibited in Islam; a unique feature of Islamic banking is its profit-andloss sharing PLS paradigm, which is predominantly based on the mudarabah profitsharing and musharakah joint venture concepts of Islamic contracting.
Under the PLS paradigm, the assets and liabilities of Islamic banks are integrated in the sense that borrowers share profits and losses with the banks, which in turn share profits and losses with the depositors,.
After the introduction of Islamic banking system many issue were raised and discussed in this regards. Whether this system really follows the Islamic laws? Is interest free banking system better than the interest based banking system?
And what are the differences and similarities between Islamic and conventional banking systems? This paper will analyze the operations and products of Islamic banking system in comparison with traditional conventional banks. The aim of this study is to address the perceptional issues by identifying the main similarities and main differences in both finance systemsfigure 1 from Al Baraka Banking Group.
It is shown that although Islamic banks have many products similar to those offered by conventional banks and have to face similar risk and market conditions, the two entities differ conceptually. On the other hand, conventional banks are operating on the man-made principles where the predetermined rate of interest is the core activity, .
Riba-free Transactions The oversight of Islamic laws Like conventional banks, an Islamic bank is a financial intermediary that brings together the providers of capital with the users of capital but Islamic banking and conventional banking are very much dissimilar from each other, as conventional banking have interest based ideology.
Islamic banks and other financial institutions must comply with a variety of principles besides avoiding interest, Riba. This system has some main rules which are accepted by all Islamic banks and institutions, such as: Although, all the Islamic banks and finance institutes agree with the previous issues there are several important and challenging issues available for discussion.
Islamic banks are unique in that their activities are regulated by rules derived from Islamic laws and interpreting each principle is more difficult than you may think. Scholars spend their lifetimes learning all they can about the intent and past interpretation of sharia law, and they still often have differing opinions about it.
One of the key differences between Islamic and conventional banking system is that Islamic banking is operating on the Islamic principles of finance. Here, the In Arabic term Riba is a synonym for the term interest used in conventional banking system which is the core activity.
Some Islamic banks regard seemingly use commercial rates of interest as something other than Riba and there have been many debates and attempts to discuss this issue.
Some Islamic banks use interest rate as a reference point to calculate the required profit return by providing some services as long as the amount is certain, the return is fixed, the project is trade related and the bank has a genuine stake in the outcome.
But, since, Islamic bank activities have to be trade based, involve actual trade, avoid prohibited practices and must be carried out with the utmost integrity and good faith, it becomes complicated.This article defines financial instruments and highlights some of the prohibited elements in conventional financial instruments.
Thereafter, the major differences between Islamic and conventional financial instruments are compared. There really are differences between Islamic Banking and conventional banking, and there are some of us trying very hard to make a difference in the compulsion towards Riba’.
As a summary, below are some quick differences I have compiled from my earlier days in the industry on the differences between the models.
Differences between Islamic Banking and Conventional Banking Offerings Deposit / Liabilities CASA & Term Deposit Conventional banks accept deposits on the basis of loan for all types of deposit accounts including Term Deposit, Savings and. Comparison between Islamic and conventional banks Introduction The rapid growth of Islamic financial institutions across borders and continents is a testament to the buoyant nature of the Islamic banking system.
What is difference between conventional mortgage financing and Islamic Mortgage financing? Under conventional mortgage, in order to purchase a property the customer borrows money and repays it with an additional amount over a period of time.
major differences exist in the operations of Islamic Financial Institutions (IFIs) in comparison with conventional banking. IFIs have succeeded in creating trust in the eyes of depositors and receive deposits on profit and loss.