Islamic Banking vs Conventional Banking: Key Differences, Functions, and Features Explained

www.website.com
+123 6678 8890
Difference Between
Islamic and Conventional
banking

Academy for International Modern Studies (AIMS) aims.education
Difference between Islamic Banking and Conventional Banking
Let us first understand the Islamic banking and conventional banking system.

• Islamic Banking is an Ethical Banking
System, and its practices are based on
Islamic (Shariah) laws.
• Interest is completely prohibited in
Islamic banking.
• It is asset-based financing, in which
trade of elements prohibited by Islam is
prohibited.
• For example, you cannot take a loan for
a Wine Shop.
Islamic Banking System

Conventional Banking System
On the other hand,
Conventional Banking is an
Unethical Banking system
based on Man-Made Laws. It
is profit-oriented and aims to
make money through
interest.

Islamic Banking and Conventional Banking - Major Differences
Now, let us review some major
differences between Islamic
banking and conventional
banking systems:

1
Medium of Exchange Medium of Exchange
Money is a product besides medium of
exchange and store of value
Real Asset is a product. Money is just a
medium of exchange

2
Interest on Capital
Profit on Exchange of Goods &
Services
Time value is the basis for charging
interest on capital
Profit on exchange of goods & services is
the basis for earning profit

3
Expanded Money in the Money
Market
No Expansion of Money
The expanded money in the money
market without backing the real assets,
results deficit financing
Balance budget is the outcome of no
expansion of money

4
No Loss Sharing Loss Sharing
Interest is charged even in case, the
organization suffers losses. Thus no
concept of sharing loss
Loss is shared when the organization
suffers loss

5
No Exchange of Goods & Services
under Contract
Exchange of Goods & Services
under Contract
While disbursing cash finance, running
finance or working capital finance, no
agreement for exchange of goods &
services is made
The execution of agreements for the
exchange of goods & services is must,
while disbursing funds under Murabaha,
Salam & Istisna contracts

6
Inflation No Inflation
Due to non existence of goods &
services behind the money while
disbursing funds, the expansion of
money takes place, which creates
inflation
Due to existence of goods & services no
expansion of money takes place and thus
no inflation is created

7
Increase of Prices Control in Prices
Due to inflation the entrepreneur
increases prices of his goods & services,
due to incorporating inflationary effect
into cost of product
Due to control over inflation, no extra
price is charged by the entrepreneur

8
Inappropriate Surveillance Proper Surveillance:
Bridge financing and long term loans
lending is not made on the basis of
existence of capital goods
Musharakah & Diminishing Musharakah
agreements are made after making sure
the existence of capital good before
disbursing funds for a capital project

9
Easy to Obtain Loans without
Monitoring
Monitoring Board Restrictions
Government very easily obtains loans
from Central Bank through Money
Market Operations without initiating
capital development expenditure
Government can not obtain loans from
the Monetary Agency without making
sure the delivery of goods to National
Investment fund

10
Poverty Takes Place Real Growth of Wealth
Real growth of wealth does not take
place, as the money remains in few
hands
Real growth in the wealth of the people
of the society takes place, due to
multiplier effect and real wealth goes
into the ownership of lot of hands

11
Non Performing Loans Changes for Better Management
Due to failure of the projects the loan is
written off as it becomes non performing
loan
Due to failure of the project, the
management of the organization can be
taken over to hand over to a better
management

12
Decrease in Real GDP Increase in Real GDP
Debts financing gets the advantage of
leverage for an enterprise, due to interest
expense as deductible item form taxable
profits. This causes huge burden of taxes
on salaried persons. Thus the saving and
disposable income of the people is
affected badly. This results decrease in the
real Gross Domestic Product (GDP)
Sharing profits in case of Mudarabah and
sharing in the organization of business
venture in case of Musharakah, provides
extra tax to Federal Government. This
leads to minimize the tax burden over
salaried persons. Due to which savings &
disposable income of the people is
increased, which results the increase in
the real Gross Domestic Product (GDP)

13
Bad Impact of Decrease in Real
GDP
Good Impact of Increase in Real
GDP
Due to decrease in the real GDP, the net
exports amount becomes negative. This
invites further foreign debts and the
local-currency becomes weaker
Due to increase in the real GDP, the net
exports amount becomes positive, this
reduces foreign debts burden and local-
currency becomes stronger

These study contents are taken from
Islamic finance courses online. These
courses are delivered through
interactive learning and they are
designed by AIMS for
masters in Islamic banking and financ
e
, which leads to phd Islamic finance.

Islamic Banking vs Conventional Banking: Key Differences, Functions, and Features Explained

More Related Content

Similar to Islamic Banking vs Conventional Banking: Key Differences, Functions, and Features Explained (20)

More from Academy for International Modern Studies (AIMS) (19)

Recently uploaded (20)

Islamic Banking vs Conventional Banking: Key Differences, Functions, and Features Explained