StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Differences Between Islamic Bank and Conventional - Essay Example

Cite this document
Summary
The key difference between the two forms of banking emanates from the fact that Shariah foundation forms the basis of Islamic banking. Unlike in conventional banking, all dealings, business approaches,…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER96.3% of users find it useful
Differences Between Islamic Bank and Conventional
Read Text Preview

Extract of sample "Differences Between Islamic Bank and Conventional"

Differences between Islamic Bank and Conventional Islamic baking is different from conventional banking in a number of ways. The key difference between the two forms of banking emanates from the fact that Shariah foundation forms the basis of Islamic banking. Unlike in conventional banking, all dealings, business approaches, focus of investments, and transactions take place on the basis of Shariah law. Islamic banking is based on the foundation of Islamic faith; thus, it operates within the limits of Islamic faith.

Islamic banking sets forth a number of principles. These principles include the lack of interest (riba) in the transactions, avoiding economic transactions that involve oppression (zulm), and the introduction of an Islamic tax known as zakat (Fahim & Mario 2010, p. 92).Under conventional banking, the danger of insolvency is lower as compared to Islamic banking. Fluctuations in the income of a conventional bank are passed on to depositors as fluctuating payments. On the contrary, losses incurred in Islamic banking do not affect the account holders.

As such, Islamic banks may suffer the losses rather than passing on the losses to the customers. In conventional banks, the major aim to protect against possible risks and losses that may emanate from investments. Therefore, depositors choose to invest their funds in banks that have high returns. On the other hand, depositors in Islamic banks do not look for banks that have high rates of return since the sole aim is not to make high profits (Visser 2009, p. 140).In conventional banking, transactions are shaped by the limits in applying usury prohibition.

This ensures separation of the banks from the risks associated with the activities of the customers. On the other hand, in Islamic banking, a system based on the participation of the creditors in the risks and profit replaces the interest-based system (Fahim & Mario 2010, p. 91). The interest earned in conventional banking is based on the fact that the lender ought to get a fixed return on the investment, regardless whether the venture of the borrower succeeded or did not succeed. On the other hand, Islamic banking prohibits the presence of predetermined return, although it recognizes the legitimacy of profit sharing.

Conventional banking operates for the own interests of the bank; thus, the bank does not make efforts to make sure that there is growth with equity. On the contrary, Islamic banking gives a lot of importance to the interest of the public. Thus, it aims at ensuring that there is growth with equity. In conventional banking, commercial banks based on interest can easily borrow from the money market. Borrowing from the money market in Islamic banking must be based on the approval of the transactions under the Shariah law.

Conventional banks place a lot of emphasis on the clients’ credit worthiness while Islamic banks focus on how viable the projects are (Visser 2009, p. 138).Conventional banks employ the strategy of profit and loss sharing mechanism as a way of reducing the impact of financial risks, which may result from the transactions that the bank carries out. In Islamic banking, there is channeling of funds from depositors with low risk to funding that favors high risk borrowers. This makes Islamic banks be market liability intermediaries.

Conventional banks call for an integrated approach in the management of assets and liabilities. However, such an approach is not a prerequisite in Islamic banks since it is not required to make borrowers and lenders’ preferences compatible and coherent (Fahim & Mario 2010, p. 92). References ListFahim, M. K & Mario, P. (2010). Islamic Banking and Finance in the European Union: A Challenge, London, Edward Elgar Publishing. pp. 91-110. Visser, H. (2009). Islamic Finance: Principles and Practice, Massachusetts, Edward Elgar Publishing. pp. 134-140.

Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Differences Between Islamic Bank and Conventional Essay”, n.d.)
Differences Between Islamic Bank and Conventional Essay. Retrieved from https://studentshare.org/finance-accounting/1601821-differences-between-islamic-bank-and-conventional
(Differences Between Islamic Bank and Conventional Essay)
Differences Between Islamic Bank and Conventional Essay. https://studentshare.org/finance-accounting/1601821-differences-between-islamic-bank-and-conventional.
“Differences Between Islamic Bank and Conventional Essay”, n.d. https://studentshare.org/finance-accounting/1601821-differences-between-islamic-bank-and-conventional.
  • Cited: 0 times

CHECK THESE SAMPLES OF Differences Between Islamic Bank and Conventional

The main differences between conventional bank and Islamic bank

Qatar islamic bank and Doha Bank: Differences between their Balance Sheets: Balance Sheet 2010: The asset category of both Qatar islamic bank and Doha Bank resemble where their sub-categories are concerned.... Qatar islamic bank and Doha Bank: Differences between their Balance Sheets: Balance Sheet The asset category of both Qatar islamic bank and Doha Bank resemble where their sub-categories are concerned.... In QIB , the minority interest and suksk shares are also subtracted from net profit while the same does not happen in Doha Bank Qatar islamic bank and Commercial Bank Comparison of 2009 reports: Balance Sheets: There are some marked differences between the balance sheets of both banks....
2 Pages (500 words) Essay

Differences between Islamic and Conventional Banking

differences between islamic and Conventional Banking differences between islamic and Conventional Banking Banking, just like anyother field in the world, has its different modes of operation.... Reference Quresh, HA, Hussain, Z & Rehman, K 2012, ‘A Comparison between Islamic banking and conventional banking sector in Pakistan', Information Management & Business Review, vol.... conventional banking may not be strict in the monitoring of any religious laws, but they must have a code of conduct to guarantee the smooth operations of the organization....
3 Pages (750 words) Essay

Islamic Contracts and Hedge Technique

As opposed to the conventional modes of financing which considers interest as the opportunity cost of money, Islamic finance considers the existence of interest as an unjust practice.... nbsp;Therefore it is important to distinguish the features of Islamic finance as distinguished from the conventional banking framework.... Hence the alternative names for the banks running on the principles of Islamic Finance are PLS bank.... In this paper "islamic Contracts and Hedge Technique", an attempt has been taken to analyze the different hedging techniques of the risks in the light of islamic finance and the different perspectives of business under which the hedging techniques are being undertaken....
10 Pages (2500 words) Term Paper

The Role of Financial Intermediaries in the Economic System

Islamic Mortgage Finance One of the products of islamic bank which has gained wide acceptance and popularity in the United Kingdom is mortgage finance.... As these financial institutions do not promise interest on the funds deposited by customers, non-Moslem investors will see it more profitable to utilize the services of conventional commercial banks.... As opposed to the conventional mortgage financing, Islamic banks buy and own the commodity for the client....
4 Pages (1000 words) Essay

Islamic banks and Conventional Banks

The report “Islamic banks and conventional Banks” is aimed at identifying and assessing the performances of the Islamic banking system on the metrics of financial performance, productivity, liquidity, efficiency, profitability and growth as well as on other ancillary factors.... But, it can be identified that in the countries in which dual banking systems are present, the growth and stability of the Islamic banking systems have been better than that of the conventional banks over the selected period for study....
11 Pages (2750 words) Term Paper

Islam and Conventional Economic Systems

The essay "Islam and Conventional Economic Systems" aims to explicate on the existent differences between islamic and conventional economic systems.... The writer of the essay presents a performance analysis of Islam and conventional banks during and after a financial crisis.... A conventional economic system is based on diverse economic standards of interests.... Contrary to the conventional system, the Islamic system is based on the belief that God gives the man the power as a trustee for the needy....
4 Pages (1000 words) Essay

Islamic Banks and Commercial Banks Performance

Additionally, the commercial banks have a better grip on the economy of countries than the islamic bank, since they have a long history compared to the Islamic banking, which is a contemporary phenomenon.... The essay seeks to answer the questions: Are there any differences between Conventional banks and Islamic banks?... If Yes, What is the difference between conventional commercial banking and Islamic banking?... How does the difference between conventional and Islamic banking affect depositors?...
7 Pages (1750 words) Essay

Conventional and Islamic Banks

The present paper “conventional and Islamic Banks” is a comparative analysis of the financial stature of conventional and Islamic banks operating in the GCC nations of the world.... hellip; The author states that eight variables have been identified to be involved in assessing the financial stability of a bank.... They, however, has already been specified before, will be portrayed to a regression model so as to assess the factors which determine the financial profitability of a bank, or rather various elements which determine the same....
24 Pages (6000 words) Research Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us