“Islamic banking is an Ethical Banking System, and its practices are based on Islamic
(Shariah) laws. Interest in completely prohibited in Islamic banking. It is asset based financing,
in which trade of elements prohibited by Islam are not allowed. For example, you cannot take a
loan for a Wine Shop. On the other hand, Conventional Banking is an Un-Ethical Banking
system based on Man-Made Laws. It is profit-oriented and its purpose is to make money through
interest”.
Key Differences between Conventional and Islamic Banking:
Now, let us review some major differences between Islamic banking and conventional banking
systems:
Conventional Banking System Islamic Banking System
Money is a product besides a medium of Real Asset is a products. Money is just a
exchange and a store of value. medium of exchange.
Time value is the basis for charging interest Profit on the exchange of goods & services
on capital. is the basis for earning profit.
The expanded money in the money market
A balanced budget is the outcome of no
without backing the real assets results in
expansion of money.
deficit financing.
Interest is charged even in the case, the
Loss is shared when the organization suffers
organization suffers losses. Thus no concept
a loss.
of sharing loss.
While disbursing cash finance, running The execution of agreements for the
finance, or working capital finance, no exchange of goods & services is a must
agreement for the exchange of goods & while disbursing funds under Murabaha,
services is made. Salam & Istisna contracts
Due to the nonexistence of goods & services
Due to the existence of goods & services, no
behind the money, while disbursing funds,
expansion of money takes place and thus no
the expansion of money takes place, which
inflation is created.
creates inflation.
Due to inflation, the entrepreneur increases
the prices of his goods & services, due to Due to control over inflation, no extra price
incorporating the inflationary effect into the is charged by the entrepreneur.
cost of the product.
Musharakah & Diminishing Musharakah
Bridge financing and long-term loan lending
agreements are made after making sure of
are not made on the basis of the existence of
the existence of capital goods before
capital goods.
disbursing funds for a capital project.
The government very easily obtains loans Government can not obtain loans from the
from Central Bank through Money Market Monetary Agency without making sure the
Operations without initiating capital delivery of goods to the National Investment
development expenditure. fund.
Real growth in the wealth of the people of
The real growth of wealth does not take the society takes place, due to the multiplier
place, as the money remains in few hands. effect and real wealth goes into the
ownership of a lot of hands.
Due to the failure of the projects the loan is Due to the failure of the project, the
written off as it becomes a nonperforming management of the organization can be taken
loan. over to hand over to better management.
Sharing profits in the case of Mudarabah
Debt financing gets the advantage of
and sharing in the organization of business
leverage for an enterprise, due to interest
venture in the case of Musharakah, provides
expense as a deductible item from taxable
extra tax to Federal Government. This leads
profits. This causes a huge burden of taxes
to minimizing the tax burden on salaried
on salaried persons. Thus the saving and
persons. Due to this savings & disposable
disposable income of the people is affected
income of the people increased, which
badly. These results decrease the real gross
results in an increase in the real gross
domestic product.
domestic product.
Due to a decrease in the real GDP, the net Due to an increase in the real GDP, the net
export amount becomes negative. This export amount becomes positive, this reduces
invites further foreign debts and the local the foreign debt burden and the local
currency becomes weaker. currency becomes stronger.