Comparison between Islamic Banking and Conventional Banking Products

INTRODUCTION

Background:

Now a days that is full of rapid change in various fields, money has become one

of the basic and necessary resources in the formations and growth of institutions, one of the main

source to get money is financial institutions, there are different forms of these institutions,

perhaps the most important are banks in all its types. The banking sector is a major source of

finance for both consumer and firms. As the conventional banks are established under the

principles of capitalism and transect business by charging interest, which is unacceptable

(forbidden) in Islam Law, so Muslims left with no choice except to establish their own financial

institutions under Islamic Principles.

The first modern experiment with Islamic banking can be traced to the establishment of the Mit

Ghamr Savings Bank in Egypt in 1963. During the past four decades, however, Islamic banking

has grown rapidly in terms of size and the number of players. The mile stone, in growth and

popularity of Islamic Financial Institutions (IFIs), was the Conference of Foreign Ministers of

Muslim countries (1973), where decision of establishment of Islamic Development Bank (IDB)

was taken place. Islamic finance has shown tremendous growth in last two decades. Islamic

banking is currently practiced in more than 50 countries worldwide. In Iran, and Sudan, only

Islamic banking is allowed. In other countries, such as Bangladesh, Pakistan, Egypt, Indonesia,

Jordan and Malaysia, Islamic banking co-exists with conventional banking. Islamic banking,

moreover, is not limited to Islamic countries. In August 2004, the Islamic Bank of Britain

became the first bank licensed by a non-Muslim country to engage in Islamic banking. The
HSBC, University Bank in Ann Arbor and Devon Bank in Chicago offer Islamic banking

products in the United States. Recent industry estimates show that Islamic banking, which

managed around US$250 billion worth of assets worldwide as of 2004, is expected to grow at the

rate of 15% per annum. Fact is that Islamic banking system has been attracting the attention of

researchers, customers, and policy makers conventional banking system is still dominated

around the globe. However, Islamic banks have to compete with standardization, innovation and

industry competition.

I compare two products of Islamic banks and conventional banks in this study:

i. First is conventional insurance compare with Takaful(Islamic insurance)

ii. Second is car financing compare with Ijarah(Islamic)

Islamic banking system has to face many challenges because it is new in market. It would take

some time to become perfect system. Islamic banking system has to adopt conventional measures

to compete with their conventional competitors. Islamic banks operate according to profit and

loss sharing and they equally share profit as well losses under Mudarabah and Musharakah mode

of financing. Especially we can say that Islamic banking operates on equity rather than interest.

The main source of funds for Islamic banks are share capital and deposits (Mudarabah and

Demand). These funds are utilize in different purpose like Murabahah, Mudarabah, Musharakah,

Qard al hasannah, and purchase of ordinary shares.

 OBJECTIVES

The main objectives to conduct research is to compare the products of Islamic banks and

conventional banks and analyze which one is better for firms and general public with respect to

Halal or Haram and financial aspects according to Islamic rules and regulations. This research

aims to advance an understanding and analysis of the conceptual and operational difference

between Islamic banks products and conventional banks products and explores the perception

and choices Islamic bank product holders in comparison with conventional bank product holder

on the selection criteria. This study aims to determine whether there is a distinction in substance

as well as in form between Islamic and conventional product and whether there are any

significant differences in perception and choices between them. In particular, the thesis plans to

explore whether Islamic product holders will acquire these product because of religious reasons.

Hence, less negative perceptions are expected from them than those with conventional banking

product.

In attaining the research aim, the following objectives are developed:

i. The first objective is to identify the conceptual and operational differences between

Islamic and conventional banking products. To achieve this objective and in light of the

existence of Takaful and Ijarah, the following sub-objectives are outlined:

a. Evaluate critically both conventional products models and frameworks. Sharia

compliance is the basis for evaluation.

b. Investigate the extent to which Islamic products are distinctive in substance from

conventional products.
 RESEARCH METHODOLOGY

To carry out the research study quantitative research methodology is used. The

target of our

research study is the Islamic and conventional banking products in Punjab, Pakistan.

I select three conventional banks, first is Askari bank, second is Bank Al-Falah and

third is Faisal bank and three Islamic banks such as Askari Islamic bank, Faisal

Islamic bank and third is Al-Baraka Islamic bank. With the through random sampling

technique. Conventional banks Faisal bank, Askari bank

and Bank Al-Falah have been selected through random sampling from the

conventional banking

sector because these are performing their activities in almost every central location

of

Punjab, Pakistan which representing the whole population of conventional banks.

While

Al-Baraka Islamic Bank Faisal Bank and Askari Bank, which are considered the banks

mostly based on

Shariah Principles, are also selected through random sampling technique from the

Islamic

Banking Sector representing the whole population of Islamic Banks in Punjab.

Data Collection

All data collected for this study from different sources. Major

source is meeting with banks officials and top management for project.

Second is from banks websites.

This study in general, helps banking sector especially Islamic banks to

improve their performance and also helps general public and firms to

selection of bank that which one is better according to their need and

demand. Due to newly start business, Islamic banks have to face some

limitations and bear high operating cost. Recently, Islamic banks

performance shows good improvement in terms of asset and deposits, which

is increased to 8.6% and 9.7% in 2012 in overall banking system (SBP Islamic

Banking Bulletin , 2012).