Difference Between

Conventional & Islamic

Banking
Presented by : Sulaiman ishfaq
Sohail
Ahmad Faraz
Shahzeb Sohail
Ammar Baig
Atif Babar
Difference between Conventional Banking & Islamic
Banking

• “Allah has permitted trade and forbidden usury” (Sura-Al-baqarah- 275)e

• Emergence of Islamic Banking:

Interest which has been the basis of conventional banking is prohibited by Islam in
unqualified term. Reminding this thing in mind and to harmonize banking practices
with the requirements of Islamic ideals of social and economic life, Islamic banking
has been emerged. Islamic banks operate on Islamic principles of profit and loss
sharing and strictly avoiding interest which is the root of all exploitation and
responsible for large scale inflation and unemployment.
• Interest:
Conventional bank offers its depositors a fixed return (rate/ percentage)
of the deposit (say 10% on deposit). Such a return is called Interest.

• Profit:
Islamic Banking provides the depositors with a share of income/
revenue the bank earns by deploying those funds is known as profit.
 Difference on the basis of Definition
Conventional Banking
• “A bank is dealer in debt – his own and of
other people” – Crowther
• “ We can define a bank as an institution
whose debts are widely accepted in
settlement of other peoples’ debt to each
other” – Sayers
• Example:
Habib Bank Ltd.
Islamic Banking
• “Islamic Bank is a financial institution whose
statutes, rules and procedures expressly state
its commitment to the principles of Islamic
Shari’ah and to the banning of the receipt and
payment of interest on any of its operations.”
– OIC.
• In the April of 1978 this definition was
approved in the conference of foreign
ministers of Muslim countries held at Dakar
the capital of Senegal:
“Islamic banking is essentially a normative
concept and could be defined as conduct of
banking in consonance with the ethics of the
value system of Islam.”
• Example:
Meezan Bank Ltd.
 Difference on the basis of Objective
Conventional Banking
• The main objective of conventional bank
is to maximize the profit motive of
business, commerce and industry.
• Earning of profit
• Creating medium of exchange
• Developing of industry and commerce
• Developing of healthy money market
Islamic Banking
• The main objective of Islamic bank is to help in
building developing and welfare of human beings by
ending exploitation from society through the
directives of ALLAH Almighty.
• Establishment of an interest-free financial system
• Ensuring justice between supplier of fund and user
of fund
• Encouraging and patronizing entrepreneurship
• Alleviating poverty through Zakat and profit sharing
micro-finance
 Difference on the basis of Features
Conventional Banking Islamic Banking

• In conventional bank the relationship
between customer and banker is nothing
but debtor and creditors. The bank does
not have the responsibility of profit and
loss of customer.
• The conventional banks give greater
emphasis on credit-worthiness of the
clients.
• In Islamic bank is not only a banker but also a
business partner. It is participatory in capital and
profit and loss.
• The Islamic bank gives greater emphasis on
viability of project.
• It gives due importance to the public interest. Its
ultimate aim is to ensure the growth with equity.

• Very often it result in the bank’s own • For the Islamic banks it must be bases on
interest becoming prominent .it makes shariah approved transaction
no effort to ensure the growth with
equity.
• For interest-based banks borrowing from
money market is relatively easier.
 Difference on the basis of Investment

Conventional Banking Islamic Banking

Interest/Riba Based : It receives deposits  Mudarabah is a special kind of partnership
from costumer and then invest their money where one partner gives money to another for
and earn profit but the banks gives only
Interest to their costumers. investing it in a commercial enterprise.

Profit based : All the investors are able to
earn profit but there is no concept of loss
Investment : Commercial bank invest in all
types of Companies Like Alcohol, smoking
companies etc
Gambling : the acquisition of wealth
through evil means or participation in
gambling is prohibited. It will protect the
Muslims from the conventional insurance
products because that is a type of
gambling.
 Musharaka it means a joint enterprise in
which all the partners share the profit or loss
of the joint venture.
 Investment in Prohibited Companies:
They do not invest costumers money In any
company which is against the Islamic
Principles
 Gambling : Islamic Banking do not take
part on any activity which is based on
gambling
Difference on the basis of Investment
• Lack Of Information / Gharar:
Commercial bank do not give information
to their costumers to which company
they are depositing the money.
• Delay In Payments : They charge
interest for delay in
payment/repayment.
• Zakat system : There is A Zakat system
of 2.5%
• Complete Information : According to Islamic
rules, both parties should have a proper
control over the business. As well as the
complete information should be shared with
both parties so that the profit and loss will
be equally shared.
• Delay in Payments : For delay of payment
of investment by the clients. further amount
of profit cannot be charged.
• Zakat System : They usually deduct a Zaakat
annually 2.5% from each costumer
Investment In Islamic Banking

• Ijara to give something on rent, is an exchange transaction in which a known benefit arising
from a specified asset is made available in return for a payment, but where ownership of the
asset itself is not transferred.
• Murabaha is a particular kind of sale whereby the seller acquires a commodity and then sells
it to another person at a profit or mark-up
expressly disclosing to the purchaser the cost price that he (the seller) has paid for the
commodity.
• Bay as Salam or Salam means a contract in which advance cash payment is made for goods
to be delivered later on.”
• Istisna is a contract of exchange, whereby the funding party agrees to deliver a commodity or
an asset at a pre-determined future time at an agreed price.
 Difference on the basis of Social Responsibilty
Conventional Banking
• Less Economic & Socially Responsible
• No commitment social development
and economic development.
• Only focus On Profit
• There is no justification or
consideration whether the business is
good or bad in conventional banking
system. Earning interest is the main
motive of this system.
Islamic Banking
• More Economic & Socially responsible
• Commitment of Social & Economic
Development.
• Equally Profit & Loss distribute
• Islamic banks do not do the business on items
harmful for societies though there are
possibilities to earn more there against.
 Difference on the basis of deposits

Conventional Banking Islamic Banking

 Collection of deposit on the basis of  Collection of deposit on the basis of

interest profit&loss sharing

 A conventional bank has to guarantee all
its deposits.
 Their depositors do not share any profit
or bear any loss.
 Islamic bank can only guarantee deposits for
deposit account, which is based on the
principle of al-wadiah, thus the depositors
are guaranteed repayment of their funds,
however if the account is based on the
mudarabah concept, client have to share in a
loss position.

 Mudaraba depositors are to share the loss if

any, incurred out of investment made from
mudaraba Deposits.
 Difference on the basis of Principles
Conventional Banking
• The activities of conventional banking are
done by the procedures and laws evolved
through human research studies and
innovations.
• Conventional banking follows the man
made practice and rules.
• The basis of conventional banking is
interest and as such its all activities are
operated with interest.
• It aims at maximizing profit without any
restrictions.
Islamic Banking
• All the activities are done according to
Islamic Laws ( Shari’ah ) i.e as per guideline
and directives of the Holy Qur’an and
Sunnah.
• Islamic Banks are to follow Quran , Sunnah
, Ijma and Kias. i.e Shari’ah, in all the
business transactions including Accounting
entries.
• In Islamic banking interest (Riba) is strictly
prohibited and consequently all its activities
are operated without involvement of
interest.
• It also aims at maximizing profit but subject
to Shari’ah restrictions.
 Difference on the basis of Functions
Conventional Banking
• Leading money and getting it back with
interest is fundamental function of the
conventional banking.
• Collection of deposits on the basis of
interest.
• Creating medium of exchange and
credit.
• Investment in shares and securities
having coupon rate of interest.
• Discounting of bill.
Islamic Banking
• Participation in partnership business is the
fundamental function of the Islamic bank.
• Collection of deposits on the basis of profit
sharing.
• Investment following buy mode, investment
mode, lease mode. Investment in shares and
Mudarabah bond. No discounting of bill.
• Islamic bank works as a trading concern
and financial intermediary to perform
interest-free activities purely according to
principles of Sharia’h.
• It is found that Islamic bank performs activities
in the right direction towards human
development. It plays a positive role towards
economic development having main focus on
human development while performing its
functions (Al-Harran, 1993).
• Fund based activities are called primary
functions of Islamic bank i.e. acceptance of
deposits from savers on profit& loss basis.
 Difference on the basis of Accounting
• The basic principle (golden rule) in determining debt or credit for accounting entries in universally
accepted. In banking transactions the golden rules is accepted. In Islamic banking the golden rule is
also accepted.

• The golden rule is as under-

• Debit Credit

• ASSETS: Increase Decrease

• Liabilities: Decrease Increase

• Capital: Decrease Increase

• Income: Decrease Increase

• Expenditure: Increase Decrease

• In Islamic banking accounting is the main difference with conventional banking is that Islamic
banking cannot deal with the interest transaction and also cannot deal with Forbidden business.
 Difference on the basis of Accounting
Accounting of Conventional Banking: Accounting of Islamic Banking:

 They also follow international financial reporting

 They only follow international financial
standards (IFRS). The rules of the income Tex. the
reporting standards (IFRS). The rules
rules of the companies act. The rules of the Security
of the income Tex. the rules of the
Exchange Commission (SEC).
companies act. The rules of the
Security Exchange Commission  They cannot engaged in any interest transactions.
(SEC).
 If any income is earned against shari’ah principles that
 They conduct their transaction on cannot be included in the distributable income of the
interest basis. bank.
 Interest is their main income.
• Islamic banks are follow shari’ah (Islamic law)
 They do not follow the shari’ah rules
and regulations.