Five ways Islamic Banking Differs from Conventional Banking

An increasing number of banks in United Arab Emirates have started their own separate Islamic division and are challenging the markets through “Islamic windows” like National Bank of Abu Dhabi (NBAD) having its own dedicated subsidiary of Islamic Banking Abu Dhabi National Islamic Finance (ADNIF). Middle East Bank has converted to Emirates Islamic Bank, and Mashreq bank’s announcement of a new Islamic financing firm.

Despite big names for Islamic Banking in the market, a lot of people are still unaware of Islamic banking and how it varies from the standard banking systems. There are also several misunderstandings and fallacies about the dissimilarities of these two banking systems. Let’s discuss a few important ones.

The key difference between these two banking schemes is that the Islamic banking system is based on the Islamic Sharia law while the typical banking system is based on man-made thoughts and principles.

A question may arise that why a bank needs a sharia board. The basic difference between traditional and Islamic banking is based on interest. The board just fulfills the obligation by making sure that none of their dealings involves charging of interest.

Along with avoiding interest, Islamic finance is also based on four central principles: Prohibiting usury, avoiding speculation, avoiding gambling and investing ethically.

Another distinction is that Islamic banks work on the basis of profit and loss sharing. This means that if a businessman experienced losses, the Islamic bank will share the losses – unlike conventional banks which will still charge interest even if the entrepreneur suffers losses with bank loans.

Investments in conventional banks are based on earning a fixed amount of income. The conventional bank has the accountability to pay back the customer the principal as well as the interest rate charged for a particular time, even if the bank lost the money in an investment.

On the other hand, in Islamic banking the concept of investment is different. The customer deposits the money to earn extra income from her savings, but her principal and returns aren’t guaranteed. If Islamic bank loses money due to a business failure, then it isn’t liable to pay back the money to its customer.

Conventional banks use money not only as a mode of exchange and a store of value but also as a commodity; whilst Islamic banks use money only as a medium of exchange and a store of value, not a commodity.

Islamic banking charge interest on the basis of time value whereas conventional banks use profit on the exchange of goods & services as a source of profit charging.

Islamic banks focus solely on halal (lawful) economic growth, keeping in view the the interest of public. Whereas the chief objective of conventional banks is to make profit; means interest of the bank comes first.

Islamic and conventional banks may offer similar banking products, but still are two separate entities. People lack knowledge about Islamic Banking. They gather deceptive & false information from unverified sources on the internet and spread generalized comments due to misunderstandings or just plain ignorance of the hard facts. These comments are exaggerated without understanding the absolute truth, exploration or verification. The concept of Islamic Banking has to be cleared in the mindsets in order for it to flourish in the region.