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The first part of any economic system is the doctrinal beliefs that society endorses and the second part is the organization of the group of institutions capable of making these beliefs a reality. You can read more about difference between commercial bank and islamic bank.
Historically, banks have been an integral part of the institutions in which the theories and convictions of every economic system are applied. Because of these differences in principles and convictions, there must be fundamental differences between banks in the Islamic economic system and banks in the capitalist system. Here, dear reader, are the fundamental differences between banks in the Islamic economy and banks in the capitalist economy.
Prior to getting started, it’s important to note that we’ll be referring to Islamic banks as Islamic banks, and conventional banks as conventional banks.
First: The principles and convictions of Islamic and conventional banks
As Islamic banks follow the beliefs and provisions of the Islamic system, anything that is forbidden in the Islamic legislative system will be prohibited to deal in Islamic banks. The Prophet, peace and blessings be upon him, stated: “When Allah has forbidden eating a thing, he has also forbidden it’s price for the people. For example, Islam forbids everything that harms a human being.”. Accordingly, it won’t fund smoke factories, and it also disallows pork. Therefore, it won’t grant funding for pig farms.
As for conventional banks, they don’t have anything that prevents them from lending to any commodity except for illegal goods like drugs, and this is true for Islamic banks as well.
Second: The concept of money
Individuals are allowed to use money to access goods and services and to obtain assets permitted by Islamic law, and money is viewed as a store of value and is therefore used in valuing assets.
Money in the capitalist system is regarded as a commodity as well as being a medium of exchange and a store of value, and since it is a commodity, this will allow the commercial bank to lease money at a higher value when it grants loans and use the difference between the nominal value and the value recovered from the borrower. Also, the commercial bank can rent the money and pay an increased price for it when dealers deposit the money with it.
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Third: The relationship of the customers with the bank
Conventional and Islamic banks both receive bank deposits and grant funding, but the relationships between them differ fundamentally.
With a conventional bank, you will have a debt relationship with the bank. This will result in the bank owing the customer the deposit principal as well as interest, which is a fixed return on capital, and the bank will be a guarantee of the deposit in all cases.
In Islamic banks, deposits come from depositors based on the Mudaraba contract, not on debt.
A Mudaraba contract is one in which the money is provided on the one hand and the work is provided on the other, where the dealers are “the owner of money.”
The bank is a worker, that is, it invests the depositors’ money, and their money isn’t guaranteed except if the bank defaults.
Islamic banks don’t have debt relationships except in interest-free loan contracts, where they provide cash as a loan without consideration or overpayment from the borrower.
Islamic banks generally don’t get usurious interest on the money because it is considered forbidden in the Islamic legislative system. It’s called “usury” for the conditional increase in the capital without consideration.
Fourth: different forms for investing money
Most traditional banks invest their money with interest-bearing loans, which they receive as a collateralized interest loan and lend to clients as an interest-bearing loan.
For Islamic banks, they receive money in the form of (Mudarabah), which we mentioned earlier, where the dealers own the capital, and the bank is a “worker factor”, which means an investment agent. In addition, Islamic banks have a set of legal forms based on real buying and selling. These forms can be used to grant funds, such as mudaraba, and lease-to-own (ijarah), since it is forbidden in Islamic economics to exchange cash for cash with a conditional increase in capital.
Fifth: bearing the risk
Islamic banks differ from other banks due to the distribution of risks. Conventional banks place the entire risk on the borrower. When a person takes a loan from a commercial bank with the intention of investing it, he bears all risks and commits to return to the bank all the benefits that accrue to him, even if he incurs a loss during the project.
Unlike traditional banks, Islamic banks are working to expand the circle of risks in investment, whether they are granting or receiving financing; therefore, when an Islamic bank is granted financing, it bears part of the risks according to the contract on which the financing was granted, and the investor participates in the results of the investment if a default or violation of conditions is committed by him.
A depositor will also bear some investment risk if the Islamic bank is the investor.
Thus, the conventional bank guarantees the capital in case the deposit is made to it, while the Islamic bank does not guarantee the capital unless the depositor defaults or violates the conditions.
Sixth: Revenue and distribution of profits
Islamic banks have different revenue and profit distributions than conventional banks, which determine profits based on a specific percentage of capital. The bank would probably give a person a thousand dinars and a fixed return of 50 dinars if he deposited a thousand dinars with them.
With an Islamic bank, the return is based on a common percentage of the profit. The same person who deposited a thousand dinars in the Islamic bank was told that he would earn 5% profit return, so he would earn 5% of the profit generated for the thousand dinars at the end of the fiscal year – and since we can’t know the profit that will be achieved with certainty, we’ll call this return a “speculated return.”
Compared to the conventional bank, the difference is that the return is known from the moment the money is deposited. In Islamic banks, you get a speculated return based on the profit achieved at the end of the year.
Those are two of the biggest differences between conventional banks and Islamic banks, so it became apparent that they were launched from convictions and principles that were totally different.
It shows that the Islamic bank isn’t just a different name, it’s a fundamentally different operation that appears clear from the moment it’s incorporated and affects all of its parts.
what is the Islamic banking?
As well as Islamic banking, Islamic finance is also known as shariah-compliant finance since it adheres to shariah (Islamic law). Islamic banking is based on the sharing of profits and losses, as well as a prohibition on lenders and investors collecting and paying interest.
what is the difference between commercial bank and Islamic bank ?
In commercial banking, rules are determined by man and interest is financed. Although Islamic banks function as commercial banks, they follow the rules of the Islamic Sariah board. Islamic banking is the interest free banking. They follow the Islamic modes of finance Mudarabah, Musharaka, Ijarah etc.
source: TheBoomoney
