ISLAMIC BANKING & CONVENTIONAL BANKING

Submitted by: Harram Aneeqa

Islamic Banking &Conventional Banking

• Islamic banking is also called ‘Sharia compliant finance’

• Taking interest on loans which in terms in Sharia is called as RIBA and USUARY

• Type of bank which gives facility of accepting deposits, business loans, and offers basic investment products

• It includes commercial banking which refers to a bank or division of bank that mostly deals with deposits and loans from giant corporations or large businesses

Purpose

• Islamic banking teaches us to stay away from Haraam earning (sinful-not allowed)

• Not investing in the activities which are making profits by prohibited activities

History

• The basic teaching of Islamic banking is outlawing of riba

• Majority of its principles are based upon simple morality

Functions under Islamic BankingMudarabah:• Kind of partnership where one gives money to

other for investing in commercial enterprise. Profits generated are shared between the parties according to a pre-agreed ratio.

 Musawamah:• Musawamah is the negotiation of a selling price

between two parties without reference by the seller to either costs or asking price.

Bai Salam:• Bai Salam is a contract in which advance payment

is made for goods to be delivered later on.The transaction is considered Salam if the buyer has paid the purchase price to the seller in full at the time of sale.

Ijarah (Leasing) :• A form of shariah law-compliant leasing involving

the rights over the use of an asset under which the bank buys the asset then leases it to the customer over a fixed period.

Functions under Conventional Banking

The main function of a conventional bank is : To take deposits from different customers

and advance loans on certain interest rate to other customers who are in need of money

Accepting deposits. Giving loans. Overdraft. Discounting bills of exchange. Investment of funds. Agency functions. Miscellaneous functions.

ISLAMIC BANKING CONTRIBUTING

TOWARDS GLOBAL ECONOMY

Conventional banking affects economy as:

• It brings investments in new enterprises.• It promotes trade and setting up industries.• It helps a lot in development of agriculture.• Commercial bank influences the economic

activities in a country.• It ensures the implementation of monetary

policy.• Commercial banks promote capital formation

PROS AND CONS OF ISLAMIC BANKING OVER CONVENTIONAL BANKING

• Risk sharing nature of Islamic finance has shielded the Islamic banks from the impact of financial crisis

• Islamic banks focused on cost efficiency which is essentially attributed towards the mutual risk sharing nature of Islamic banks