Different Principles:
Conventional banking relies on interest-based transactions, while Islamic banking adheres to Sharia principles, prohibiting interest (riba) and emphasizing risk-sharing and asset-backed transactions.
Conventional Banking
- Conventional banks make profit by charging interest on loans and paying interest on deposits.
- The risk associated with lending is largely transferred to the borrower, with the bank primarily concerned with repayment.
- While some conventional banks may engage in asset-backed transactions, they are not strictly required to do so.
Islamic Banking
- Islamic banks prohibit interest, viewing it as exploitative. Instead, they utilize profit-and-loss sharing (PLS) mechanisms and asset-backed financing.
- Islamic banks share both profit and risk with their customers through various contracts like Mudarabah (profit-sharing) and Musharaka (joint venture).
- Islamic banking transactions are secured by tangible assets, promoting real economic activity and avoiding speculation.
Difference in Practice
- Profit and Loss Sharing
In Islamic banking, if a project fails, both the bank and the customer share the loss, based on a pre-agreed ratio. Conventional banks, in contrast, may write off bad loans.
- Contracts
Islamic banks utilize contracts like Murabaha (cost-plus financing) and Ijarah (leasing) while conventional banks rely on interest-based lending agreements.
- Ethics Focus
Islamic banking emphasizes ethical considerations, social responsibility, and the removal of harm from financial transactions.
- Customer Relationships
In conventional banking, the customer-bank relationship is often creditor-debtor. In Islamic banking, it can be a partnership or a relationship of sale or lease
Recent Trends
Growth of Islamic Finance
Islamic banking is experiencing significant growth globally, expanding beyond Muslim-majority countries.
Market Trends
As per the Islamic Financial Services Board (IFSB 2023), Islamic banking assets have increased by 10% to 12% per year over conventional banks in a variety of emerging markets.
Saudi Arabia, the UAE Saudi Arabia, the UAE Malaysia have60 percent of global Islamic financial assets.
Integration with Conventional Systems
There’s growing interest in integrating Islamic finance principles into conventional banking systems.
Demand for Islamic Banking Professionals
The increasing adoption of Islamic banking has created a demand for professionals with expertise in Islamic finance.
By,
Rajesh Shankar
AVP Banking With Sivasubramanian Sankaranarayanan- Senior Business Analyst
