Islamic Banking vs Conventional Banking

As widely known, Islamic banks requires strict compliance with Islamic Shariah, mainly based on its fundamental principle of ‘prohibition of riba-interest-‘ whereas interest plays significant roles in making conventional banks competitive in the market. Islamic banks normally provide almost all services that conventional banks used to offer to its customers except that Islamic banks don’t accept or pay interests on lending and deposits and indulge with haram (Prohibited in Shariah) businesses or unethical business practices. The major functions of a commercial bank include safeguarding customers’ money, supplying money, lending functions, investment function, and other financing services. Islamic banks also provide all these services and moreover. Both Islamic banks and conventional banks provide various financial services like accepting deposits, lending functions, investments, trade-finance, accepting payments etc with a basic difference that any of these functions shouldn’t be anyway related to accepting or paying interest. Conventional banks generate profits from interests. They accept interest on most of its lending like overdraft and loans. People deposits money in banks, either for safeguarding or interest-earning purposes, which in turn allow the banks to use their money to deposit in other banks, like reserve banks, and generate interest thereon. This enables banks to pay a relatively small rate of interest to their depositors (Houghton, 2009, p. 12), for instance, 9% for fixed deposits and 3.5% for savings accounts. The conventional banks charge a relatively high rate of interest on loans, overdraft, and other lending.

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