Islamic & Conventional Banking

Sara Riaz 06-0016

Banking
Bank
A bank is a person who carries on the business of banking. The legal definition of the business of banking is Conducting current accounts for customers Paying to the customer's order (e.g. the customer's cheques drawn on the bank), and Collecting the cheques deposited to the customers's account, as the customer's agent and crediting the proceeds to the customer's current account.

Islamic Banking
Islamic banks adhere to the concepts of islamic law,islamic banking revolves around many well established concepts which are based on islamic canons.islamic banking refers to a system of banking or banking activity that is consistent with islamic law (sharia)principles and guided by islamic economics

Principles of Islamic banking

Prohibition of riba (interest) Profit sharing (mudharabah) Safekeeping ( wadiah) Joint venture ( musharakha) Cost plus ( murabahab) Leasing ( ijarah )

Conventional Banking
Functions and operating modes of conventional banking are based on fully man made principles The investor is assured of a predetermined rate of interest It aims at maximizing profit without any restriction. Lending money and getting it back with compounding interest is the fundamental function of the conventional banks

State Bank of Pakistan & Its Role In Islamic Banking

In order to promote Islamic Banking in Pakistan, State Bank is following a three pronged strategy as under: I) Establishment of full-fledged Islamic bank(s) in the private sector; II) Setting up of subsidiaries for Islamic Banking by existing commercial banks; and III) Allowing Stand-alone branches for Islamic banking in the existing commercial banks.

Criticism

Differences between Islamic bank and conventional

Conventional banking
It does not deal with zakat

Islamic banking
In modern Islamic banking, it has become one of the service oriented function of the Islamic banks to be a zakat collection centre and they also pay out their zakat Islamic banks have no provision to charge any extra money from the defaulters It gives due importance to the public interest, its ultimate aim is to ensure growth with equity Islamic bank can only guarantee deposits for deposit account, thus depositors are guaranteed repayment of their funds

It can charge additional money in case of defaulters Very often it results in the banks own interest becoming prominent. it makes no effort to ensure growth with equity Conventional bank has to guarantee all its deposits

The status of a conventional bank, in relation to its clients is that of creditor and debtors

The status of Islamic bank in relation to its clients is that of partners, investors and trader buyer and seller

Which One is Better??

Islamic or Conventional Banking