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Islamic vs. Conventional Banking

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Islamic Finance, although young in comparison to Conventional Banking, is a growing sector in the financial market whose characteristics and values are appreciated by both Muslims and non-Muslims. The main difference between the conventional and Islamic methods of banking is the fact that Islamic Finance operates in accordance with the principles of the Shariah Law, the law of Islam. Hence, all dealings occurring in Islamic institutions must follow ethical behaviour since any form of exploitation is prohibited under this law. Since business approach and all transactions and investments are derived from the Shariah Law, this leads to a significant difference in various Islamic operations when compared to conventional practices.

One of the main principles behind Conventional Banking is the fact that money generates money. However Islamic teaching states that money has no intrinsic value and profiting from lending is prohibited. Hence, under Shariah Law, the borrowing and lending of money for interest, which in Islam is known as riba, is prohibited. In any Islamic transaction any gain or loss relating to trading is shared between the person providing the capital and the person providing the expertise. This is due to the fact that under Islamic Law wealth can only be generated through legitimate trade and investment and thus no reward can be gained from capital unless it is exposed to business risk.

Moreover, the relationship between Islamic finance institutions and their customers is not the same as the debtor-creditor relationship, since it involves the sharing in financial risks and rewards. In Islamic Banking, the borrower does not bear all the risk of failure, thus resulting in a balanced distribution of income and hence the lender is not allowed to monopolize the economy. This is in great contrast with conventional banking practices as these are instead concerned with the elimination of risk and the incurrence of interest which in turn leads to an inequitable distribution of income in society, which is prohibited under the Shariah law.

Furthermore, in any Islamic bank or banking institution offering Islamic banking products and services a Shariah Supervisory Board is required. This Board advises the institutions and ensures that any activities being carried out by the bank are in compliance with Shariah Principles.

 

Should you require any further information regarding Islamic Banking and how it varies from Conventional Banking or you are interested in setting up an Islamic Institution, kindly Contact Us and we will gladly assist you with any queries you might have.

 

 

 

 

 

 

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