Difference between Islamic Banking and Conventional Banking Products

Explore further to understand how Islamic Banking is different from the Conventional Banking mechanism.

Current Account

Islamic Banking	Conventional Banking
Islamic Current Account is Qard based and funds are invested in Shari’ah-compliant avenues.	Conventional banking Current Account is also based on loan, wherein customer’s deposited funds are used in lending and interest earning businesses.

Saving Account & Term Deposit Account

Islamic Banking	Conventional Banking
Savings Account and Term Deposit in Islamic banks are based on the concept of Mudarabah. Islamic banks pay out as per agreed ratio actually earned profits on Shari’ah-compliant transactions. Mudarabah is a partnership of services and capital between two parties. In Islamic banking, banks render their services and expertise against a capital (deposit) of a customer. It is a partnership where the returns are shared between the bank and depositors as per the agreed profit sharing ratio and weightages, whereas, the loss in principal is borne by the depositors as per their respective investment ratio.	Savings Account and Term Deposit in Conventional banks are based on loan or Qard basis. Conventional banks pay interest earned on loans to its depositors as returns.

Islamic Banking

Conventional Banking

Savings Account and Term Deposit in Islamic banks are based on the concept of Mudarabah. Islamic banks pay out as per agreed ratio actually earned profits on Shari’ah-compliant transactions.

Mudarabah is a partnership of services and capital between two parties. In Islamic banking, banks render their services and expertise against a capital (deposit) of a customer. It is a partnership where the returns are shared between the bank and depositors as per the agreed profit sharing ratio and weightages, whereas, the loss in principal is borne by the depositors as per their respective investment ratio.

Savings Account and Term Deposit in Conventional banks are based on loan or Qard basis. Conventional banks pay interest earned on loans to its depositors as returns.

Financing Products

Islamic Banking	Conventional Banking
Islamic banks primarily utilize different modes of finance such as Murabaha, Salam and Diminishing Musharakah, etc. Murabaha: It is a trade contract between the two parties with disclosing of profit. In this case the bank (as seller) discloses the cost and profit to the customer (the buyer). Salam: It is also a trade contract of fungible goods between the two parties where 100% payment is made in advance and goods delivery is set on a future date as per agreed conditions. Diminishing Musharakah: It is a form of joint ownership in an asset or property in which any of the joint owners undertakes and promises to buy the ownership share of the other joint owner(s) gradually until the ownership of the joint asset or property is completely transferred to the purchasing joint owner.	Conventional banks only have one mode of financing for their customers and that is a ‘Loan’. Be it an individual customer, a business partnership, or a corporate client, they can avail an array of products with an underlying mode of loan from a conventional bank. However, conventional banks have designed several products such as credit cards, running finance, car and house loans, and long-term loan facilities for different customer segments, but all of them simplify as a loan advanced by a bank to its customer. For instance, a credit card is also a debt instrument, a car lease finance translates into an accrued loan for any customer. Likewise, a registered partnership or a corporate customer avails both short-term and long-term financing facilities. All of them are essentially outstanding loans to a company and they pay interest or mark-up to the bank on quarterly or annual basis. For example, if a customer avails a house or car finance from a bank and due to some reason car or house gets damaged or is destroyed, the bank would then ask the customer to keep paying monthly installments despite the asset loss till insurance settlement comes in or else the customer would be reported as a defaulter in case of non-payment of the same and their e-CIB shall be adversely affected.

Islamic Banking

Conventional Banking

Islamic banks primarily utilize different modes of finance such as Murabaha, Salam and Diminishing Musharakah, etc.

Murabaha:
It is a trade contract between the two parties with disclosing of profit. In this case the bank (as seller) discloses the cost and profit to the customer (the buyer).

Salam:
It is also a trade contract of fungible goods between the two parties where 100% payment is made in advance and goods delivery is set on a future date as per agreed conditions.

Diminishing Musharakah:
It is a form of joint ownership in an asset or property in which any of the joint owners undertakes and promises to buy the ownership share of the other joint owner(s) gradually until the ownership of the joint asset or property is completely transferred to the purchasing joint owner.

Conventional banks only have one mode of financing for their customers and that is a ‘Loan’. Be it an individual customer, a business partnership, or a corporate client, they can avail an array of products with an underlying mode of loan from a conventional bank.

However, conventional banks have designed several products such as credit cards, running finance, car and house loans, and long-term loan facilities for different customer segments, but all of them simplify as a loan advanced by a bank to its customer.

For instance, a credit card is also a debt instrument, a car lease finance translates into an accrued loan for any customer. Likewise, a registered partnership or a corporate customer avails both short-term and long-term financing facilities. All of them are essentially outstanding loans to a company and they pay interest or mark-up to the bank on quarterly or annual basis.

For example, if a customer avails a house or car finance from a bank and due to some reason car or house gets damaged or is destroyed, the bank would then ask the customer to keep paying monthly installments despite the asset loss till insurance settlement comes in or else the customer would be reported as a defaulter in case of non-payment of the same and their e-CIB shall be adversely affected.

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