Similarities and Differences Between Islamic Banking and Conventional Banking

3146 Words Feb 9th, 2013 13 Pages

Introduction 1

How Islamic banking system is different from conventional one? 1

Maintenance of CRR/SLR: 4

Project appraisal and evaluation: 4

Basis for collection of deposit 5

Moral Dimension 5

Emphasis on Productivity as compared to credit worthiness 5

Scope of the activities: 6

Guarantee for deposit: 6

Distributive justice and economic stability: 7

Allocate Efficiency: 7

Stability of banking system: 8

Growth of the banking system: 8

Emphasis on the character of the loan applicant: 8

Conclusion 10

References 10


Banking system plays a very important role in the economic life of the nation. The health of the economy is closely
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Interest based system encourage instability in the economy because there is a chance of high inflation etc, but on the other hand Islamic banking system encourages a stability in the economy ➢ Islamic banking system increases the investment. In conventional banking system, higher the level of interest the lower the level of investment and vice versa. Thus financing the business on the basis of profit and loss sharing instead of interest will increase level of productive investment. ➢ Today all costs for example those occurred due to time log in a deferred payment, default risk and the inflation rate are covered under the interest rate and margins added to it. Such costs are likely to appear in an Islamic Riba free framework too, but the media through which there costs will be met is different. ➢ At present, commercial banks are mostly financing to the large size or medium to large size projects but in Islamic framework it is not so. The management of Islamic banking system has to give incentive to increase small and medium size investment to generate revenue and profits so they give incentives to small and medium size entrepreneurs and in turn the prospects for mudarabah and Musharaka will increase. ➢ It is important to appreciate the high interest rates penalize entrepreneurs, as the cost of

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