Since Islamic banking had grown owing to the global financial crunch, it would be important to establish the difference of both Islamic banking and conventional banking.

Very few people who know the real difference between Islamic and conventional banking, as apparently both seem the same as in conventional banking interest is charged on its transactions and on the other hand Islamic banking is based on interest free banking but they also charge some fees for their transactions. Many employees even in the Islamic banks do not know the basic concept or rational behind Islamic modes of financing.

Islamic banking is asset based banking which means that it’s transactions must be backed by some assets. Interest or Riba is prohibited in Islam therefore it is also prohibited in Islamic banking operations.

We cannot earn money out of money in Islamic banking. On the other hand conventional banking is totally based on interest they charge interest on their transactions and take out profit from that.

In conventional banking only the profit is shared whereas in Islamic banking, profit and loss both are shared.

Islamic banking must stay within the limits of Islamic law and Shariah in all actions and transactions. Islamic banking is done by laws and regulations which are defined in the Quran and Sunnah in which the product or services are not introduced by the Islamic banks which contradicts the Islamic values. These banks also introduced tax and Zakat system according to the Islamic values. Profit sharing is fixed in Islamic banking based on real profit. Islamic banks based on the buyer-seller relationship, whereas conventional banking based on the debtor-creditor relationship.

The regulations, laws, rules and transactions of conventional banking system are fully manmade. Investors are encouraged by maximum interest rate. The aim of conventional banking system is to earn profit. In case of any default by the investors it charges extra amount of money, whereas in Islamic banking is case of defaults the extra amount charged to customer will go for charity not in the bank’s income. Conventional banks always encourage providing loans with fixed interest rate to its customer which is against our Islamic values.

The accounting and auditing of both banking system is to some extent similar but the documentation in Islamic banking is different as compared to conventional banking.

If a person wants to start his business he will take a loan on interest basis from a conventional bank and pay the principle amount plus the interest on that, on the other hand if the same person goes to an Islamic bank the Islamic bank asks him about the type of business he wants to start and provides all resources or material to him to start his business instead of giving him only cash and charge some fees on that.

Now many conventional banks also open Islamic banking window or moves towards Islamic banking due to change in the trend of banking. So Islamic banking is relatively better from conventional banking because it follows all the Islamic values and conditions which are given in the Quran and Sunnah.

The writer is a student.