Islamic Banking vs. Conventional Banking

Islamic Banking vs. Conventional Banking

Islamic Banking vs. Conventional Banking (Foreign Exchange Mode)

From the view point of Islamic “Shariah’ (law), in order to be justified as an Islamic way of dealing with financial transactions the banking systems has to avoid interest. Consequently, financial intermediation in Islamic banking between the bank and the client takes place as a partner rather than a debtor-creditor. The financial activities of modern conventional banks are based on a creditor –debtor relationship between depositor and bank on one hand and between borrower and the bank on the other .Conventional banks regard interest as the price of credit reflecting the opportunity cost of money. As interest is prohibited in Islam, Commercial banking in an Islamic framework could not be based on the creditor-debtor relationship. The other aspect of the theoretical basis of Islamic banking is that the interest free bank is not risk free. This principle is applicable to two main factors of production, i.e. labour and capital. According to this principle, as no payment is allowed to labour, unless it is applied to work, no reward for capital should be allowed, unless it is exposed to business risk. From these two principles of the theoretical basis of Islamic banking, it may be said that Islamic financial relationships are of a participatory nature (Ahmed, 1994). Based on the interest-free financing principle, business practices of Islamic banks, especially sources and uses of bank’s funds, are characterized by the following modes or techniques.

Mode Islamic Banking Conventional Banking Differences
Import Murabaha Bill of Exchange(MBE) Payment Against Documents(PAD) Not so differences in practice.
Murabaha Post Import(MPI) Loan Against Imported Merchandise(LIM) Not so differences in practice.
Force Murabaha Post Import(FMPI) Force Loan Against Imported Merchandise(FLIM) Not so differences in practice.
Bai-Muazzal Trust Receipt

(Baim-TR)

Loan against Trust Receipt(LTR) Not so differences in practice.
Inward Foreign Bills for Collection (IFBC) Inward Foreign Bills for Collection (IFBC)
Baim Wes Bills Force/ Demand Loan Against Imported Merchandise(F/D LIM) Not so differences in practice.
Export Foreign Bill for Purchase (FBP) Foreign Documentary Bill Purchase(FDBP) Not so differences in practice.
Foreign Bill for Collection (FBC) Foreign Documentary Bill for Collection (FDBC) Not so differences in practice.
Musharaka Pre-shipment Finance(MPSF) Packing Credit(P.C) Not so differences in practice.
F.C. Held FBP Awaiting Remmitances(FBPAR) Not so differences in practice.

From the above, it is seen that there is no difference in Foreign Exchange and Foreign Trade in Islamic Banking and Conventional banking in practice.

Islamic Banking vs. Conventional Banking

Islamic Banking vs. Conventional Banking

Islamic Banking vs. Conventional Banking

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