Talking on Banking-Conventional and Islamic Banking

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Talking on Banking-Conventional and Islamic Banking


What is banking?

Banking definition is given by expert banker in various points of views.Some one says; banking is a process of depositing money and investing to the clients in a systematic way.

Dr. Md. Makhluk Hasan says,” Banking is the activities of banker.Banking is what is done by the banker.”

The Oxford English Dictionary says -“Banking is the business of a banker, the keeping or management of a bank”

Indian Banking Companies Act 1949 says- “Banking means the accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise with
drawable by cheque, draft, order or otherwise.”

Australian Encyclopedia-“ Ordinarily, Banking business implies a routine of operation s consisting
chiefly in the management of customers deposit accounts, payment of their
cheques by exchange or cash, collection of documents for them, the
arrangement of credit by discount or advances & transactions with other
bodies in pursuance of these functions.” .

Talking on Banking-Conventional and Islamic Banking

Banking Period

Ancient Ages : BBC 500 – 2000 BB.C.
Vaidic Ages : BBC 2000 – 1150 B.C.
Moughal Regime : 1150 – 1750 B.C.
British Regime : 1750 – 1947
Partition of India and Pakistan : 1947 – 1971
Partition of Pakistan and Bangladesh Time: 1971 – 1991

Objectives of Islamic Banking

The primary objective of establishing Islamic banks all over the world is to promote, foster and develop the application of Islamic principles in the business sector. More specifically, the objectives of Islamic banking when viewed in the context of its role in the economy are listed as following:

To offer contemporary financial services in conformity with Islamic Shariah;

To contribute towards economic development and prosperity within the principles of Islamic justice;

Optimum allocation of scarce financial resources; and

To help ensure equitable distribution of income.


Talking on Banking-Conventional and Islamic Banking

These objectives are discussed below.

Offer Financial Services: Interest-based banking, which is considered a   practice of Riba in financial transactions, is unanimously identified as anti-Islamic. That means all transactions made under conventional banking are unlawful according to Islamic Shariah. Thus, the emergence of Islamic banking is clearly intended to provide for Shariah approved financial transactions.

Islamic Banking for Development: Islamic banking is claimed to be more development- oriented than its conventional counterpart. The concept of profit sharing is a built-in development promoter since it establishes a direct relationship between the bank’s return on investment and the successful operation of the business by the entrepreneurs.

Optimum Allocation of Resources: Another important objective of Islamic banking is the optimum allocation of scarce resources. The foundation of the Islamic banking system is that it promotes the investment of financial resources into those projects that are considered to be the most profitable and beneficial to the economy.

Islamic Banking for Equitable Distribution of Resources: Perhaps the must important objective of Islamic banking is to ensure equitable distribution of income and resources among the participating parties: the bank, the depositors and the entrepreneurs.

Talking on Banking-Conventional and Islamic Banking

Distinguishing features of the conventional banking and Islamic banking are shown in terms of a box diagram as shown below:

Banks Islamic Banks
1. The functions and operating modes of conventional banks are based on manmade principles. 1. The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah.
2. The investor is assured of a predetermined rate of interest. 2. In contrast, it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur).
3. It aims at maximizing profit without any restriction. 3. It also aims at maximizing profit but subject to Shariah restrictions.
4. It does not deal with Zakat. 4. In the modern Islamic banking system, it has become one of the service-oriented functions of the Islamic banks to collect and distribute Zakat.
5. Leading money and getting it back with interest is the fundamental function of the conventional banks. 5. Participation in partnership business is the fundamental function of the Islamic banks.
6. Its scope of activities is narrower when compared with an Islamic bank. 6. Its scope of activities is wider when compared with a conventional bank. It is, in effect, a multi-purpose institution.
7. It can charge additional money (compound rate of interest) in case of defaulters. 7. The Islamic banks have no provision to charge any extra money from the defaulters.
8. In it very often, bank’s own interest becomes prominent. It makes no effort to ensure growth with equity. 8. It gives due importance to the public interest. Its ultimate aim is to ensure growth with equity.
9. For interest-based commercial banks, borrowing from the money market is relatively easier. 9. For the Islamic banks, it is comparatively difficult to borrow money from the money market.
10. Since income from the advances is fixed, it gives little importance to developing expertise in project appraisal and evaluations. 10. Since it shares profit and loss, the Islamic banks pay greater attention to developing project appraisal and evaluations.
11. The conventional banks give greater emphasis on credit-worthiness of the clients. 11. The Islamic banks, on the other hand, give greater emphasis on the viability of the projects.
12. The status of a conventional bank, in relation to its clients, is that of creditor and debtors. 12. The status of Islamic bank in relation to its clients is that of partners, investors and trader.
13. A conventional bank has to guarantee all its deposits. 13. Strictly speaking, and Islamic bank cannot do that.


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