Difference between Islamic banking and conventional banking

Islamic banking and conventional banking are extremely different in many ways. The key
difference is that Islamic Banking is based on Shariah foundation. Thus, all dealing,
transaction, business approach, product feature, investment focus, responsibility are derived
from the Shariah law, which lead to the significant difference in many part of the operations
with as of the conventional

The foundation of Islamic bank is based on the Islamic faith and must stay within the limits
of Islamic Law or the Shariah in all of its actions and deeds. The original meaning of the
Arabic word Shariah is the way to the source of life and is now used to refer to legal system
in keeping with the code of behaviour called for by the Holly Quran (Koran). Amongst the
governing principles of an Islamic bank are :
* The absence of interest-based (riba) transactions;
* The avoidance of economic activities involving oppression (zulm)
* The avoidance of economic activities involving speculation (gharar);
* The introduction of an Islamic tax, zakat;
* The discouragement of the production of goods and services which contradict the Islamic
value (haram)
On the other hand, conventional banking is essentially based on the debtor-creditor
relationship between the depositors and the bank on one hand, and between the borrowers
and the bank on the other. Interest is considered to be the price of credit, reflecting the
opportunity cost of money.
Islamic law considers a loan to be given or taken, free of charge, to meet any contingency.
Thus in Islamic Banking, the creditor should not take advantage of the borrower. When
money is lent out on the basis of interest, more often that it leads to some kind of injustice.
The first Islamic principle underlying for such kind of transactions is deal not unjustly, and
ye shall not be dealt with unjustly which explain why commercial banking in an Islamic
framework is not based on the debtor-creditor relationship.
The other principle pertaining to financial transactions in Islam is that there should not be any
reward without taking a risk. This principle is applicable to both labour and capital. As no
payment is allowed for labour, unless it is applied to work, there is no reward for capital
unless it is exposed to business risk. (Ust Hj Zaharuddin Hj Abd Rahman)
(https://mohdhafez.wordpress.com/2007/03/03/differences-between-islamic-bank-andconventional/)

Bankalhabib:
a) Murabaha Finance:
A contract between the Bank and a Customer under which the Customer first purchases
certain goods/commodities/assets as an Agent of the Bank, and the Bank after taking
possession of the goods/commodities/assets sells it to the same Customer by adding certain
profit margin to its cost.
Local purchase of Assets/Commodities/Goods.Imports under Letter of Credit/Firm
Contract.Purchase of raw material for exports.Local purchase of raw materials for production
of Goods/Assets.Shariah Compatibility:
Assets must be Shariah compatible. All agreements/documents approved by our qualified and
experienced Shariah Advisor and regular monitoring/checking of Murabaha transactions by
the Shariah Advisor. Customers Guidance:
Murabaha is always allowed for fresh purchases. Goods shall not be used by the Customer
before the Murabaha offer and acceptance are signed. Rollover in Murabaha is not allowed.
However, fresh purchases can be made under new Murabaha arrangements. Murabaha price
once fixed cannot be changed.In case of late payment, Customer will have to pay certain
amount to charity fund as per Murabaha Agreement.

b) Ijarah Finance (Leasing)

Ijarah is basically the transfer of usufruct of a fixed/durable asset to another person for an
agreed period, at an agreed consideration. Under Ijarah agreement the asset will be given to
the Customer on rent for the period agreed at the time of contract.
Ijarah agreement and other document approved by our qualified and experienced Shariah
Advisor.Periodical rentals to be fixed according to Customer needs at very competitive
terms.Regular monitoring and checking of Ijarah transactions by our Shariah Advisor.For
Machinery & Equipment (Leasing):

Machinery (for small, medium and large industrial units) and office equipment.
Lease agreements and other documents approved by our qualified and experienced Shariah
Advisor.Periodical rentals to be fixed according to Customer needs at very competitive
terms.Regular monitoring and checking of Ijarah transaction by our Shariah Advisor.

c) Diminishing Musharakah Finance (For Shirkat-ul-Milk)

Diminishing Musharakah is a form of partnership in which one of the partners promises to
buy the equity share of the other partner gradually until the title of the equity share is
completely transferred to him. This transaction starts with the formation of a partnership,
after which buying and selling of the equity takes place between the two partners.
Diminishing Musharakah can be used for plant, machinery, equipment, buildings and
automobile financing.

Principles of Diminishing Musharakah (Shirkat-ul-Milk):

Diminishing Musharakah (DM) is a form of co-ownership in which the client and the bank
share the ownership of a tangible asset in agreed proportion and the client undertakes to buy
in periodic installments of the proportionate share of the bank until the title to such tangible
asset is completely transferred to the client.Diminishing Musharakah can be created only in
tangible assets. Diminishing Musharakah shall be limited to the specific asset(s) and not to
the whole enterprise or business.A DM would consist of the following three steps Creation of
joint ownership between the bank and the client.Renting out by the bank undivided share in
the asset owned to the client.Selling its share in periodic installments by the bank to the
client.
All other terms and conditions as are essential to co-ownership, Ijarah and sale shall be
fulfilled in respect of different stages in the process of DM arrangement.Proportionate share
of the client and the bank must be known and defined in terms of investment.Loss, if any,
shall be borne by the bank and the client in the proportion of their respective investments.The
amount of periodic payment would go on decreasing with purchase of ownership units by the
client.Each periodic payment shall constitute a separate transaction of sale.Separate
agreements/contracts shall be entered into at different times in such manner and in such
sequence so that each agreement/contract is independent of the other in order to ensure that
each agreement is a separate transaction.Following are the documents to be executed in DM
Financing; Diminishing Musharakah AgreementRental Agreement for moveable/Immoveable
AssetsAgreement for purchase of Musharakah Units

In case a client fails to honor the undertaking, as aforesaid with regard to the periodic
payment and purchase of sale of units as the case may be, the asset may be sold in the open
market and the bank aggrieved by such failure shall be entitled to recover:
Actual loss, defined as the difference between the market price and price mentioned in the
undertaking, if any, not being the opportunity cost.Any gain on sale of property, shall be

shared by the bank and the client in proportion of their respective investment at the time of
such sale. The bank shall be entitled to recover outstanding periodic payments in respect of
the period for which the client has actually used or possessed the asset which shall be payable
to the bank.

d) Istisna Finance
Istisna is a contract of sale of specified item(s) to be manufactured or constructed. It is an
order to a manufacturer to manufacture a specific commodity for the purchaser. It is
necessary for the validity of Istisna that the price is fixed with the consent of the parties and
that the necessary specifications of the required items are fully settled between them. The
Istisna price can either be paid in advance, or in installments or at the time of delivery of
goods.
Manufacturing of specified item(s).Construction of buildings, plants, highways, bridges,
under Build, Operate and Transfer arrangements.Manufacturing of aircrafts, ships, machines,
plant/factory and equipment.
(https://www.bankalhabib.com/business/islamic-banking/islamic-financing.php)