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Comparison Between Islamic

& Conventional Banking

MD. Shafiqul Islam


ID: 51221050

Banking
Bank
An establishment authorized by a government to accept
deposits, pay interest, clear checks, make loans, act as an
intermediary in financial transactions, and provide other
financial services to its customers.
A banker is a person who carries on the business of banking.
The legal definition of the business of banking is
Conducting current accounts for customers
Paying to the customer's order (e.g. the customer's
cheques drawn on the bank), and
Collecting the cheques deposited to the customers's
account, as the customer's agent and crediting the
proceeds to the customer's current account.

Islamic Banking
Islamic banks adhere to the
concepts of islamic law, islamic
banking revolves around many
well established concepts which
are based on islamic canons.
Islamic banking refers to a system
of banking or banking activity
that is consistent with islamic law
(sharia)principles and guided by
islamic economics

Principles of Islamic
banking

Prohibition of riba (interest)


Profit sharing (mudharabah)
Safekeeping ( wadiah)
Joint venture ( musharakha)
Cost plus ( murabahah)
Leasing ( ijarah )

Conventional Banking
Functions and operating modes of
conventional banking are based on fully man
made principles
The investor is assured of a predetermined
rate of interest
It aims at maximizing profit without any
restriction.
Lending money and getting it back with
compounding interest is the fundamental
function of the conventional banks

Role of Bangladesh Bank in Promoting


Islamic Banking in Bangladesh:
Though there is no complete Islamic Banking Act till date for controlling, guiding and
supervising the Islamic banks in Bangladesh, some Islamic banking provisions have
already been incorporated in the amended Banking Companies Act, 1991 (Act No.
14 of 1991). Inspection and supervision of the Islamic banks operation are being
scrutinized by the Bangladesh Bank as per the general guidelines framed for the
conventional banks. In view of the rapid expansion of Islamic banks in Bangladesh,
Bangladesh Bank issued a letter to the Islamic banks to carefully address and
examine the upcoming problems in due time. To help actualize those, Bangladesh
Bank identified the following problems and accordingly advised all Islamic banks on
5th March, 1997 to take appropriate measures on them through mutual discussion
and co-operation:
Development of an Inter-Bank Islamic Money Market.
Constitution of Central Shariah Supervisory Board.
Preparation of draft Islamic Banking Act.
Establishment of Islamic Insurance Company.
Development of New Financial Products in line with Islamic Shariah.
Constitution of Consortium/Syndicate by the Islamic banks for large financing.
In October, 2004, Bangladesh Bank has issued a Mudaraba bond named Government
Islamic Investment Bond on behalf of the government as a first ever Islamic
financial instrument in Bangladesh to facilitate the Islamic banks and financial
institutions to invest their funds (to be calculated as an outlet for maintaining SLR).
Government Islamic Investment Bond has been playing an important role in
developing the Islamic financial instruments in Bangladesh.

Sources of funds
ISLAMIC BANKS

CONVENTIONAL
BANKS

Tier 1 Capital (equity)

Tier 1 Capital (equity)

Tier 2 Capital (?)

Tier 2 Capital (Subordinated


loans)

Current accounts

Current accounts

Saving accounts

Interest-based Saving accounts

Unrestricted Profit Sharing


Investment Accounts (PSIAs)

Time & certificates of deposits

Profit equalization reserves


(PER)

Reserves

Investment risk reserve (IRR)

. Sources of funds
ISLAMIC BANKS

CONVENTIONAL
BANKS

Current accounts

Current accounts

Banks in both cases use shareholders equity to protect these


deposits
Profit sharing investment accounts
(PSIA)
Shareholders equity protects these
liabilities only in case of fiduciary
risks (theory); Profit Equalization
Reserve (PER) & Investment Risk
Reserve (IRR)
Cost of funds: Variable

Time deposits, certificates of


deposits, etc fixed income
liabilities
Shareholders equity and
subordinated loans protect
these liabilities against all risks

Cost of funds: Fixed

Uses of Funds
ISLAMIC BANKS
Cash & balances with other
banks
Sales Receivables
(Murabaha, Salam, Istisnaa)

CONVENTIONAL
BANKS
Cash & balances with other
banks
Loans

Investment securities

Mortgages

Musharaka financing

Financial leases

Mudaraba financing

Investment in real estate

Investment in real estate

Securities

Investment in leased asset


Inventories (including goods
for Murabaha)

Criticism

Differences between
Islamic Banking and
Conventional Banking

Islamic banking

Conventional banking

In modern Islamic banking, it has become


one of the service oriented function of the
Islamic banks to be a zakat collection centre
and they also pay out their zakat

It does not deal with zakat

Islamic banks have no provision to charge


any extra money from the defaulters

It can charge additional money in case of


defaulters

It gives due importance to the public interest,


its ultimate aim is to ensure growth with
equity

Very often it results in the banks own interest


becoming prominent. it makes no effort to
ensure growth with equity

Islamic bank can only guarantee deposits for


deposit account, thus depositors are
guaranteed repayment of their funds

Conventional bank has to guarantee all its


deposits

The status of Islamic bank in relation to its


clients is that of partners, investors and
trader buyer and seller

The status of a conventional bank, in relation


to its clients is that of creditor and debtors

Which One is Better???


Islamic or Conventional
Banking

Thank You All