Islamic banks, like conventional banks, are profit-making organisations. Their aim is to gain profit. However, they are prohibited to trade in
or toengage in any business activity that is not in compliance with
principles. In contrast, there are no such restrictions on conventional banks.Islamic banking activities are based on the principle of buying and selling of assets. For example, in financing a home loan, the selling price (includingthe bank's profit margin) is fixed from the very beginning.The differences between Islamic banking and conventional banking systemsare listed in the following table:
ISLAMIC AND CONVENTIONAL BANKING
CharacteristicsIslamic Banking SystemConventional BankingSystem (Interest-Based)
Business FrameworkFunctions and operatingmodes are based on
law.Banks have to ensure that allbusiness activities are incompliance with
requirements.Functions and operatingmodes are based onsecular principles and notbased on any religiouslaws or guidelines.
' in Financing
Financing is not interest-oriented and is based on theprinciple of buying and sellingof assets, whereby the sellingprice includes a profit marginand is fixed from thebeginning.Financing is interest-oriented and a fixed/floating interest is chargedfor the use of money.Prohibition of
inDepositsDeposits are not interestoriented but profit and loss-sharing oriented wherebyinvestors share a fixedpercentage of profit when itoccurs.Banks get back only a share ofprofit from the business towhich it is a party and in case ofloss, the investor loses none interms of money but foregoesthe reward for its activitiesduring that period.Deposits are interestoriented and the investoris assured of apredetermined rate ofinterest with a guaranteeof principal repayment.