ISLAMIC WEALTH AND ASSET MANAGEMENT

ASSIGNMENT 1:

DIFFERENCES BETWEEN ISLAMIC BANKING AND CONVENTIONAL BANKING

PREPARED BY

AHMAD SAUFE BIN NAWI

2009114839

SUBMITTED TO

ADJUNCT PROFESSOR DATUK VASEEHAH HASSAN ABDUL RAZACK

MASTER IN BUSINESS ADMINISTRATION

UNIVERSITI TEKNOLOGI MARA MALAYSIA

Differences between Islamic Banking and Conventional Banking

IB refers to a system of banking or banking activity that is consistent with the principles

of Islamic law (shariah) and its practical application through the development of Islamic

economics. There are many differences point that differ Islamic Banking with conventional

banking. Firstly, Islamic banking operation is fully based on principles of Islamic Law. Moreover,

Islamic Law derives from al quran and as sunnah. Whereas, the functions and operating modes

of conventional banking are based on fully man - made principles. In Islamic banking and

finance, the system itself promotes risk sharing between provider of capital (investor) and the

user of fund (entrepreneur) via profit sharing contract such as Al Mudharabah contract. The

investor is assured of predetermined rate of interest in the normal conventional banking. The

aim of Islamic banking is to maximize the profit but subject to syariah restriction whereas in

conventional banking, there are no restriction in maximizing the profit. Zakah collection center

being promoted by Islamic banking whereas in the conventional banking system the collection

of zakah is none of their business. In Islamic banking, the usage of interest or riba’ is prohibited

whereas in conventional banking, the usage of interest in the banking operation is permissible.

The conventional banking lend money and getting it back with compounding interest whereas in

Islamic banking, the banker and customer participate in partnership in granting a financing

facility. The commercial banking can charge additional money (penalty and compounded

interest) in a case of defaulters. In Islamic banking, the banker has no provision to charge any

extra money from the defaulters. Only small amount of compensation (ta’widh) and these

proceeds is given to charity. Rebates (ibra’) are given for early settlement at the bank’s

discretion.