COMSATS UNIVERSITY ISLAMABAD, LAHORE CAMPUS

Assignment # 2

SUBMITTED TO:
Dr. Waheed Akhter
ASSISTANT PROFESSOR
DEPARMENT OF MANAGEMENT SCIENCES

SUBMITTED BY:
Usman Ilyas
CIIT/FA17-BAF-042/LHR

COMSAT
S University Islamabad, Lahore Campus, 1.5 Km Defence Road, Off Raiwand
Road, Lahore, 54000
 Question: List the key differences that exist between Islamic and conventional
banking. Compare and contrast the income statement of a selected sample of
Islamic and conventional bank, highlight the key differences and justify those
using suitable reasons.

Answer:

Differences Between Islamic and Conventional Banking

Conventional banking deals in the money and documents. They did not deal in the goods and do
not bear any risk in respect of subject matter. It is based on the fully man-made principle.
Islamic banking deals in the goods and documents. They did not deal in the money and bear the
risk. The Islamic banks are more concerned with the nature of the business that are permissible
and beneficial. It is based on the principle of divine rules or laws.

CONVENTIONAL BANKING ISLAMIC BANKING

The lease contract has been started when the
banks pay the price of the goods.
The free of cost services has been provided to
their customer which is equivalent to interest.
They take interest on lending or borrowing
money.
A conventional bank accepts deposits from its
client and forwards them on interest to other
clients who require financing.
Interest (Riba) has been taken as a premium
from the debator.
Banks are engaged in bargaining without
knowing any information about the results.
Gambling is not prohibited in conventional
banks like prize bonds.
Conventional insurance is not a Sharia
compliant due to the involvement of Riba and
Maisir.
Ijarah has been paid on the day of delivery of
the goods.
The free of cost services has been given to
their customers whether they are current or
saving accountholder.
They are not money lending institutes they
only worked as trading/investing.
Islamic bank receives deposits on the basis of
Mudarabah and invests these funds in a
Shariah compliant manner. The profit has
been shared according to the profit sharing
ratio that has agreed by the bank and the
depositor.
The Sharia has been prohibited any kind of
interest/Riba.
Islamic banks are not engaged in any type of
bargaining in which results is hidden.
Gambling is prohibited in Islamic banks.
In Islamic banks, insurance is based on the
rules of Sharia.
Income Statement Difference:
I have taken two banks statements for contrasting the difference between them. One bank is
Allied (Islamic) Bank as Islamic and other is Askari Bank as conventional.
The pro-forma of income statements of both the banks is similar having maximum same number
of the categories like interest, income tax, net income etc. Both the banks conventional and
Islamic are different in their operating income, dividend, taxes etc. The major difference is that
the conventional banks depends on the interest or loans taken up from the investors investments
and the Islamic banks depends on the Mudarabah (partnership), Musharakh (PLS arrangement),
earn the fees after giving services like consultancy fee and mostly importantly they are Sharia
compliant. Both are providing almost same activities like borrowing or lending money but their
motive behind them is different. Askari Bank Limited used their markup/interest on investment
and return on investment is based on the accrual basis. All the markups/ investments/
restructured advances are recognized under the regulation of SBP or the places where branches
are not operated recognized as the overseas regulatory authority of the country.
Fee and commission income is recognized at the time of performance of service.
The Askari bank has the right to recognize the dividend income when it receives. Under
unconsolidated profit and loss, all the gain and loss about the sale of investments are recognized.

In Allied Islamic bank, they give the partnership opportunities were one party provides
investment while the other party provides skills for doing a business like a sole proprietorship.
The Musharakh is another philosophy that may take form a permanent equity investment where
the bank’s share is reimbursed over time by the company funds so the profit on Musharakah
funds as adjusted on accrual basis by declaration of the profit of the partners. In Islamic banking
like Allied, the Ijarah income is recognized on accrual basis where the rental income is yet not
paid. All the Murabaha and Salam incomes are paid on deferred basis. The time proportion
method is used where the debt securities are purchased at premium and amortized from income
statement account using effective interest method rate for the markup/interest/ advances/ return
and in investments.
Interest or mark-up recoverable on classified loans, advances and investments is recognized on
receipt basis. Interest /return / mark-up on classified rescheduled / restructured loans and
advances and investments is recognized as permitted
by the regulations of the SBP. Dividend income is recognized when the right to receive the
dividend is established.
Under consolidated income statements, all gains and losses are recognized about the sale on
investment.
Reference:
1. https://www.ubldigital.com/Banking/UBL-Ameen/Knowledge-Center/Differences-
between-Conventional-Bank-and-Islamic-Bank#:~:text=Conventional%20Bank%20treats
%20money%20as,bank%20is%20of%20Creditor%2DDebtor.
2. https://askaribank.com/wp-content/uploads/2020/04/Askari-Bank-Annual-Report-
2019.pdf
3. https://ukdiss.com/litreview/performance-of-islamic-and-conventional-banks-in-
pakistan.php#:~:text=The%20population%20of%20this%20research%20is%20Banks
 %20of%20Pakistan.&text=Meezan%20bank%20Limited%2C%20BankIslami
%20Limited,are%20selected%20as%20conventional%20banks.
4. https://www.abl.com/services/downloads/financial-reports/