Comparison between Conventional Bank and Islamic Bank Conventional bank 1.

The functions and operating modes of conventional banks are based on fully manmade principles. 2. The investor is assured of a predetermined rate of interest. 3. It aims at maximizing profit without any restriction. Islamic bank 1. The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah. 2. In contrast, it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur). 3. It also aims at maximizing profit but subject to Shariah restrictions. 4. In the modern Islamic banking system, it has 4. It does not deal with Zakat. become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat. 5. Lending money and getting it back with compounding interest is the fundamental function of the conventional banks. 5. Participation in partnership business is the fundamental function of the Islamic banks. So we have to understand our customer's business very well. 6. The Islamic banks have no provision to charge 6. It can charge additional money (penalty and compounded interest) in case of defaulters. any extra money from the defaulters. Only small amount of compensation and these proceeds is given to charity. Rebates are give for early settlement at the Bank's discretion. 7. Very often it results in the bank's own interest becoming prominent. It makes no effort to ensure growth with equity. 8. For interest-based commercial banks, borrowing from the money market is relatively easier. 7. It gives due importance to the public interest. Its ultimate aim is to ensure growth with equity.

8. For the Islamic banks, it must be based on a Shariah approved underlying transaction.

9. Since income from the advances is fixed, it gives little importance to developing expertise in project appraisal and evaluations.

9. Since it shares profit and loss, the Islamic banks pay greater attention to developing project appraisal and evaluations.

10. The conventional banks give greater emphasis 10. The Islamic banks, on the other hand, give on credit-worthiness of the clients. greater emphasis on the viability of the projects. 11. The status of Islamic bank in relation to its clients is that of partners, investors and trader, buyer and seller. 12. Islamic bank can only guarantee deposits for deposit account, which is based on the principle 12. A conventional bank has to guarantee all its deposits. of al-wadiah, thus the depositors are guaranteed repayment of their funds, however if the account is based on the mudarabah concept, client have to share in a loss position.

11. The status of a conventional bank, in relation to its clients, is that of creditor and debtors.

The Difference Between the Principles of Takaful and Conventional Insurance.

y The operations of Takaful must be in line with the Shariah principles. A Takaful operation may be held voids if any aspects of its operation is proven to be contrary to the Shariah principles. y The operation of Takaful is generally based on the governing principles of al-Mudharaba, profits and loss sharing financing technique, which is an alternative to the interest (riba), based financing technique as adopted by the conventional insurance practices. y The operation of Takaful practices is generally supervised by an independent body called the Shariah Supervisory Council. It is the duty of the council to advise the Takaful operator(s) in any given organization on their operations for the purpose of ensuring that no aspect of the company(s) operations involves any element which is not approved by the Shariah principles.

Comparison between Takaful and Conventional Insurance Insurance Contract An exchange contract (sale and purchase) between insurer and insured. - Element of riba Responsibility of policyholders/ Participants Policyholders pay premium to the insurer Takaful A combination of tabarru' contract (donation) and agency or profit sharing contract - al-mudharabah a) Participants make contributions to the scheme; b) Participants mutually guarantee each other under the scheme Liability of the insurer/operator Insurer is liable to pay insurance benefits as promised from it assets (insurance funds and shareholders' fund) a) Takaful operator acts as the administrator of the scheme and pays the takaful benefits from the takaful funds b) In the event of deficiency in the takaful funds, takaful operator will provide interest-free loan to rectify the deficiency Investment of fund There is no restriction apart from those imposed for prudential reasons. Assets of the takaful funds are invested in shariah compliant instruments. Insurable interest Absolute beneficiary over the policy Trustee. distribute the benefits according to wasiyah and mirath Modus operandi of insured premium account Investment only Investment and donation account

Insured alive upon maturity

Right to claim on:a) policy b) c) d) Interest Dividend Bonus Whole amount agreed in the

Right to claim on:a) b) c) d) Paid premiums Profit sharings Dividend Bonus

Insured dies before maturity

Right to claim on:The whole amount agreed in the policy

Nominees right to claim on:a) b) c) d) e) Paid premiums Profit sharings Bonus Dividend Donation