Islamic Banking vs. Conventional Banking

1580 words 7 pages
Islamic Banking vs. Conventional Banking
In most Islamic countries, they tend to practice two types of financing in banking industry which are conventional and Islamic banking. The country like in Malaysia has successfully developed an Islamic banking system that operates in parallel with the conventional banking system. There is similarity between conventional banking and Islamic banking which helps to promote economic growth provided financing services such as credit facilities for business activity, mortgage, securities, etc. in order to achieve their same ultimate profit objectives. However, there are also having differences in practicing financial services due to most investors having their own preferences on their investments and
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According to the definition concept lending of money in Islamic bank is regulated by Islamic law which based on risk sharing whereas conventional bank is based on risk transfer under regulation of BAFIA act (Timur Kuran, 2005, p.9). This allows investors to choose their type of financing which based on their risk investment. Another approach of explanation about the difference of lending money is that charging of interest on loans for Islamic bank is based on profit and loss sharing whereas conventional bank is charged interest fees on their customers (Yasmeen Naseer, 2011, para.1). It has become a common practice to lend money at high rates of interest around the globe today. In conventional banking, borrower may bear the risk for investment as the risks involved in borrowing are not shared by the bank. Therefore, the borrower still needs to return his loan to the bank with interest whether his business results in failure or success. On the other hand, Islamic bank enjoys a share in the profit of the company or share the loss if the business fails. In other words, the investor of conventional bank is assured of a predetermined rate of interest in which charges on loan with compounding interest and charge on additional money with penalty or compounded interest in case of defaulters (Rajesh Aggarwal & Tarik Yousef, 2000, p. 96). In contrast, Islamic bank promotes risk sharing between investor capital and