Islamic & Conventional
Banking
Sara Riaz
06-0016
Banking
• Bank
A bank is a person who carries on the
business of banking. The legal definition of
the business of banking is
• Conducting current accounts for
customers
• Paying to the customer's order (e.g. the
customer's cheques drawn on the bank),
and
• Collecting the cheques deposited to the
customers's account, as the customer's
agent and crediting the proceeds to the
customer's current account.
Islamic Banking
Islamic banks adhere to the
concepts of islamic law,islamic
banking revolves around many
well established concepts which
are based on islamic
canons.islamic banking refers to a
system of banking or banking
activity that is consistent with
islamic law (sharia)principles and
guided by islamic economics
Principles of Islamic banking
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Prohibition of riba (interest)
Profit sharing (mudharabah)
Safekeeping ( wadiah)
Joint venture ( musharakha)
Cost plus ( murabahab)
Leasing ( ijarah )
Conventional Banking
• Functions and operating modes of
conventional banking are based on fully man
made principles
• The investor is assured of a predetermined
rate of interest
• It aims at maximizing profit without any
restriction.
• Lending money and getting it back with
compounding interest is the fundamental
function of the conventional banks
State Bank of Pakistan & Its
Role In Islamic Banking
• In order to promote Islamic Banking in
Pakistan, State Bank is following a three
pronged
strategy as under:
I) Establishment of full-fledged Islamic
bank(s) in the private sector;
II) Setting up of subsidiaries for Islamic
Banking by existing commercial banks;
and
III) Allowing Stand-alone branches for
Islamic banking in the existing
commercial banks.
Criticism
Differences between Islamic bank
and conventional
Conventional banking
Islamic banking
It does not deal with zakat
In modern Islamic banking, it has become
one of the service oriented function of the
Islamic banks to be a zakat collection centre
and they also pay out their zakat
It can charge additional money in case of
defaulters
Islamic banks have no provision to charge
any extra money from the defaulters
Very often it results in the banks own interest
becoming prominent. it makes no effort to
ensure growth with equity
It gives due importance to the public interest,
its ultimate aim is to ensure growth with
equity
Conventional bank has to guarantee all its
deposits
Islamic bank can only guarantee deposits for
deposit account, thus depositors are
guaranteed repayment of their funds
The status of a conventional bank, in relation
to its clients is that of creditor and debtors
The status of Islamic bank in relation to its
clients is that of partners, investors and
trader buyer and seller
Which One is Better??
Islamic or Conventional Banking