company law-present
TRANSCRIPT
Difference between Islamic and Conventional Banking
Group MembersName Roll No
Muhammad Umar Baig (E11MBA078)
Salman Younas (E11MBA097)
Jawad Ahmad (E11MBA109)
Muhammad Ali Yasin (E11MBA122)
Muhammad Sohail (E11MBA139)
contents
Introduction of the project
Importance of trade in Islam
Why Islamic banking
Governing principles of Islamic banking
Difference between Islamic and conventional
banking
Comments on Balance sheet of both system
Holy Quran :
We have created the night as covering and we have created the day for Economic activities
Hazrat Umar Said
“Every system can prevail in this world but not the one which is unjust.”
Introduction
In this project our main focus on the following topics
What is Islamic banking and why we need such system
Difference b/w Islamic banking and conventional banking
Importance of Trade in Islam
Islam has given an immense importance to trade
The nobility of this profession is obvious from the fact that it was the chosen profession of prophet Muhammad (PBUH)
WHY ISLAMIC BANKING
Before explaining the concept “what is Islamic Banking” the elaboration of concept “why Islamic Banking” is very important
Islam is a complete code of life that provides guidance regarding each aspect of life.
WHY ISLAMIC BANKING
The primary objectives of Islamic Economic System are as under.
Equal Distribution of wealth
Social justice
These objectives can never be achieved in Interest/Riba based economic systems.
WHY ISLAMIC BANKING
Now we come to our core question
Islamic banking has been defined as banking in consonance with the ethos and value system of Islam and governed, in addition to the conventional good governance and risk management rules, by the principles laid down by Islamic Sharia’h
Governing principles of Islamic Banking
The prohibition of interest or riba based transactions
Avoidance of speculations (gharar)
Avoidance of oppression (zulm)
Introduction of Islamic tax (zakat)
Financing of Shariah Approved activities and discouraging the production of goods and services which are not allowed in Islam
Definition of Conventional Bank
A financial institution that provides services, such as accepting
deposits, giving business loans and auto loans, mortgage lending, and basic
investment products like savings accounts and certificates of deposit.
The traditional commercial bank is a brick and mortar institution with
tellers, safe deposit boxes, vaults and ATMs. However, some commercial
banks do not have any physical branches and require consumers to complete
all transactions by phone or Internet. In exchange, they generally pay higher
interest rates on investments and deposits, and charge lower fees.
Difference Between Islamic And Conventional Banking
Functions and operations are based on Sharia’h principles In Islamic banking whereas
Functions and operations are based on fully man made principles in conventional banking
Promote risk-sharing between provider of capital (investor) and user of funds (entrepreneurs) in islamic banking whereas
Investor is assured of pre-determined rate of interest in conventional banking
Cont………….
Aim at maximising profit but subject to Sharia'h in islamic banking
Aim at maximising profit without any restrictions in conventional banking
Partners, investor and traders, buyer or seller relationship in islamic banking whereas
Creditor-Debtor relationship in conventional banking
Cont……….. Encourage asset-based financing and based on commodity
trading in islamic banking whereas
Conventional banking Based on money trading. Money is a medium of exchange and not a commodity, its sale and purchase is prohibited in Islam
in islamic banking No right of profit if there is no risk involved. The profit and loss sharing depositor may lose money in case of loss whereas
In conventional banking It is almost risk free banking and depositor has no risk of losing its money because interest is guaranteed
Cont……….
Islamic banks have no provision to charge any extra money from the defaulters except for compensation and is used for charitable purposes whereas
C.Banks can charge additional money (penalty and compounded interest) in case of defaults
In islamic banking Importance is given to the public interest or maslahah. Its ultimate aim is to ensure growth with fairness whereas
In C.banks Banks interest is the main objective. It makes no effort to ensure growth with equity.
DIFFERENCE BETWEEN ISLAMIC AND CONVENTIOANL BANKING
For the Islamic banks, it must be based on a Shariah approved underlying transaction but
Interest-based commercial banks don’t care about the activities being performed with their financing.
Greater emphasis on the viability of the projects in Islamic banks
The conventional banks give greater emphasis on creditworthiness of the clients
DIFFERENCE BETWEEN ISLAMIC AND CONVENTIOANL BANKING
Islamic bank can only guarantee deposits for deposit account, which is based on the principle 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.
A conventional bank has to guarantee all its deposits
Two Basic Sides of Banking Transactions
The Asset side
The liability side
The Asset Side
This side of a bank's transactions refers to the financing
facilities that the banks provide to their clients.
For instance, a conventional bank provides financing to its
clients by giving them interest based loans where as an Islamic
bank provides financing to its client based on profit based
financing such as Murabaha, Ijarah, Salam, etc.
The Liability Side
This side of a bank's transactions refers to the deposit and
investment facilities that the bank provides to its clients.
A conventional bank accepts deposits from its client and forwards
them on interest to other clients who require financing.
The interest that accrues on such a transaction is distributed
amongst the depositors and the bank. On the other hand, an
Islamic bank receives deposits on the basis of Musharakah or
Mudharabah and invests this fund in a Shariah compliant manner .
Other Difference
Deposits
Deposits are collected from savers under both type of institutions for
reward irrespective a bank is operating under conventional system or
Islamic system. The difference lies in agreement of reward. Under
conventional system reward is fixed and predetermined while under
Islamic deposits are accepted through Musharaka and Mudaraba where
reward is variable.
The second phase in savings mobilization process is extension of credit facility to business and industry for return. Both types of institutions (Islamic and Conventional) are providing financing to productive channels for reward.
The difference lies in financing agreement. Conventional banks are offering loan for a fixed reward while IFIs cannot do that because they cannot charge interest. IFIs can charge profit on investments but not interest on loans.
Financing and Investments
Overdrafts/Credit Cards etc.
Conventional banks offer the facility of overdrawing from account of the customer on interest. One of its form is use of credit card whereby limit of overdrawing for customer is set by the bank. Credit card provides dual facility to customer including financing as well as facility of plastic money whereby customer can meet his requirement without carrying cash. As for facility of financing is concerned that is not offered by Islamic banks except in the form of Murabaha (which means IFI shall deliver the desired commodity and not the cash) however facility to shop/meet requirement is provided through debit card whereby a customer can use his card if his account carries credit balance
Short term loans are provided to customer to meet working capital
requirements of firm by conventional banks. Working capital is required
by firms to invest in inventories and accounts receivables and meet the
expenses
Short term loans
Medium to long term loans
Medium to long-term loans are provided for purchase or building of
fixed assets by firms to expand or replace the existing assets. Under
Islamic financial system requirement of firms and individuals are fulfilled
through Murabaha, Bai Muajjal and Istasna. Although financing under
Murabaha, Bai Muajjal and Istasna is very much look like conventional
loans with the only difference of provision of asset and not cash to client
however differences exist in the contracts which alter the nature of risks
and returns
Leasing or Ijarah
Ijarah in the terminology of Shariah is called to hire a specific thing or a
person for a permissible purpose against specific remuneration.
Types of Ijarah1. Ijarah of an Asset
2. Ijarah of a Person
Ijarah of an Asset
To rent out something this is called leasing in English and in
the terminology of Fiqh it is called ijarah of an asset
Ijarah of a Person
To hire ones services for a specific remuneration, it is usually
Referred in English as employment, while in the terminology
of Fiqh it is called as Ijarah of a person or lease :
Types of Ijarah of a Asset
I. Financial lease
II. Operating lease
Agricultural Loans
Agricultural loans include both types of loans short-term as well as
long-term.short term for seeds and fertilizers and long term for
purchase of additional land and equipments. Conventional banks
are providing credit facility by charging interest. Same facility is
provided by IFIs to the farmers under Bai Slam, Bai Murabaha
Musharaka and Mudaraba. Under Bai Salam cash is provided to
farmers for purchase of seeds and fertilizers however this is not
loan rather purchase of finished crops to be delivered by farmers.
ANY QUESTION?