Islamic Banking is a way of banking which conforms to the rules and principles of Shariah.
By saying this, it means that Islamic Banking avoids the express prohibition as applicable under the main sources of Islam, which is the Quran and Hadith.
What is the main difference between the conventional banking and Islamic banking?
Conventional banking uses the element of interest as its underlying business model, whereas Islamic banking avoids the prohibition of interest entirely.
Why is interest forbidden under Shariah?
It’s because of various reasons, however, I’ll summarize this into 2 main categories, or 2 main reasons.
First, interest causes injustice.
It seeks to take advantage over the financial difficulty of the borrower, and therefore causes hardship and oppression to the borrower.
Secondly, interest does not involve in the real economy.
The lender is able to get profit, out of his lending business activity by only having enough funds to lend it to the borrower, and then expect the repayment of that principal lent amount at a certain percentage, which is considered an interest and therefore prohibited under Shariah.
Islamic Banking meanwhile does not involve in the interest business model at all, but promotes the active participation between the parties, the bank and the customer, and involve both parties, in the business transaction itself.
So let’s say, you as a customer, you wish to purchase a car, but you don’t have sufficient money, so you go to the bank, the bank will offer you an Islamic product, whereby the bank will purchase the car first, and then the bank will sell it to you at a profit price, so there is a principal and profit, and the principal and profit is obtained by way of the selling and buying of the asset which is a trade business activity which has been done many many times, in the past, during the Islamic, during the prophet time, during the Khalifa Al-Rasyidun time, and is something which is promoted highly under Islam.
Therefore, this is the main difference between conventional banking and Islamic banking.
On the one hand, the business model of conventional banking is making money out of money, from the lending and borrowing relationship and business activity.
On the other hand, Islamic banking, obtains profit, by the active participation, of the bank and the customer, in the business transaction itself, and does not merely rely on credit ability of the lender in granting the loan amount to the customer.
And most important, Islamic banking business model avoids the prohibition of interest as mentioned in the Quran and as well as in the Sunnah.
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