Islamic vs. conventional banks: key differences

In-Depth Analysis

The only common aspect between the business models of the two types of banks is the word 'bank.' To prove this, there must be a valid explanation since on the surface both types of banks look precisely the same. Similarities include a matching layout of branches, well-attired and courteous staff, both receive and pay cash and cheques, have ATMs and lockers, provide scores of the same online and offline banking services, entertain funding requests from individuals and businesses, maintain identical organizational setups, have general assembly, board of directors, a CEO and senior management team, and most of them have their shares listed on stock exchanges. A famous scholar, belonging to the lineage of a reputed scholarly family, described the difference in an interesting manner at an Islamic finance conference in Istanbul by showing two photographs of beef burgers — one Halal and one Haram. Since both burgers were indistinguishable, it was impossible for anyone to pinpoint the Halal burger. He said the difference is 'identical yet different.' The first and foremost difference in Islamic banks is that they do not carry out the business of borrowing and lending the money on interest. They accept funds from depositors — similar to what conventional banks do — but not as a borrower. They do this activity as the manager of customers' funds. The contract entered into between the Islamic bank and the customer is termed as Mudarabah (fund management contract), the customer is called Rab Al Maal (the owner of the funds) whereas the Islamic bank is called the Mudarib or manager of the fund. The bank invests these funds in various Shariah compliant investment options such as Murabahah, Musharakah, Mudarabah, Istisna, Ijarah, Salam, Sukuk and such.