Differences between Conventional Bank and Islamic Bank

Current Accounts

  • Conventional Islamic
  • No specific underlying mode is used in Current Account. Ameen Current Account is based on Qard contract where the Bank is liable to pay depositor’s money back on demand.
  • The Bank can use these funds for investment and other purposes regardless Shariah prohibition. The Bank can use these funds for investment and other purposes. It allows satisfaction of having the money safely deposited with a bank with the additional assurance that the Bank is not investing it in activities that contravene Shariah principles.
  • Free of cost services are offered to customer which tantamount to interest. Free of cost services are offered to all customers across board means all free services are offered to current as well as saving accountholders.

Saving Accounts

  • Conventional Islamic
  • No specific underlying mode is used in Saving Account Islamic Saving Account is an “investment for profit” account governed under the rules of Mudarabah with a vision to provide return on the investment.
  • The Bank can use these funds for investment and other purposes regardless Shariah prohibition The funds deposited will be invested in an investment pool; investment/deposit/transfer-in of funds
    will be deemed purchase of investment share in the respective investment pool and withdrawal / encashment / premature encashment of funds are deemed to be sale of investment share in the said investment pool.
  • Debtor-Creditor Mudarib-RabulMaal/Partners
  • Interest Profit

Leasing / Ijarah

  • Conventional Islamic
  • Lease commences the very day on which the price is paid by the Bank, whether the Customer has taken the delivery or not. Rentals start after the delivery of asset, not from the day the price has been paid by Bank.
  • Expenses incurred in the process of purchase of asset are paid by the Customer. Bank is the owner of the asset therefore it is liable to pay all expenses incurred in the process of its purchase
  • Lease does not differentiate between wear & tear or losses caused by the negligence of Customer and Customer is liable for cost incurred due to natural disasters The Customer is responsible only for misuse and negligence, but not for events beyond control. In Auto Ijarah, each situation is treated separately
  • Penalty charges are taken from Customer on late payment. They are taken as income by the Bank If the Customer fails to pay rental on due date, a certain amount will be taken from the Customer and given to charity by Bank.
  • In a lease agreement it has been noticed that unrestricted power has been given to Bank to terminate the lease unilaterally whenever it wishes If the Customer breaks any term of the agreement, Bank has a right to terminate Auto Ijarah unilaterally. However, if there is no contravention at Customer’s end Auto Ijarah cannot be terminated without mutual consent

Lending / Financing

  • Conventional Islamic
  • Conventional banks are in the business of lending & borrowing money based on interest. Islamic Banks are not money lending institutes but they work as a trading/ investment house.
  • In Conventional banks, we see no such restrictions. Interest is the back-bone of this system and short selling, sale of debts and speculative transactions are common. Islamic Banks work under the socio-religious guidelines that prohibit charging and paying interest and avoid all impermissible transactions like gambling, speculation, short selling & Sale of debts & receivables.
  • In Conventional Banks, all types of industries are financed, only businesses deemed illegal by the law of the land are not supported. Islamic Banks do not permit financing to industries that cause harm to the society such as alcohol, tobacco etc
  • Generally Conventional Banks do not involve themselves in trade and business as they act only as money lenders. Islamic Bank business model is based on trade, thus it needs to actively participate in trade and production process and activities.
  • In Conventional Bank, no such framework is present. Islamic Banks have strong Shariah governing framework in terms of Shariah Advisor and/or Shariah Supervisory Board, which approves the transactions and product in the light of the Shariah rulings.
  • In Conventional Banks almost all the financing and deposit side products are loan based. Islamic Bank recognize loan as non-commercial and exclude it from the domain of commercial transactions. Any loan given by IB must be interest free.
  • Conventional Bank treats money as a commodity and lend it against interest as its compensation. Islamic banking products are usually asset backed and involves trading of assets, renting of asset and participation on profit & loss basis.
  • Relation of customer & bank is of Creditor-Debtor. Relationship of customer & bank is of Seller- Buyer
  • Compensation is always Interest Compensation is always Price (Thaman)