10 - Basic Differences between Islamic and Conventional Banking

Before we understanding the detailed differences between Islamic and conventional banking products and transactions, it is important to know these broad differences:-

# Islamic banking only deals in “halal” products and services. The definition of "halal" has been earlir described in Article 5. Thus, all transactions must be SHARIAH COMPLIANT i.e. must be in accordance with the Islamic Jurisprudence.

# Most Islamic Financing transaction is based on trading and deferred exchange contract, whereas conventional banking loan product is granted on the basis of debtor and creditor relationship. In short, Islamic bank relationship is regarded as “Financier & Customer/Client” rather than “Lender & Borrower”. The only lender and borrower transaction under Islamic banking is when the borrower (i.e. the Bank) grant interest free loan under the principle of "Al-Qard". Under this transation, we expect the borrower to repay the loan at no extra charges. But if it is granted based on "Al-Qardhul Hassan", it is lent based on benevolent basis i.e. if the borrower cannot pay, we should not be expected to demand for repayment.

# The consideration of collateral to be looked upon separately. However, if the transaction is based on "joint-venture" basis, there should not be any collateral;

# In a default or termination situation, the Bank (or financier) normally demand the outstanding sale price. Generally, the sale price is fixed and comprise "principal and profits" predetermined upfront before a contract is signed.

# Compounding calculation i.e. to conventional practise of "interest upon interest" element is strictly prohibited under Islamic banking system.

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