The journey started with making efforts to establish Shariah objected the conventional banking system in Pakistan and across the Muslim world and insisted to introduce Islamic banking. The concept of Islamic banking was to provide people with Halal banking along with safety from Riba (interest). The basic purpose was to avoid foreign financial services, especially banks and their overall banking system, in almost every single Muslim country. The core vision behind this concept was to establish an Islamic Economic System around the Islamic World.
Following the initial phase, people raised the basic question “Is Islamic banking really according the Islam? This article will try to answer this question by discussing why comparison between conventional and Islamic banking systems is crucial.
There are two major aspects behind this specific question or matter. At first, what is the basic distinction in the banking methodology or the system the lay person can see while dealing with an Islamic bank in comparison to a conventional commercial bank? In the second place, whether interest is totally eliminated from the Islamic banking system, even at the benchmarking level?
The problematic issue emerges when the Islamic banking system is only taken as a simple change of name, not the whole system. So, it is necessary to understand the difference between Islamic banking system and conventional baking systems, which can be possible to make comparison between them.
Conventional Banking System
Conventional commercial banking system, money refers to a commodity along with medium of exchange and store of value. For this very reason, despite of its face value it can be sold at high price as well as it can be rented out. In this system, charging interest on capital is based on time value. Interest is the basic part of this system charged even in such a situation when a business organization experiences losses by using bank’s funds. Hence, profit and loss sharing is not its basis.
There is no concept of exchange of goods & services while disbursing any type of finance including cash finance, running finance or working capital finance, no agreement. Money is used by conventional commercial banks as a commodity which results in inflation.
Islamic Banking System
In Islamic banking system, money does not refer to a commodity though it is employed as a medium of exchange and store of value as in the conventional system. Thus, money, despite of its face value, in Islamic system can’t be sold at a higher price or rented out. Moreover, earning profit is based on profit on trade of goods or charging on facilitating people with service. It suggests that profit and loss sharing is the basis of Islamic banking system and its operational activities. Further, if the businessman or an organization has experienced losses, the bank has the responsibility to share even these losses on the basis of the mode of finance used (Mudarabah, Musharakah).
In Islamic system, it is necessary to make agreements for the exchange of goods & services, while disbursing funds according to the contracts of Murabaha, Salam & Istisna.
Islamic banking system inclines to establish a connection with all the real sectors of the economic system through activities associated with trade. Since, the money is connected to the real assets thus its contribution is direct in the overall development of the economic health.
In-Depth Comparison between Islamic Banking System and Conventional Banking System
If we talk about conventional mortgage, a finance facility, if a person decides to purchase a property he as the customer borrows some financial support (money) and repays it with an extra amount (interest) over a specific time period. The extra amount the customer will pay is called the interest amount which is not according to the Shariah and Islam. On the other hand, if we talk about Islamic mortgage, Islamic bank is responsible for sharing with the customer in purchasing the property. So, both the bank and the customer make ownership and become the property’s joint owners along the lines of their share in purchasing the property. So as to own and use such a property, the share of bank’s property is purchased by the customer over a time period, while paying the rent for using the bank’s property share. With the passage of specific time, the customer manages to buy the total share of bank. The customer acquires the sole property ownership finally.
Moreover, as far as the Islamic mortgage finance is concerned, the rent will be charged once the delivery of the property has been taken by the lessee and it is in workable/usable condition. Keep in mind that rent cannot be charged from the moment the price was paid with the aim of acquiring the property. In case of delay from the end of the supplier regarding the delivery even following receiving the full price, there will not any liability on the lessee for the rent of the delayed period. In the conventional mortgage finance, on the other hand, the lease rentals typically commences from the date the bank pays to purchase the property.
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