Comparison Between Islamic & Conventional BankingMD. Shafiqul IslamID: 51221050

BankingBankAn establishment authorized by a government to accept deposits, pay interest, clear checks, make loans, act as an intermediary in financial transactions, and provide other financial services to its customers.A banker is a person who carries on the business of banking. The legal definition of the business of banking isConducting current accounts for customers Paying to the customer's order (e.g. the customer's cheques drawn on the bank), and Collecting the cheques deposited to the customers's account, as the customer's agent and crediting the proceeds to the customer's current account.

Islamic Banking

Islamic banks adhere to the concepts of islamic law, islamic banking revolves around many well established concepts which are based on islamic canons. Islamic banking refers to a system of banking or banking activity that is consistent with islamic law (sharia)principles and guided by islamic economics

Principles of Islamic bankingProhibition of riba (interest)Profit sharing (mudharabah)Safekeeping ( wadiah)Joint venture ( musharakha)Cost plus ( murabahah) Leasing ( ijarah )

Conventional BankingFunctions and operating modes of conventional banking are based on fully man made principlesThe investor is assured of a predetermined rate of interest It aims at maximizing profit without any restriction. Lending money and getting it back with compounding interest is the fundamental function of the conventional banks

Role of Bangladesh Bank in Promoting Islamic Banking in Bangladesh:Though there is no complete Islamic Banking Act till date for controlling, guiding and supervising the Islamic banks in Bangladesh, some Islamic banking provisions have already been incorporated in the amended Banking Companies Act, 1991 (Act No. 14 of 1991). Inspection and supervision of the Islamic banks operation are being scrutinized by the Bangladesh Bank as per the general guidelines framed for the conventional banks. In view of the rapid expansion of Islamic banks in Bangladesh, Bangladesh Bank issued a letter to the Islamic banks to carefully address and examine the upcoming problems in due time. To help actualize those, Bangladesh Bank identified the following problems and accordingly advised all Islamic banks on 5th March, 1997 to take appropriate measures on them through mutual discussion and co-operation:Development of an Inter-Bank Islamic Money Market.Constitution of Central Shariah Supervisory Board.Preparation of draft Islamic Banking Act.Establishment of Islamic Insurance Company.Development of New Financial Products in line with Islamic Shariah.Constitution of Consortium/Syndicate by the Islamic banks for large financing.In October, 2004, Bangladesh Bank has issued a Mudaraba bond named Government Islamic Investment Bond on behalf of the government as a first ever Islamic financial instrument in Bangladesh to facilitate the Islamic banks and financial institutions to invest their funds (to be calculated as an outlet for maintaining SLR). Government Islamic Investment Bond has been playing an important role in developing the Islamic financial instruments in Bangladesh.

Sources of funds

ISLAMIC BANKSCONVENTIONAL BANKSTier 1 Capital (equity)Tier 1 Capital (equity)Tier 2 Capital (?)Tier 2 Capital (Subordinated loans)Current accountsCurrent accountsSaving accountsInterest-based Saving accountsUnrestricted Profit Sharing Investment Accounts (PSIAs)Time & certificates of depositsProfit equalization reserves (PER)Reserves Investment risk reserve (IRR)

. Sources of funds

ISLAMIC BANKSCONVENTIONAL BANKSCurrent accountsCurrent accountsBanks in both cases use shareholders equity to protect these depositsProfit sharing investment accounts (PSIA)Time deposits, certificates of deposits, etc fixed income liabilitiesShareholders equity protects these liabilities only in case of fiduciary risks (theory); Profit Equalization Reserve (PER) & Investment Risk Reserve (IRR)Shareholders equity and subordinated loans protect these liabilities against all risksCost of funds: VariableCost of funds: Fixed

Uses of Funds

ISLAMIC BANKSCash & balances with other banksSales Receivables (Murabaha, Salam, Istisnaa)Investment securitiesMusharaka financingMudaraba financingInvestment in real estateInvestment in leased assetInventories (including goods for Murabaha)

CONVENTIONAL BANKSCash & balances with other banksLoansMortgagesFinancial leasesInvestment in real estateSecurities

Criticism

Differences between Islamic Banking and Conventional Banking

In modern Islamic banking, it has become one of the service oriented function of the Islamic banks to be a zakat collection centre and they also pay out their zakat It does not deal with zakat Islamic banks have no provision to charge any extra money from the defaulters It can charge additional money in case of defaulters

It gives due importance to the public interest, its ultimate aim is to ensure growth with equityVery often it results in the banks own interest becoming prominent. it makes no effort to ensure growth with equity

Islamic bank can only guarantee deposits for deposit account, thus depositors are guaranteed repayment of their fundsConventional bank has to guarantee all its deposits The status of Islamic bank in relation to its clients is that of partners, investors and trader buyer and sellerThe status of a conventional bank, in relation to its clients is that of creditor and debtors

Islamic bankingConventional banking

Which One is Better??? Islamic or Conventional Banking

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