Different between Islamic Banking and non-Islamic banking

By : Yusuf (Seer)

Banking is a fundamental part of our everyday lives, and it plays an essential role in the economy. There are two main banking systems: Islamic banking and non-Islamic banking. Islamic banking is based on the principles of Sharia law and is designed to cater to the needs of Muslims. On the other hand, non-Islamic banking, also known as conventional banking, is primarily based on interest-based transactions. While both systems share similarities, there are fundamental differences between them. In this article, we will explore the differences between Islamic and non-Islamic banking, including their principles and practices, products and services offered, contractual and legal frameworks, risk management, social responsibility and ethical values, growth, and future prospects.

Introduction to Islamic and Non-Islamic Banking

There are two types of banking systems that exist in the world today - Islamic banking and non-Islamic banking. While non-Islamic banking is the traditional banking system that we are all familiar with, Islamic banking follows a unique set of principles and practices that are rooted in Shariah law. In this article, we will explore the differences between Islamic banking and non-Islamic banking.

What is Islamic Banking?

Islamic banking is a banking system that operates in accordance with the principles of Shariah law, the moral and ethical code of conduct that governs the Islamic way of life. Shariah law prohibits the payment or receipt of interest, and instead, encourages profit and loss sharing. Islamic banking also emphasizes social justice, ethical investment, and economic empowerment for all individuals, regardless of their socioeconomic status.

What is Non-Islamic Banking?

Non-Islamic banking is the traditional banking system that we are all familiar with. It operates on the basis of interest-based transactions and does not follow any particular religious or ethical code. Non-Islamic banking offers a variety of products and services to its customers, including savings accounts, loans, and credit cards.

Principles and Practices of Islamic Banking

Shariah Law and Banking

One of the key principles of Islamic banking is to operate in accordance with Shariah law. This means that all financial transactions must adhere to the moral and ethical code of conduct that governs the Islamic way of life. Shariah law emphasizes fairness, justice, and transparency in all financial dealings.

Riba and Interest

Riba, or interest, is prohibited in Islamic banking. Instead, Islamic banks use a profit and loss sharing model, where the profits and losses of the bank are shared between the bank and the depositor. This ensures that both parties share the risks and rewards of the investment.

Profit and Loss Sharing

In Islamic banking, profit and loss sharing is a fundamental principle. This means that the depositor shares in the profits and losses of the bank. The bank invests the depositor's money in halal, or permissible, businesses and shares the profits from those investments with the depositor. However, if the investments incur losses, the depositor also shares in those losses.

Differences in Products and Services Offered

Types of Accounts

Islamic banking offers a variety of accounts that are designed to cater to the unique needs of their customers. These include savings accounts, investment accounts, and current accounts. Non-Islamic banking also offers similar types of accounts, but the terms and conditions may differ.

Loans and Financing

Islamic banking offers loans and financing options to their customers that adhere to the principles of Shariah law. These include profit and loss sharing models, where the bank and the borrower share in the risks and rewards of the investment. Non-Islamic banking offers traditional loans that are based on interest rates.

Investment Options

Islamic banking offers investment options that are halal, or permissible, according to Shariah law. These include investments in real estate, agriculture, and other businesses that are deemed ethical and socially responsible. Non-Islamic banking offers a variety of investment options, but they may not adhere to any particular ethical or religious code.

Contractual and Legal Frameworks of Islamic and Non-Islamic Banking

Contracts and Agreements in Islamic Banking

All contracts and agreements in Islamic banking must adhere to the principles of Shariah law. This means that all financial transactions must be fair, just, and transparent. Contracts are studied and reviewed by Shariah scholars to ensure that they meet these criteria.

Contracts and Agreements in Non-Islamic Banking

Contracts and agreements in non-Islamic banking are subject to the legal and regulatory frameworks of the country in which they operate. These contracts may include interest-based transactions, which are prohibited in Islamic banking. Non-Islamic banking also follows a different set of legal and ethical guidelines than Islamic banking.

Risk Management and Regulations of Islamic and Non-Islamic Banking

Risk Management in Islamic Banking

The principles of risk management in Islamic banking are based on the Shariah laws. Islamic banks follow certain principles such as profit-sharing, risk-sharing, and asset-based financing to ensure that risks are distributed among different parties. In Islamic banking, the bank and the customer share the risks and rewards of investments which makes the banking system more stable.

Risk Management in Non-Islamic Banking

Non-Islamic banks use conventional banking practices to manage risks. They mainly rely on credit scoring models to assess the creditworthiness of customers. They also use financial derivatives such as futures, options, and swaps to manage risks.

Regulations in Islamic and Non-Islamic Banking

Both Islamic and non-Islamic banks follow the regulations set by the central banking authorities in their respective countries. Islamic banks, however, also follow the regulations set by Shariah supervisory boards which ensure that their banking practices are in line with Islamic principles.

Social Responsibility and Ethical Values of Islamic Banking

Corporate Social Responsibility in Islamic Banking

Corporate social responsibility (CSR) is a key component of Islamic banking. Islamic banks are required to invest in projects that benefit society and avoid financing activities that could harm the environment or society. This makes Islamic banking a more socially responsible banking system.

Ethical Values in Islamic Banking

Islamic banking is based on Islamic principles which promote ethical values such as honesty, transparency, and fairness. To ensure that banking practices are in line with these values, Islamic banks follow Shariah laws and guidelines.

Growth and Future Prospects of Islamic Banking

Global Spread and Growth of Islamic Banking

Islamic banking has grown significantly in the past few decades. It is estimated that there are over 300 Islamic banks in more than 60 countries. The global Islamic finance industry is estimated to be worth over $2 trillion and is expected to continue to grow in the coming years.

Challenges and Opportunities for Islamic Banking

One of the major challenges for Islamic banking is to increase awareness about its principles and practices. Islamic banks also face competition from non-Islamic banks which have a larger client base. However, the growing interest in Islamic banking and finance presents opportunities for Islamic banks to expand their reach and diversify their product offerings.

Conclusion: Which Banking System is Right for You?

Choosing between Islamic and non-Islamic banking depends on personal beliefs and values. If you prioritize social responsibility and ethical values, Islamic banking may be a better option for you. On the other hand, if you prefer a more conventional banking system, non-Islamic banking may be a better choice. Ultimately, it's important to research and weigh the options before making a decision. In conclusion, both Islamic and non-Islamic banking systems cater to different needs and share unique features. It is important to understand the differences between them to make informed decisions regarding financial matters. When it comes to choosing a banking system, it ultimately depends on an individual's beliefs, values, and financial goals. However, regardless of the system we choose, it is crucial to uphold ethical values and social responsibilities while conducting financial transactions.