Compare and contrast the

features of Islamic banks

with their conventional
counterparts
EBB 20403
Timur Rustemov
Relationship
Conventional banking: debtor-creditor relationship
between depositor and bank and then the borrower and
bank on the other hand. Interest considered being price of
credit opportunity cost of money.

Islamic banks: loan has to be given or taken free of charge.
With that being said the creditor cannot take advantage of
the borrower; when money is lent out on the basis of
interest, more often that it leads to some kind of injustice.
The first Islamic principle underlying for such kind of
transactions is deal not unjustly, and ye shall not be dealt
with unjustly [2:279] which explain why commercial
banking in an Islamic framework is not based on the
debtor-creditor relationship.
Deposits
Irrespective of whether the bank is functioning under the conventional system or
Islamic system deposits are collected from depositors for rewards purposes.
The difference comes in terms of the agreement of reward.
Conventional system:
Reward is fixed and pre-determined.
Higher return on long-term deposits, and lower on short-term deposits
Risk borne by bank and reward to depositor at fixed rate

Islamic Banks:
Deposits accepted through Musharakah and Mudarabah where the reward is
variable.
Same as conventional - Higher weight for profit sharing on long-term deposits,
and lower on short-term deposits
Share profits with depositors
Both risk and rewards shared by depositor
Three (3) common Shariah principles used in structuring deposit products are:
Mudarabah, Wakalah, and Wadiah
Financing/loans
Conventional Banking system:
Offer loan for a fixed reward
3 types of loans:
Short term loans, overdrafts and long-term loans
Short & medium term loans are provided to customer to meet working capital
requirements
Working capital required to invest in inventors and account receivables to meet
expenses
Islamic Banks:
Cannot charge interest but can charge profit on investments but not interest on
loans
Can only issue interest free loans (Qard al Hassan)
Inventory investment provided by Islamic banks through Murabaha
Profit of a certain period is shared by IFIs
Must prove viability of the project/business
No personal consumption loans issued
Murabaha financing is very useful for short to medium term financial requirements
of business/nonprofit organizations and individuals
Leasing provided under agreement of Ijarah
Recently IFIs have created an avenue to meet their liquidity requirement in the
form of Sukuk (Islamic Bonds) whereby servicing is fixed like conventional bonds
however such types of Sukuk can be issued against Ijarah receivables.
Contracts:
Conventional system: not based off of contract system.
Islamic banking system: Must be within the framework of Shariah. A
contract only exists once both trading parties have agreed on terms
including: asset, price and delivery. A contract is a legally binding
agreement or a set of promises between two or more parties either
written or oral.
Under the common law, the final elements must be met in order for a
contract to be valid:
Intention/Consideration
Certainty of terms no ambiguity
Capacity mature and sane parties
Informed consent voluntary
Legal/Permissible
Parties must have ownership of asset that is being sold
Parties must be able to deliver
Dual Banking System
Dual Banking System
Existence of dual laws in parallel for the
Islamic as well as conventional financial
institutions.
Both banking systems are equally
comprehensive and viable.
Malaysia is the best Example

Advantages
The Muslims in the countries which have only a conventional
system do not have the opportunity to benefit from the
facilities of a modern banking system without being involved in
Riba.
In the case of the conventional plus system (conventional
system with a few Islamic banking institutions operating on the
fringe of the banking system ex. Saudi Arabia, Bangladesh, and
Bahrain): the services they offer are not as comprehensive and
as sophisticated as the conventional system.
The small scale nature of the operations of the Islamic banking
institutions in these countries also make their services less
efficient and more costly compared to the conventional
institutions.
Islamic banks cannot afford to be complacent, since they
operate in a competitive and dynamic environment.
The level of sophistication in the Islamic banking system will
continuously be upgraded.
Disadvantages
Islamic Banking in dual-banking system is subjected
to the same supervision and regulatory regimes of a
Central bank than for the conventional one.
As IFI have to face competition coming from
conventional banks, Islamic bank will have no
choice to copy conventional financial products.
Conventional banks tend to be leaders
Benchmarks have to be similar
Customer remains confused
Difficult to compete with big conventional banks
Displacement risk to Islamic Banks
Efforts and initiatives
Deployment of human and financial resources to
develop Islamic financial instruments.
Development of secondary market
Strategic alliances have been made between
International Financial Exchange and the Bahrain
SE: cross-border and trading of Islamic financial
products
Development of the Islamic Capital Market: ex in
Malaysia, Introduction in 2005 of the Citigroup
Malaysian Government Securities Index and the
DJ RHB Islamic Malaysia Index
Al Qard Al Hassan
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What is Qard al hassan
Qard Al Hassan is a loan which is returned
at the end of the agreed period without
any interest or share in the profit or loss
of the business. Therefore, qard al-hasan
is a kind of gratuitous loan given to the
needy people for a fixed period without
requiring the payment of interest or
profit. The receiver of qard al-hasan is
only required to repay the original
amount of the loan.
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Promoting brotherhood
Islam emphasizes to make brotherhood
among the Muslims. The main principle
of brotherhood is to care and share each
other. Qard al-hasan being a gratuitous
loan can help the fellow Muslim brothers
who need money but they do not have.
Thus, qard al-hasan enhances
brotherhood among the Muslims.
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Objectives
To help the needy fellow people.
To establish better relationship among poor and
the rich.
The mobilization of wealth among all people in
the society.
To perform a good deed that is encouraged and
appreciated by the Almighty Allah and His
messenger.
To strengthen the national economy.
To facilitate the poor to create new jobs market
and business ventures by using their merits, skills
and expertise.
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Objectives (Contd.)
To establish a caring society.
To eradicate unemployment problem from
the society.
It can be also a missionary work for daw'ah
activities by giving qard al-hasan to the non-
Muslims, who might be attracted by
knowing the beauty of Islam.
It can remove social and economical
discrimination from the society, and
Finally, obviously there is a great reward in
the Hereafter for giving qard al-hasan.

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Banks & Qard al hassan
Despite the benefit of the Qard AlHassan on
the community, Qard AlHassan is not
practice widely in Islamic banks today.
Banks aim to maximize their profit and
providing Qard AlHassan is incompatible
with the banks aim. Qard Al Hassan is zero
profit loan which means that the bank will
not benefit from the transaction. Moreover,
banks dont want to bear the risk from
providing Qard because banks act as a
trustee of the depositors' money.

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Implementation
Qard AlHassan can be implemented through
Cash Waqaf. In Cash Waqaf, providers of the
money will not be depositors but founders
where they provide money for no reward.
The Waqaf fund and practice should be
monitored and audit to insure avoiding any
Haram elements.

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