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Conventional banking system depend on the interest (doesn't matter borrowing side or placement side) and uncertainty, there is a huge breach between the financial and real sectors of economy in this system.
In social life, relationsjip based on the interest leads to a conflict as there are inequitable distribution of public income and exploitation in conventioanl economy.
Islamic finance and banking in its essence (Maqsad ul Shariah) prohibits the interest in any form as well as uncertainty, leads to development of real sector of economy abd harmonisation of social ties through investing into the production of real assets.
The two entities share many similarities though they differ conceptually. Commercial banks comprise of financial instruments which accept deposits and advance loans on an interest basis. They perform functions as investments, lease plans, mortgages, savings, bonds etc. They have different types of checking accounts with varying levels of interest. Commercial banks rely on evolving principles and focus on the maximisation of profit. Islamic banks perform the same functions as commercial banks but they follow Shari’ah rules. Islamic banking is built upon an interest-free model, and follows the Islamic modes of finance Mudarabah (Speculation), Musharaka (Full Partnership), Ijarah (Lease Financing) amongst others. Islamic banks share profits and losses with its customers and depositors. This sharing gives more strong ground to Islamic Banking.
Main differences are related with:
- prohibiting usury
- avoiding speculation
- avoiding gambling
- investing ethically
