Is there really a difference between conventional and Islamic banks?
For a specific definition “Conventional Bank treats money as a commodity and lend it against interest as its compensation. Islamic banking products are usually asset backed and involves trading of assets, renting of asset and participation on profit & loss basis”
Unlike conventional banking, which charges interest on loans, Islamic banks are structured to encourage financial transactions with a principal focus on charity and community development.
I’m addition Islamic banking is often referred to as “ethical” or “people-friendly” banking. As well as being more ethical, Islamic banking is also more environmentally friendly than conventional banking because it encourages people to make smaller loans rather than take out large ones.
I would imagine the main differentiator would be whether there’s Riba involved or not. Islamic banking doesn’t allow for Riba whilst conventional banking is pretty much predicated on it
This would, I imagine, mean that Islamic banking wouldn’t facilitate any services or products that are interest based. E.g. savings accounts based on interest, interest based mortgages etc.
And I think that reflects there technique/method of making money.
With the profit sharing method, it’s ensured that incentives are aligned so as to protect society as a whole
I’d also assume that the investments Islamic banks make are less risky as compared to conventional banks
May I ask why you feel this way? Trying to understand the underlying reason as there isn’t persay anything wrong with a riskier investment
I would say the investment techniques, the interest, the change in wording, the added “Islamic” words, and generally a more ethical way of making money. Friendly for the environment and friendly for everyone. However, they don’t make as much money as a conventional banks because of the whole interest-based transaction, however, having said that, they charge a lot more to close the gap of how much other banks make generally.
Agreed, they invest in way less volatile products that have massive shifts (I think) in their value, like Gold. They also, charge a lot more than average banks when you buy a house with them.
How much is this true? Are there any stats or anything that shows how much they protect or benefit society? I believe in it but would love to read it and educate myself in it.
I was just going to say this. The main difference between the two is riba. Islamic banking does not involve riba hence “Islamic” banking
Although, not all banks are as shariah compliant as they claim. I think as Muslims it’s our responsibility to look into the disclaimers, small prints and do further research before investing into them. One well known company (still around) for example states to be shariah compliant but they’re driven by interest rates. So it’s important to do your research before taking out a “halal” mortgage with anyone.
Which then takes me onto my next point… all of these “Islamic” banks have actually been haram because they all deal with interest in the background. They take peoples money and give it out to others as loans “halal mortgages”. Think thats why Wahed is a big deal and people don’t realise
The thing is Islamic banks are attached to conventional banks at the back end so if those banks store your wealth in currency you’re still part of a riba based system.
So to this end, you might as well have a conventional account and turn off the interest.
The core fundamental difference would be that true Islamic banks would be asset-based and work on a shared profit-risk format.
I agree. I was going to say this. Might aswell stay put with conventional banks
It’s sad to say, but the Islamic banks of the past were a scam.