Islamic banking; how is it different from conventional banking?

islamic banking & conventional banking

When it comes to banking, many of us get confused as to which type of banking to choose. Some say conventional banking works on interests and rules that do not fully correlate with what is actually allowed in Islam. Many are skeptical about going for Islamic banking. This has left a lot of us perplexed as we do not exactly know how it works.

If you want to get a brief idea of what Islamic banking is without having to read as much then you have come to the right place. In this article, we will discuss the basics of Islamic banking and touch upon aspects that set it apart from conventional banking.

So let’s get started:

What is Islamic banking?

To put it simply, Islamic banking is premised on the principles of shariah. It entails following rules laid down by shariah when it comes to profit or loss. Be it simple transactions or taking out loans, every aspect of the finances ought to be resolved under the light of the Quran. That is where Islamic banking derives its rules from.

All the bankers or employees working in Islamic banks are asked to adhere to the Islamic principles in every transaction or issue they encounter. Many Islamic banks make affiliations or collaborate with religious scholars adept at handling financial aspects in Islam. This makes it easier for them to tackle novel issues or align their banking principles with Islam. In this way, a harmonious system is developed that ensures shariah is followed at every step.

So what does Islam say about profit and loss that is included in Islamic banking?

According to shariah, the profit and loss ought to be shared and usury or interest are strictly prohibited. So, Islamic banking laid out certain principles to get on with banking needs.

The main difference

‘Interest’ is strictly prohibited in Islam and mainstream banking depends a lot on it. When a bank gives businesses loans, it charges a set percentage of interest as well. So, apart from repayment of the loan, the business is also liable to pay an extra amount to the payment. Different banks have set their own standards for interest payment.

Since Islamic banking in Dubai is strictly against usury, it has developed its own system for giving out loans that go by the name of equity participation scheme. The equity participation scheme works on the principle of sharing profits instead of charging interest. For instance, if a startup takes a loan to invest in their business, instead of having to give a set percentage of interest every month or annually the startup is supposed to share its profits with the bank. However, in case of any loss encountered, the startup that took the loan is not liable to anything. So, for these banks, the primary means of earning profit is equity programs.

Further, Islamic banks are very selective when it comes to granting loans as they do not get any benefit out of the situation in which a business suffers a loss. These banks are also very careful in choosing the businesses to invest in as any business involved in something that is prohibited in Islam ought not to be helped. For instance, if the startup is involved in gambling or any such activities, the Islamic bank won’t provide it any financial support.

Islamic banking in conventional banking

Many conventional banks practice Islamic banking for certain operations. You can find widow services offered by other banks as well. These services provided to widows work on Islamic principles. So, it is not Islamic banks that practice Islamic banking.

Many conventional banks also participate in the collection of Zakat. The banks automatically deduct zakat from the accounts that have signed up for it.

Conclusively

All in all, Islamic banking in Dubai encourages healthy transactions. It is against charging interest on loans. It promotes Islamic activities and refrains from investing in businesses that entail things termed ‘haram’ in Islam. The best part about it is its risk-sharing that lets you share the risk with the bank you are taking the loan from i.e., the bank only benefits when the business makes a profit.

Experience it for yourself and enjoy the benefits of risk-sharing provided by Islamic banking.

For more information on Islamic banking in Dubai, feel free to reach out to us!

Islamic banking; how is it different from conventional banking?

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