Islamic Vs. Conventional Financial Institutions

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IslamicVs. Conventional Financial Institutions

Afinancial institution is an organization that conducts financialdealings such as investments, loans and deposits. These institutionsinclude: commercial banks, investment banks, insurance companies andbrokerage among others.

Islamicfinancing system is founded on the framework specified by the Sharia.Islamic commercial banks prescribe to the doctrines of sharia lawwhich emanate from the Quran and Sunnah. Sunnah is the justification,elaboration and clarification by Prophet Mohammed. The main featuresof Islamic financial system are(Haron, Shanmugam&amp Alam 2007).

Prohibitionof Interest

Shariacompliant financial institutions forbid the imbursement or receipt ofRiba or Usury which factually denotes an excess. It is construed asan unwarrantable increase of money whether in loans or in sales. Ribais defined as irrespective of the performance of any venture a fixedpositive rate of profit functional to the maturity of any amount.(Ayūb, 2009).

Conventionalbanks charge interest incomes on their services which includeinterest on loans, bid bonds, withdrawal charges, service chargesamong others. This interest is the major source of income to mostconventional commercial banks

Profitand Loss Sharing

Islamicfinancing system bars getting income by charging interest but allowsincome generation through the distribution of perils and rewards(mudharabah) amongst parties to the business deal. This incomesharing mechanism inspires people to be associates and work togetherrather than to enter accreditor-debtor relationship.

Conventionalbanking is founded within a framework that allows investors andstakeholders derive income from various financial services renderedin the banking sector through interest income and service charges.This constitutes the profitability of bank which is a private limitedcompany and not a partnership model(Al-Qahtani &amp O`Leary 2003)

Banof Speculative Behavior

Islamicfinancial system is against hoarding and does not approvetransactions that are uncertain in nature or comprise gambling andrisks.

Conventionalbanks allow speculative behavior as evidenced in financial and moneymarkets. The sale of shares, stocks and bonds are speculative innature and allow customers to gain interest(Al-Qahtani &amp O`Leary 2003)

Avoidanceof Excessive Risk Taking

Shariabars financial transactions that contain gharar which is interpretedas trickery, extreme risk or undue uncertainty. The gharar occurs inagreements where the entity of the sale is not in the ownership ofthe vendor or does not exist at the time. For example sale of unripefruits on the tree or sale of fish in the sea has lot uncertainties.(Haron, Shanmugam&amp Alam 2007).

Thisconsideration is not taken into account in conventional banking. Thelaid down policies and procedures often guides the banks on the kindbusiness to deal with and bans illegal businesses.

Thereare a lot of similarities between conventional banking and Islamicfinancial system governance structure. However the Islamic banks havesharia supervisory boards that report straight to stakeholders andregional sharia committees as shown in the illustrations below



Conventional banks might face enormous challenges inachieving outstanding results as compared to AlHilal bank. Al Hilal bank was initiated as a government owned Islamicbank with an undertaking of supporting national progress and setinnovative principles that would restate the Islamic banking marketall over the world. Al Hilal bank selected the finest systems,approaches, devices, tools and made a team with suitable individualsat its inception. The bank offered contemporary and innovativefinancial services in accordance with Sharia law. There is a superiorcustomer service culture that personalize account numbers withflexible, fast, convenient and privileges accessible services. Thereis an art gallery, free internet access and brand shop within thebank as part of lifestyle bank that offer comfort, elegance andclass.(Ayūb, 2009)

Theinnovative design of financial malls segment the different productsand offer inviting environment to clients.In the face of globalfinancial crunch, Al Hilal bank strategized itself and turned thecrisis as an opportunity by expanding its services. The bank hadstrategic partnership with companies like Arabian Automobile Companyand Al Qudra real estate that offered competitive products utilizedby its customers. These strategic alliances offered a comparativeadvantage to Al Hilal bank that made it prosper in the face ofeconomic crisis and remain competitive, relevant and highlyproductive.


Al-Qahtani,S., &amp O`Leary, T. (2003). Comparisonbetween clashing cultures: Islamic and conventional banking – thecase of Bahrain.Manchester: University of Manchester and UMIST.

Ayūb,M. (2009). Fundamentalsof Islamic banking.Dubai: Carillon.

Haron,S., Shanmugam, B., &amp Alam, N. (2007). Islamicfinancial system.Petaling Jaya: Insight Network.