islamicbanksvsconventionalbanks-210627102427.pptx

Islamic banks vs conventional banking system... in pakistani context along with examples

1. Islamic vs conventional Banking System

2. Islamic Banking & Finance Islamic banking or Islamic finance or sharia-compliant finance is banking or financing activity that complies with sharia (Islamic law). Islamic finance foundation based on two standards: Ethics Moral

3. Understanding the difference – Islamic vs Conventional

4. A. Conceptual & Socio-Religious level ISLAMIC BANKS Islamic banks are not money lending institutes; rather they are working as trading or investment company. CONVENTIONAL BANKS Conventional banks are involved in a business of lending & borrowing of money on the basis of interest.

5. Islamic banks are working on the basis of socio religious laws that prohibit giving and taking of interest. These banks also avoid those transactions which are declared haram in Islam such as gambling, debts. There are no such restrictions in conventional banks. Interest based activities are common.

6. Islamic banks do not support those businesses which are involved in trading of Haram products, and also cause harm to society such as alcohol, tobacco, etc. Conventional banks usually finance all types of industries whether they are beneficial or harmful for society.

7. B. Business Model & Governing Framework ISLAMIC BANKS Business model of Islamic bank is based on trading activities, Islamic banks actively participate in trade and production based processes. CONVENTIONAL BANKS Conventional banks are only involved in lending money, they are acting as money lenders, and also they do not participate in any kind of trade or business.

8. Islamic banks have governing framework based on Sharia’h . A strong sharia’h supervisory board or Sharia’h advisor board is established to approve all products and transaction of Islamic banks. Sharia’h supervisory board check and approve product development at every level No such sharia’h board is present in Conventional banks.

9. C. Product Level implementation ISLAMIC BANKS The products of Islamic banks are usually asset based and includes trading of assets, renting of asset and participation on profit & loss basis. Islamic banks any loan given by the bank must be interest free. CONVENTIONAL BANKS The products of conventional banks are interest based, money is considered as a commodity Both deposit and financing side of conventional banks loan based. Interest is earned and paid.

10. relationship between banker and customer The main relationship between banker and customer in conventional banks is of creditor and debtor. Islamic banks, the relationship between banker and customer varies as per nature of product If there is a sale transaction between bank and customer, Islamic Banks and the customer adopt the role of Seller and Buyer respectively.

11. In Rental based modes, the relationship between Islamic bank and customer is that of Lessor and Lessee respectively In Service based modes, the relationship between Islamic Banks and Customer is of Mustajir (Service Provider) and Ajeer (To whom service is given) respectively.

12. Wise Comparison of Conventional Bank and Islamic Bank The conventional banking performs the following major activities on the basis of interest: 1. Deposit creation 2. Financing 3. Agency services 4. Issuing letter of Guarantees (LGs) 5. Advisory services 6. Other related services

13. Financing Activities The asset side of a bank includes financing activities in which a bank extends fund to finance different entities with different names like lease, running finance, overdraft, term finance, house finance and consumer finance etc. In a conventional bank all above mentioned activities are performed on bases of loan. conventional banks are based on loan, therefore interest is received as the compensation by Conventional Banks from these financing products.

14. Financing in Islamic banks While in Islamic banks financing side is totally different from conventional banks Islamic banks use asset based financing techniques, which include either sale or rent agreement of underlying asset. For car financing Islamic bank uses Ijarah (Rent).

15. Asset side of Islamic Banks Islamic banks are providing financing facilities on following basis. Sale Based Modes: . In sale based modes it is necessary for a bank to first acquire the asset and sell it to the customer after taking all risk and reward of that asset. Examples of Sale Based modes are Murabaha , Salam, Istisna , Istijrar etc.

16. Participation Based Modes in this mode, Islamic bank enters into a partnership with its customer to perform a specified business activity. The profit is share among partners Examples of Participation based modes are Musharakah and Mudarabah .

17. Rental Based Modes : In Rental based modes, Islamic Bank acquires the asset and after assuming its ownership and risk, give the asset on rent to the customer for a definite period. Examples of rent based financing are Ijarah

18. Agency Based transactions A bank under Islamic Sharia’h can act as an agent (on Al- Wakalah basis) of the customer and can carry out the transaction on his behalf. Moreover, it can charge agency fee for the services. The agency fee can be charged in the following cases: • Inward bill of collection • LC opening and acceptance • Payment / receiving of cash on behalf of the customer • Outward bill of collection

19. One major difference between Islamic Bank and Conventional Bank under this category is that Islamic Bank can only carry out such transactions which are Sharia’h Compliant, and which are allowed in Islam. Moreover Islamic banks do not support those industries which causes harm to society such as liquor, tobacco and pork industry.

20. Role of the Bank as Guarantor In a contemporary banking industry banks usually providing guarantee services to their client in which they guarantee their customers and charge a guarantee fee. According to sharia’h fee cannot be charged on guarantee agreements.

21. Advisory Services Most of the advisory services provided by the financial institutes can be carried out easily in compliance with Sharia’h as long as the nature of business is halal. These include: • Equity placement • Merger & acquisition advise • Venture capital. • Cash & portfolio management advice

22. Other Services Other allowed Islamic financial services and products are: • Demand draft • Pay order • Lockers & custodial services • Sale & purchase of travelers checks (local & foreign currency) • ATM services • Electronic online transfer • Remittance • Zakat deduction

23. • Sale & purchase of foreign currency • Telegraphic transfer (of cash) • Opening of bank account (current & non-interest or no-markup) • Clearing facility • Collection of dividends • Electronic banking window • Telephone banking

24. New Challenges for the Industry Lack of awareness shortage of trained Human Resource in Islamic banking & finance. Limited number of Sharia’h Scholars Lack of the solutions for Liquidity Management in Islamic banks