Question

2.	a)	What are the differences between Conventional Commercial Bank and Islamic Commercial Bank?	4
	b)	How does Islamic Bank contribute to socio-economic development?	6

Answer 1

A. Following are five key ways that conventional and Islamic commercial banks differ.

1. The oversight of a sharia board

A sharia board consists of Islamic scholars who are qualified to give opinions on Islamic business contracts. In a commercial bank, the board is also involved in supervising bank operations to make sure they comply with sharia principles.

2. Concepts of money and the basis of transactions
To say that Islamic banks are different from conventional banks because the former don’t charge interest is accurate, but it’s only the tip of the iceberg. That difference is just one of many ways that the fundamentals of Islamic banking differ from those of conventional commercial banking.

The basic purpose for establishing an Islamic bank is to promote and encourage Islamic principles. Conventional banks are profit-making organizations that generally aren’t based on religious principles. That said, earning money is also a primary function of an Islamic commercial bank. Although the bank has a specific religious purpose, it can’t serve that purpose unless it also meets the objective of earning money.

3. A bank serves no purpose at all if it can’t stay in business!

Islamic banks operate based on Islamic business law (called fiqh-u–muamalat) for their basic transactions, and they also follow the financial laws and regulations of the countries in which they operate. Conventional banks likewise operate based on a country’s financial laws and regulations, but they don’t have contact with any religious body.

4. Relationships with clients or customers
When you deposit your paycheck in a conventional bank, your relationship with that bank is one of creditor to debtor; the bank has a responsibility to pay back your money with or without interest according to your account contract. Similarly, the roles reverse when the bank provides you with a loan.

5. Investments in the bank
Investments in conventional commercial banks are based on guaranteed principal and earning a fixed amount of income.

For example, say that a customer in a conventional bank deposits $10,000 in a six-month term deposit. After six months, the bank has a liability to pay back the customer the principal plus the interest rate charged for six months. Even if the bank lost the money in an investment, the bank is still liable to pay back all the money due.

In Islamic banking, the concept of investment is different. Although the customer deposits the money in order to earn extra income for her savings, her principal and returns aren’t guaranteed. Suppose the Islamic bank loses money because of an unexpected business failure. In this case, the bank isn’t liable to pay the money to its customer.

B. In the long run, the financing of Islamic
banking is positively and significantly associated with
economic growth and accumulation of capital in the country.

Islamic financial system is more stable than
the traditional banking system due to the elimination
of debt financing. It also reduces inflation in the
economy and cannot provide the money to go higher
than the supply of goods. Islamic banks are less risky
than conventional banks, both for investors
and entrepreneurs share some of the risks involved in
the business.

The effect of Islamic banking in muslim countries encouraging people to deal
with the banking system has been good and positive. Many people support the role of Islamic banking in the reduction of inflation. The Islamic
banking has a positive effect on the employment. The system has had
a positive effect on trade, for which the provision of
financial facilities to this sector. Islamic banking in Iran has had a positive effect on
GDP. Various results also indicates that improvement of the Islamic financial infrastructure in country benefit
economic development.
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