Question

Explain the risks and challenges faced by Islamic and commercial banks and differentiate between them.

Answer 1

Differences between the risk and the challenges faced by Islamic and commercial banks are as follows-

1. Islamic banks does not charge any interest but commercial bank generally charge interest and it is the main earning source of its revenue.

2. Islamic banks invest their money into only such assets and companies which invest in non interest generating as well as activities which are ethical according to the Islamic rules and regulations while commercial banks generally do not adopt with certain hardline principles of Investments.

3.Islamic finance is based on the principle of profit as well as loss sharing while normal conventional banks are not based on the principle of profit or loss sharing in fact it shares the majority of the risk.

4.Since that risk is shared between both the parties, Islamic banks are not exposed to the level of risk as the conventional Bank faces because conventional bank is the primary party of dealing with all the risks.

since there is difference in the fundamental upon which are conventional bank is based and a fundamental upon which an Islamic bank is based, the risk sharing and the operating performance of both the banks differs significantly.