Islamic vs Conventional Bankings

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Bank Management Islamic and Conventional Banks a. How Islamic and Conventional banks differ Conventional banks are the same as commercial banks which are financial institutions that provide services to customers such as loans, deposits, providing several investment products, safe deposit boxes and ATMs. Islamic banks has the same definition and functions as conventional banks, however, they implement the principles of Islamic law in their operation which resulting in some restrictions. In general, both banks have the same operations but with different methods and objectives (Bader et al. 2008, 23). The major difference is on the method of how they gain their profit. Conventional banks make profits from interest rates, particularly by the spread between interest rates charged and the payback of interest rates from the borrower (Bader et al. 2008, 23). On the other hand, Islamic banks cannot make profits from interest rates because of the Islamic principles. They gain profit through profit and loss sharing, rental and rental with eventual ownership (Kesowani 2012, 5). In other words, conventional banks are able to maximize its profit without any restrictions while Islamic banks have Shariah restrictions. In conventional banks, the terms used between customers are creditors and depositors but in Islamic banks, they are more towards partnerships, so it is necessary for them to know the clients (Zaharuddin.net 2007). Second, they have different methods of borrowing (Kesowani 2012, 31). Conventional banks borrow funds from depositors on fixed rates and to make ends meet, they usually charge higher interest to their borrowers. As a result, they have funds to pay the depositors. Islamic banks usually pay higher return to their depositors due to the floating rate of interest. Moreover, conventional banks ought to guarantee all its deposits while in Islamic

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