THE DIFFERENCES BETWEEN ISLAMIC BANKING AND CONVENTIONAL BANKING IN TERMS OF SHARI’AH RULING CONFORMITY
by: Dr. Zaharuddin Abd Rahman [al-naqiy]
Many still do not understand the differences between the products and services offered by Islamic banking and conventional banking. Many are still saying that Islamic products and services are just conventional products that have been window dressed. Some even claim that Islamic banking only changes the terms such as ‘interest’ into profit rate, ‘Ujr or wage cost, and other Arabic terms are viewed by critics as tricks. These general statements should not be made without knowing exactly how an Islamic bank operates, as such statements will inhibit the revival and development of the Islamic banking industry. We do acknowledge that there are problems in the implementation process and other problems in Islamic banking. However, in my opinion, it is normal to experience difficulty before achieving success.
All parties, whether Syariah scholars, lawyers, judges, customers or the Islamic bank administration, are still in the learning process. It is undeniable that mistakes will occur here and there throughout this process. Islamic banking is still in the process of maturity and achieving perfection. Thus, deficiencies will occur throughout this journey. Yet, these deficiencies do not make Islamic banking haram and invalid. Just like a new Muslim who has yet to perform the five daily solah (prayers) as he is in the process of learning and understanding it, this falls under the forgivable category. What really matters is that the process is heading forward (i.e. improving) and not falling backwards.
Some of the deficiencies are due to lack of knowledge amongst the administration. Consequently, people may get an inaccurate perception of Islamic banking. The Syariah strength and observance of an Islamic bank depend strongly on the hard work of various parties, inside and outside the bank. The people who determine that Syariah compliancy is adhered to are the Chief Executive Officer (CEO), the Product Development Department, the Syariah Advisor and the Syariah Department of the bank. They are responsible for Syariah compliancy within the bank.
Without hard work and wisdom, an Islamic bank or Islamic banking will take the easy route and just copy the products and systems of conventional banking, without observing the implementation aspect of the Syariah. Society should clearly understand that the Islamic banking system has revolutionized the relationship between the customer/saver and the bank. The relationship between the customer and a conventional bank is through the loan contract that entails interest on the principal. The borrower must pay the bank within the stipulated period.
Islamic banks have changed the borrowing relationship to various concepts that are acknowledged in Islam such as partnership (Musharakahor Mudharabah), or seller (bank) and buyer/renter (customer). Changes in the relationship are not only with the ‘aqad or contract, even asset ownership has changed and is accepted by Malaysian law. This means, from the legal point of view, the trading or renting process does take place. However, many customers of Islamic banks do not recognise the efforts of Islamic banks in making changes as they do not read the contracts they sign.
The partnership principle in the finance products also offers customers profit sharing with the bank. However, if the customer faces a loss, the Islamic bank will bear part of it based on this contract. A banking system devoid of riba fulfills the needs of both customers and the general public. Islamic banking, through the introduction of Islamic concepts, has successfully generated large profits in the business it participates.
Nevertheless, the main concern of Islamic banking is to ensure that every bit of its business process is Syariah compliant and this is more meaningful than reaping more profit. This main concern is a commitment, responsibility and preservation of the trust granted by Allah s.w.t. to human beings, which emphasizes the principle of cooperation amongst humans in fulfilling each respective need.
Everyone should resist from comparing the application and productsof an Islamic bank and that of a conventional bank. The “apple to apple” comparison is not fair in this case; it is like comparing the rules and discipline of soccer and hockey. Although both games are played on the field, they have completely different concepts and disciplines.
The differences are as follows: Conventional Banking Islamic Banking
|Conventional Banking||Islamic Banking|
|Its functions and operationsare based fully on man-made||FUNCTIONS & OPERATIONS||Its functions and operations follow the Qur’an and the Sunnah as much as possible.|
|In its investment product, theinvestor is promised a fixed
rate. In reality, it is a riba based
|INVESTMENT PRODUCTS||In its investment product,an Islamic bank promotes the sharing of risk andprofit between investor and investment fund manager.There is no fixed profit
promised. Division of profit is based on real profit.
|Aiming for profit withoutreligious or moral boundaries.||AIM||Aiming for profit that adheres to Islamic discipline that is limited to that which benefit society.|
|Ignores zakat.||ZAKAT||Pays zakat as it is a social responsibility fulfilled by Islamic banks.|
|The retail loan product applies the system of giving out loans with multiplied interest.||RETAIL LOAN||Its retail product utilizes thetrading or renting of an asset,and not the loan contract.|
|Charging a compounding penalty on a loan if there is late payment.||PENALTY||Charges compensation for any late payment, but it does not go toward the bank’s earnings.Instead, it is channeled directly to charity.|
|The main priority is to protect the bank’s interest; no priorityis given to ensure equity development.||PRIORITY||Emphasize projects that benefit society. The mainaim is to ensure equity development.|
|Loans given by conventional banks are simple, no asset required. Their concept is “money breeds money.”||REQUIREMENT OF ASSET||Money is not generated through loans. Thus, any loan should have an underlying asset.|
|Evaluation stresses on the ability of the borrower to pay off the loan. Not much attention is given to the progress of the customer’s project.||EVALUATION||Evaluation also stresses on the potential or viability, performance and prospect of the project that is being financed.|
|Earn revenue from fixed interest charged to the customer.||REVENUE EARNED||Profit according to the concept of sharing profit-loss; the bank gives more attention on investing in project development.|
|The bank-customer relationship: loan lender and borrower.||RELATIONSHIP||The bank-customer relationship: seller, buyer or partner.|
Excerpt from Al-Naqiy; an Islamic Finance organisation.