Difference between Islamic and conventional banks

This time we will discuss some of the differences between Islamic Banking and Conventional Banks based on their function and existence. In the Indonesian banking world, there are two types of banks, namely Islamic Banks and Conventional Banks.


Indonesians are still foreign to the existence of these two banks, without realizing that they have differences.


The differences between them vary. For example, in terms of bank interest rates. In addition, the services of the two banks are also different.


To open your understanding and insight about the function and existence of Islamic Banks and Conventional Banks, we will explain the differences.


Table of contents :

Advantages of Islamic Banks with Conventional Banks

Fund Management

Banking Transaction Process

Promotion and Installments

Flower System

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Advantages of Islamic Banks with Conventional Banks

Both banks are mutually profitable for their customers. It’s just that the benefits of the two banks are different.


According to Law Number 10 of 1998, Conventional Banks are banks that carry out conventional business activities


and provide benefits in the form of interest rates to its customers. Meanwhile, in Islamic banking, interest rates are completely avoided.


Sharia Bank: Profits come from the profit sharing approach (al-mudharabah).


Conventional Bank: Profits come from interest rates with a predetermined nominal amount. In addition, customers benefit from quite high interest rates on deposits, while shareholders’ interests include obtaining the optimal spread between deposit and loan interest rates (optimizing the interest difference).


Fund Management

the difference between Islamic banking and conventional banks 1


The difference between the two banks also occurs in terms of fund management. Banks have their own way of managing customer funds to keep turning. Even financial screenings can be done through any product.


It can be from savings, deposits to checking accounts. However, in Islamic banks, this financial management cannot be arbitrary.


Sharia Bank: Financial management in the form of deposits or investments. All management originating from and investing in business activities that violate Islamic law, such as trading in illegal goods, gambling (maisir) and manipulatives (ghahar) are strictly prohibited.


Conventional Banks: Financial management can come from any source without having to know where or where the money was transferred, as long as the debtor can pay installments regularly.


Banking Transaction Process

The transaction processes and agreements that occur in the two banks show differences. In Islamic banking, transactions are carried out in accordance with the principles of Islamic Sharia.


Also Read:   Understanding Incentives

Meanwhile in conventional banks all transactions and agreements are based on applicable law in Indonesia.


Sharia Bank: Transactions based on the Qur’an and Hadith and have been declared by the Indonesian Ulema Council (MUI). Types of transactions include al-mudharabah (profit-sharing) contracts, al-musyarakah (partnerships), al-musaqat (farmers’ cooperation), al-ba’i (profit sharing), al-ijarah (lease) contracts, and al-agents ( agent).


Conventional Banks: Transactions are based on the laws in force in the country of Indonesia.


Promotion and Installments

These two things are the attractiveness of the bank in attracting customers. And both have their own tactics in providing promotions and installments.


If Conventional Banks like to spread promotions and tempting installments, for example, 0% installments are given to customers who have savings at certain banks


or a fixed rate when they want to buy a house. Well, Islamic banks also have their own way of providing promotions and installments.


Sharia Bank: The installment program is implemented at a fixed amount based on the profits agreed between the bank and the customer during the credit agreement. Meanwhile, promotions must be conveyed clearly, unambiguously and transparently.


Conventional Banks: Almost every month there are different promotions aimed at attracting customers to pour money into the bank. This promotion is very diverse, such as providing a fixed interest rate for a certain period of time, before finally providing a fluctuating interest rate or a floating interest rate to customers.


Flower System

There are differences when it comes to giving the interest system. Of course, as explained in the previous point, Islamic banks strictly exclude interest because they do not comply with Islamic law.


Sharia Bank: The existence of interest is doubted by all religions including Islam. Therefore, Islamic banks do not comply with this system.


Conventional Banks: Determination of interest rates made at the time of contract with guidelines must always benefit the bank. The percentage is based on the amount of money (capital) lent. The amount of interest payments is not binding even though the amount of profit is doubled when the economy is in good shape.

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