Why Islamic Banking Is Better Than Conventional.Islamic banking and finance is based on the principles of Shariah, which prohibits the charging of interest (riba) and promotes risk-sharing and ethical investment practices.
20 Reasons People Believe, Why Islamic Banking Is Better Than Conventional.
- Ethical principles: Islamic banking adheres to ethical principles, which prohibit transactions that involve gambling, speculation, and financing of unethical activities like alcohol and tobacco. This ensures that the banking industry operates in a responsible and sustainable manner, with a focus on the well-being of society.
- Risk-sharing: Islamic banking operates on the principle of risk-sharing, which means that the bank shares the risk with the customer in the financing of a project. This creates a partnership between the bank and the customer, with both parties sharing the risks and benefits of the investment.
- Asset-backed financing: Islamic banking uses asset-backed financing, which means that the bank finances tangible assets, such as property and equipment, rather than intangible assets, such as future earnings. This provides greater security to both the bank and the customer.
- Transparency: Islamic banking operates on the principle of transparency, with all transactions and investments clearly disclosed to the customer. This ensures that the customer has a clear understanding of the terms and conditions of the investment.
- Community focus: Islamic banking promotes community development, with a focus on providing financial services to underserved communities. This helps to promote economic development and financial inclusion.
While Islamic banking may have some advantages over conventional banking, it is important to note that both systems have their strengths and weaknesses. Ultimately, the choice between Islamic banking and conventional banking will depend on an individual’s personal values and financial goals.
Why Islamic Banking Is Better Than Conventional.
- Functions of Bank:
The functions and operating The functions and operating modes modes of traditional banks are of Islamic banks are based on the based on fully manmade principles, principles of Islamic Shariah.
- Rate of Interest:
The investor is assured of a In contrast, it promotes risk sharing predetermined rate of interest. between provider of capital (investor) and the user of funds (entrepreneur).
- Mission:
It aims at maximizing profit It also aims of maximizing profit without any restriction. but subject to Shariah restrictions.
- Zakat and Ushr:
It does not deal with Zakat In Islamic banking system, the and Ushr. Islamic banks or Zakat Collection
Centres and they also pay out their Zakat.
- Compounding Interest:
Lending money and getting Participation in partnership business it back with compound interest is the is the fundamental function of the fundamental function of the Islamic banks, conventional banks.
- Penalties in Case of Defaulters:
The traditional banks charge The Islamic banks do not to charge additional money (penalty and any extra money from the compounded interest) in case of defaulters. Only small amount of defaulters. compensation which is also given
as charity.
- Projects Evaluation:
Since income from the Since it shares profit and loss, the advances is fixed, it gives little Islamic banks pay greater attention importance to developing expertise in developing project appraisal and in project appraisal and evaluation. evaluation.
- Preferences Towards Client:
The traditional banks give The Islamic banks give greater greater emphasis on credit- emphasis on the viability of the worthiness of the clients. projects.
- Relation with Customers:
The status of a traditional The status of Islamic bank in bank, in relation to its clients, is that relation to its clients is that of of creditor and debtors. partner, investor, trader, buyer and
seller.
- Deposits Guarantee:
A traditional bank has to Islamic Bank can only guarantee guarantee all its deposits. deposits for deposited amount,
which is based on the principle of al- wadiah. Thus the depositors are guaranteed repayment of their funds, however if the account is based on the mudarabah concept, client have to share in a loss also.