Differences between Conventional Bank and Islamic Bank (2024)

Conventional banks are in the business of lending & borrowing money based on interest.Islamic Banks are not money lending institutes but they work as a trading/ investment house.In Conventional banks, we see no such restrictions. Interest is the back-bone of this system and short selling, sale of debts and speculative transactions are common.Islamic Banks work under the socio-religious guidelines that prohibit charging and paying interest and avoid all impermissible transactions like gambling, speculation, short selling & Sale of debts & receivables.In Conventional Banks, all types of industries are financed, only businesses deemed illegal by the law of the land are not supported.Islamic Banks do not permit financing to industries that cause harm to the society such as alcohol, tobacco etcGenerally Conventional Banks do not involve themselves in trade and business as they act only as money lenders.One of the Islamic Bank business model is based on trade, thus it needs to actively participate in trade and production process and activities.In Conventional Bank, no such framework is present.Islamic Banks have strong Shariah governing framework in terms of Shariah Board, who approves the transactions and products in the light of the Shariah rulings.In Conventional Banks almost all the financing and deposit side products are loan based.Islamic Banks recognize loan as non-commercial and exclude it from the domain of commercial transactions. Any loan given by Islamic Banks must be interest free.Conventional Bank treats money as a commodity and lend it against interest as its compensation.Islamic banking products are usually asset backed and involves trading of assets, renting of asset and participation on profit & loss basis.Relation of customer & bank is of Creditor-Debtor.Relationship of customer & bank is of Seller- Buyer and Partner.Compensation is always InterestCompensation is always Price (Thaman)