Difference between Islamic and conventional banking

Khalid Yousaf

Times of Oman is offering an opportunity for our readers to ask questions on Islamic banking to Khalid Yousaf, an expert in Islamic banking and Director (Islamic Finance Advisory Services) of KPMG in Oman. The readers have to mention their full name and location while sending the questions.

Q: What exactly is the difference between Islamic banks and other conventional banks? Whereas a conventional bank is allowed to provide Islamic banking through a Window operation, can an Islamic bank also provide conventional banking services through a window operation?

Raj Krishnan, Sohar

A: The basic difference between Islamic and non-Islamic banks is that all Islamic Banks are required to follow Sharia principles in structuring their products and services for their customers. Whereas Current, Savings & Time Deposits, Loans & Advances may appear to be similarly priced by both types of banks, all products and services offered by Islamic Banks will be based upon and structured in line with Islamic Modes of Financing like Mudaraba, Murabaha, Musharaka, Wakala and others.

These Islamic Modes of Financing ensure the elimination of Riba from any product and services and their structures are based either upon an asset or a commodity, rather than straight-forward interest-based borrowing or lending offered by conventional banks. A simile could be whereby a super-market may offer meat for both non-Muslims and Muslims. The essential difference being that meat sold to Muslims has been processed following Sharia' principles and therefore, is Halal for consumption by Muslims.

In order to ensure that Islamic Banks comply with Sharia' principles, they appoint Sharia' Supervisory Board consisting of Sharia' Scholars who are experts in Fiqh-ul-Muamlat as well as knowledgeable in banking products and services.

All products and services offered by Islamic Banks are reviewed and approved through Fatwas issued by the Sharia' Supervisory Board of the respective bank. Further, Internal Sharia' Auditor and Compliance Functions ensure that processing and workings of an Islamic Bank are in total compliance with Fatwas issued by their Sharia' Supervisory Board. Conventional Banks are permitted to open Islamic Windows with the conditions that funds and operations of Islamic banking will be kept totally separate from those of the parent bank.

Further, the Window is expected to operate exactly like a full-fledged Islamic Bank in terms of Sharia'-compliance through the appointment of Sharia' Board, Sharia' Internal Audit and Compliance functions. The funds from Islamic Depositors cannot be used by the parent bank and similarly, the funds of parent bank's depositors cannot be used to fund Islamic Window assets. Some Sharia' Scholars express doubts about water-tight control  over the commingling of funds and have therefore, lobbied either for the closure of Islamic Windows or disallowing the practice. Islamic banks on the other hand, are not allowed to offer conventional banking windows at all for concerns that control over the commingling of Halal and Haram funds may be compromised.


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QUESTION: If Isamic Banking is Truly Islamic, then why does this Industry use the same type of Money which is Not Islamic?

Commentary below in explanation of what the Question above means:

I have a big problem with the term "Islamic Banking". I find it totally self contradictory. Its exactly the same as so many other terms used by Banking & Political Scientists in the Finance industry. The term "Islamic Banking" does not mean what it actually Represents. It is completely misleading. Whether this is by design or accident is another question.

For anything to be Islamic it has to be in the manner that was ordained by the Prophet Muhammad (PBUH) and the Quran. Anything short or in excess of the boundaries laid out by the Quran & the Sunnah (Way) of the Prophet Muhammad is NOT Islamic. Now the Whole institution that is Banking is not Islamic, not only because it involves amassing large amounts of wealth which Islam strongly discourages & rather Encourages charity, but because the whole money system involved is not the Money that was ordained by the Quran & the Prophet Muhammad (PBUH). Fiat or Electronic Money is Not Islamic money and the pioneers of Islamic Banking industry understand this crystal clear. True Islamic money according to the Quran & the Sunnah of the Prophet Muhammad (PBUH) has to have Intrinsic Value, like Gold for instance, which the IMF prohibits its member countries to use as money.

According to the Sunnah of Prophet Muhammad the value of 1 Kilogram of Gold is 1 Kilogram of Gold! If my great grandfather had deposited away 1 Kilogram of Gold for me to receive a 100 years later, I will only receive 1 Kilogram of Gold. Whatever 1 Kilogram of Gold could buy 100 years ago, can buy the same today. Whatever a Gold Dinar could buy at the time of the Prophet Muhammad (PBUH) over 14 centuries ago could buy the same today. You see this is an example of true Islamic money. True Islamic money does not multiply because of Time!

Now suppose instead if my great grandfather had deposited $100 bills of Fiat money for me to receive 100 years later, what this amount of money could buy 100 years ago cannot buy today even by a fraction. You would need a few thousand dollars to buy today what $100 could buy 100 years ago. This is Fiat money. Fiat & Electronic Money is Not Islamic. It does not store value. It cannot store value because according to the Quran & the sunnah of the Prophet Muhammad (PBUH), it is not Money!

You cannot slaughter a pig the Islamic way and then call its meat consumption Halal. If I steal a goat and slaughter it the Islamic way, that does not make its meat consumption Halal, simply because it was stolen.

For a minute, lets assume that in the whole world there is only one Islamic Bank, and only one car dealer and only one customer. Now this one & only customer on earth buys a car from this dealer through the only Islamic Bank under the so called Shariah compliant Murabah contract. The dealers spot price of the car is OMR 10,000. However the Islamic Bank sells the car to the customer for OMR12,000 to be paid in installments for 5 years, and calls the excess of OMR2,000 a "Profit".

There is only One reason on earth why this customer is now required to pay OMR,2000 extra or above the spot price and that is the 5 year installment plan. The Islamic Bank here is making this profit because of TIME. This is pure Riba. This is pure Usury. Islamic money does not increase through TIME. Yes I am aware there is no shortage of Fatwas issued to call this Sharia Compliant even though its not.

If it is Islamic, then, taking into consideration above, wherein there is only one customer & only one car dealer & only one Islamic Bank, where from will the customer get the extra OMR2,000 to pay back the Islamic Bank? Remember the Islamic Bank Only issued into circulation OMR10,000. But this OMR10,000 was issued out as a Debt payable to the Islamic Bank, however on top of that an extra OMR2,000 (which was not issued into circulation) has to be paid as well because of TIME. Exactly the same platform of non Islamic finance: Money now for more money LATER!

Islamic Banking brings to mind the story of The People Of The Sabbath from the Islamic tradition (in the second chapter of the Quran), when a small group of Jews in the coastal village of Ayla on the Red Sea cheated God. According to the story, the fish swam near the shore on Saturdays (Jewish Sabbath), the only day they weren’t allowed to do any work, including fishing. But then on all other days, there was barely any fish in the sea. The majority of these Jewish villagers, the true believers, knew that it was a test from God. Thus, they persevered and continued to observe the Sabbath. But then a small group figured out a smart way to circumvent the Law, without upsetting God: They set up their fishing nets on Fridays, and collected their plentiful catch on Sundays. God’s punishment was severe: the Sabbath violators were disfigured into apes.

In 1970 the price in terms of US Dollars for an ounce of Gold was $37, today it is well above $1,000. But we all know that the value of an ounce of Gold is an ounce of Gold! The Ugly fact here is that it is the USD that is falling, crumbling down like controlled demolition because it is Fiat money.

And so my question: If Isamic Banking is Truly Islamic, then why does this Industry use the same type of Money that is Not Islamic?