Differences Between Islamic and Conventional Banking

Samuel is a final year student from one of the local university in Malaysia. As he is under the Faculty of Business and Finance, he was given an assignment to work on a paper on banking industry in Malaysia.

To start it off, he thought is a good idea to find out more about the differences between Islamic and conventional banking. Hence, he approaches one of the local Islamic banks. He was told by the bank officer that the most important difference between Islamic and conventional banking is that Islamic banking must follow the Shariah. Islamic banking must also avoid activities such as riba or gharar (excessive uncertainty).

For example, instead of charging interest on financing given out, Islamic banks give financing based on musharakah and will share any profit and loss. In financing of a home purchase, Islamic banks will fix the selling price (including the bank’s profit margin) from the very beginning.