Islam is known as a complete code of life. It has everything for its followers, and it provides guidance in all paths of life for Muslims. Islam provides all the details which can be helpful for Muslims in their daily life and situations. Islam gives guidance even in money matters; this includes islamic banking.
One important concept in Islamic banking is that money cannot generate money, and it is considered as Haram. On the other hand, Interest is considered normal and right in the conventional banking. This is the biggest difference between both banking methods; there are some other differences, as well.
As it is said earlier that in conventional banking interest are charged because they say that money has a value and that value increases with time - so they charge interest. On the other hand, Islamic banking has a concept that you can earn money by using it for business or investment purpose. You cannot simply charge money on money.
The other thing is that in conventional banking, the borrower of the loan has to pay the principal interest even in case of loss. This is not the case in Islamic banking; where in case the borrower experiences any kind of loss then the bank will also share the loss by using Musharakah or Mudarbah model of investment.
The other difference between both banking models, is that in conventional banking, there is no agreement made for services or goods exchange. In case of Islamic finance, the agreement is made for the exchange for services and goods. The funds are given under the salam & Istisna Contracts as well as Murabaha.
Moreover, the conventional banks use the money as a commodity that is the real cause of inflation in the market. On the contrary, the Islamic banking focuses more on giving the loan to the real sectors which invest the money in their projects. This way money is used in a real sense and is distributed in various sectors. This investment in the real sector can form the basis of economic development.
While giving the loan, the conventional banks do not make ethical considerations. They can give the loan to anyone who fulfills their requirements. It means that they are not concerned about how the loan will be used by the borrowers. On the other hand, the Islamic banks do consider the motive of the loan. You can see that an Islamic bank won`t give a loan to anyone who wants to setup a beer factory or uses the borrowed money for any other illegal activity. This way the Islamic banking is more ethical and knows its responsibility towards the society.
So after reading this comparison, you can make your own selection of the bank from where you want to take a loan. You should also look at the policies of the banks and its effects and show your own sense of responsibility. Good Luck!
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