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8/8/2019 Banking System a Comparative Study
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THE BANKING SYSTEM
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Defining a Conventional Bank A bank is a trader of short term loans
A bank is dealer in debt his own
and of other people Crowther We can define a bank as an
institution whose debts are widelyaccepted in settlement of otherpeoples debt to each other Sayers
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Defining a Conventional Bank1. A commercial bank is dealer in
capital or more properly a dealer inmoney. He is intermediate partybetween the borrower and thelender. He borrows from one partyand lends to another and thedifference between the terms at
which he borrows and those at whichhe lends form the source of hisprofit. ----Prof. Gilbert
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Defining an Islamic Bank Islamic Bank is a financial institution
whose statutes, rules and proceduresexpressly state its commitment to the
principles of Islamic Shariah and to thebanning of the receipt and payment ofinterest on any of its operations. (OIC.April of1978 Dakar the capital of Senegal.)
Islamic banking is essentially a normativeconcept and could be defined as conduct ofbanking in consonance with the ethics ofthe value system of Islam.
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Islamicvs. Conventional
Banking ComparedIslamic Bank Conventional Bank
The functions andoperating modes ofIslamic banks arebased on IslamicShariah
The functions andoperating modes ofconventional banksare based onmanmade principles
IB promotes risksharing betweenprovider of capital andthe entrepreneur
The investor isassured of apredetermined rate ofinterest
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Islamicvs. Conventional
Banking ComparedIslamic Bank Conventional Bank
Maximizing profitshould not beobjective of an IB
It aims at maximizingprofit without anyrestriction
Islamic banks collectand distribute Zakat.
It does not deal withZakat.
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Islamicvs. Conventional
Banking ComparedIslamic Bank Conventional Bank
Participation inpartnership businessis the fundamentalfunction of the Islamicbanks.
Lending money andgetting it back withinterest is thefundamental functionof the conventionalbanks
wider scope ofactivities compared toa conventional bank. Amulti-purpose bank
Narrower scope ofactivities whencompared with anIslamic bank.
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Islamicvs. Conventional
Banking ComparedIslamic Bank Conventional Bank
The Islamic bankshave no provision tocharge any extramoney from thedefaulters
It can chargeadditional money(compound rate ofinterest) in case ofdefaulters.
It gives importance tothe public interest. Itsultimate aim is toensure growth withequity.
Banks own interestbecomes prominent. Itmakes no effort toensure growth withequity.
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Islamicvs. Conventional
Banking ComparedIslamic Bank Conventional Bank
For Islamic banks, it iscomparatively difficultto borrow money fromthe money market.
Borrowing from themoney market isrelatively easier
Since it shares profitand loss, the Islamicbanks pay greaterattention to developingproject appraisal andevaluations.
Since return from loanis fixed, it gives littleimportance to projectappraisal andevaluations.
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Islamicvs. Conventional
Banking ComparedIslamic Bank Conventional Bank
Islamic banks givegreater emphasis onthe viability of theprojects
Conventional banksgive greater emphasison credit-worthinessof the clients .
The status of Islamicbank in relation to itsclients is that ofpartners, investorsand trader.
The status of aconventional bank, inrelation to its clients,is that of creditor anddebtors
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Islamicvs. Conventional
Banking ComparedIslamic Bank Conventional Bank
Strictly speakingthere is no guaranteefor deposit money
A conventional bankhas to guarantee all itsdeposits.
An Islamic bank can
never be a bankrupt
A conventional bank
has every possibility tobe a bankrupt
Promotes massbanking
Promotes class banking
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Functional Differences between
Conventional and Islamic BanksIslamic Bank Conventional Bank
Collection of deposit
on the basis of profitsharing
Collection of deposit
on the basis ofinterest
Investment followingBuy mode/investment
mode/ lease mode
Extending credit onthe basis of interest
Issues letter ofguarantee
Issues letter of credit
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Functional Differences between
Conventional and Islamic BanksIslamic Bank Conventional Bank
Acting against
Creation of mediumof exchange and credit
Creating medium of
exchange and credit
Investment in sharesand Mudarabah bond
Investment in sharesand securities having
coupon rate of interestNo discounting of bill Discounting of bill
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Lending/investment ofIslamic &
Conventional bankcomparedPoint of diff. Conv. Bank Islamic Bank
Mode of
Investment
Lending Investment
(bui+lease+D.inv)
Safety of theloan
Primeconsideration
No guaranteefor investment
CollateralSecurity
Base of the loan Not required/Less important
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Lending/investment ofIslamic &
Conventional bankcomparedPoint of diff. Conv. Bank Islamic Bank
Character of
the loanapplicant
Important to be
considered
Very
important tobe considered
Purpose ofthe loan
Less important Importantconsideration
Liquidityconsideration
Highly importantas it prefer shortterm investmt
Less importantas it goes forterm investmt
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Lending/investment ofIslamic &
Conventional bankcomparedPoint of diff. Conv. Bank Islamic Bank
Financial
strength ofthe client
Important
consideration
Should be less
impotant
projectProfitability
Less important Very muchimportant
Diversificationofinvestment
Not a primeconsideration
An importantconsideration
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Lending/investment ofIslamic &
Conventional bankcomparedPoint of diff. Conv. Bank Islamic Bank
National
interest
Secondary
consideration
Primary
considerationClosesupervision
Not a routinework
Must be aroutine work
Observationof Shariah Not followed Strictlyfollowed
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