Introduction: The role and functions of banks outlined above are indeed highly useful and socially desirable, but interest plays a central role in each of these functions. Islamic financial intermediation endeavors to replace interest by partnership between owners of capital and entrepreneurs on the basis of profit sharing as a basis form of cooperation between capital and entrepreneur.Theoretical Basis of the Concept of Islamic Banking: First Principle: Deal not unjustly, and ye shall not be dealt with unjustly. (The Holy Quran 2:279)-lending money on the basis of interest is injusticeSecond Principle: There should not be any reward without taking risk. The principle is applicable for both labor and capital.Mobilization of Deposits: Like interest-based conventional banks, the main function of Islamic banks is to mobilize savings and provide financial support to the entrepreneurs. Yet there are differences in techniques applied in the process of savings mobilization and financing investment by the two banking systems.Al-WadiahAccount: Islamic banks receive deposits in theirAl-Wadiahaccount. This account is similar to the demand deposit account of interest-based banks. Conventional interest-based banks do not pay interest on this type of deposit account. Depositors may withdraw all or a part of the funds deposited in this account without restriction. The termAl-Wadiahmeans deposit of money allowing somebody to claim the funds in the account. As the depositors do not take the risk of losses withAl-Wadiahaccounts, they are not entitled to any profit from the use of their deposits by investorsGeneralMudarabaAccount: Interest-based banks receive deposits from clients in return for being paid a fixed interest rate. These deposits are considered to be a loan from the depositors and, thus banks must pay a predetermined rate of interest based upon the daily average balance.TheMudarabaaccount of Islamic banks is different from the checking account of an interest-based bank.Mudarabais a form of business contract where one party supplies money and the other manages the business by investing labor and time. TermMudarabaAccount: Interest-based banks receive different kinds of Term Deposits from the depositors. The deposits are generally for 3 months, 6 months, 9 months, one year, 2 years, or 3 years, and the bank pays a stated interest rate on each of these deposits, which varies depending on the term.Fixed term deposits received by Islamic banks are called "Term MudarabaDeposits". Generally an Islamic bank receives these types of deposits for a minimum period of 3 months to 3 years at the maximum. The bank invests the money, and shares any profits with the depositor based upon a percentage agreed upon at the time of contractSpecialMudarabaAccount: When an Islamic bank receives aMudarabadeposit for investment in some specific business, sector, or project, the deposit is called a "SpecialMudarabaDeposit". In this case, an Islamic bank, while receiving deposits, comes to an agreement with the depositors that the money to be received will be invested in some specific business such as the fertilizer or salt business; or in some specific sector like the industrial sector, textile sector, and export-import sector.Difference between Islamic bank and Conventional bank:Conventional BanksIslamic Banks

The functions and operating modes of conventional banks are based on manmade principles. The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah.

The investor is assured of a predetermined rate of interest. It promotes risk sharing between provider of capital and the user of funds.

It does not deal with Zakat. Islamic banks to collect and distribute Zakat.

Lending money and getting it back with interest is the fundamental function of the conventional banks. Participation in partnership business is the fundamental function of the Islamic banks.

A conventional bank has to guarantee all its deposits. Strictly speaking, and Islamic bank cannot do that.

Disadvantages of Interest Banking

It aims at maximizing profit without any restriction. It can charge additional money (penalty and compounded interest) in case of defaulters. Very often it results in the bank's own interest becoming prominent. It makes no effort to ensure growth with equity. 5) Since income from the advances is fixed, it gives little importance to developing expertise in project appraisal and evaluations 6) The status of a conventional bank, in relation to its clients, is that of creditor and debtors.

ADVANTAGES OF ISLAMIC BANKING

Justice and Fairness: The main feature of the Islamic model is that it is based on profit-sharing principle, whereby the risk is shared by the bank and the customer.

Liquidity: Follow the profit and loss-sharing principle to mobilize resources and are less likely to face any sudden run on deposits. As such, they have a minimum need for maintaining high liquidity.

Better Customer Relations: Financing and deposits are extended under the profit and loss sharing arrangement. The banks are likely to know their fund users better in order to ensure that the funds are used for productive purposes and vice-versa for investors. In this way, it develops better relations between the financial intermediary and the fund providers. No Fixed Obligations: Islamic banks do not have fixed obligations such as interest payments on deposits. Therefore, they are able to allocate resources to profitable and economically desirable activities.

Transparency: Transparent to the account holders on the investments made in different areas and the profits realized from these investments. The profit is then shared in the pre-agreed ratio.

Ethical and Moral Dimensions: Their strong ethical and moral dimensions of doing business and selecting business activities to be financed, play an important role in promoting socially desirable investments and better individual/corporate behavior.

From the above discussion it becomes clear that Islamic Banking superior over Conventional Banking.