A Comparison between Islamic and Conventional Banking System
The guiding principle of Islamic Finance is to provide banking and financial services which are compliant with Islamic Law and the challenge is that to adjust historical and ancient standards with modern banking system. The philosophy of Islamic banking and finance is a set of theories and ideas related to its understanding. In this paper, the rules of Islamic law from which the very idea of Islamic banking has been drawn are explained. One of the objectives of Islamic Law is protection of wealth or property by prohibition of rate of interest as Riba. Although, both banks and customers are aware about prohibition of Riba, the customers generally think that the Islamic banks are not much different from conventional banks in the final outcome. This paper considers these two systems and their behavior and main differences are compared and clarified. The paper concludes that there is a strong reason behind prohibition of Riba, to make the financial system healthier. Increasing the share of equity and reduction of the share of debt can make the financial system more stable.
Keywords - Islamic Banking, Conventional Banking, Finance, Rate of Interest, Deposit