Islamic banking versus conventional banking

Published: August 20, 2012
Islamic banks are on
average at least as
productive, profitable
and efficient as

Islamic banks are on average at least as productive, profitable and efficient as conventional banks. ILLUSTRATION: JAMAL KHURSHID


Contrary to popular belief, Islamic finance or banking is not just for Muslims. It aims to lay the foundations of an ethical and fair financial system, which consequently affects the socio-economic conditions of the market it is implemented in. Islamic financing, hence, can aptly service everyone irrespective of religious beliefs, wealth, ethnicity, caste or creed.

Yet, this stance is not as clear as it should be in our country; much less in the outside world where centuries old financing methods are firmly embedded within the economic system.

One of the reasons for this lack of awareness is that the concept of Islamic banking has been commercialised fairly recently. Banks and asset management companies in Pakistan are still struggling with how better to portray Islamic products for consumers’ understanding in minimal ad spaces. There is also a communication gap between the Shariah councils issuing the fatwas pursuant to Islamic Finance, and the managers drafting the advertisements.

A recent survey published in a popular monthly magazine stated that most respondents did not know the difference between conventional and Islamic banking; and that most thought that various advertised ‘Islamic Funds’ are only a marketing gimmick.

But a bigger issue – one which I have experienced personally – is that even financial advisors lack awareness of the concepts behind Islamic finance. I recently asked a finance expert – while deliberating the merits of funds in which I wished to make some investments – the difference between conventional funds and Islamic funds. He answered with a disappointing “nothing!”

For someone who does their homework is keen on not consuming any interest-related income enter, there is a difference. This expert will just lose such customers.

So what is the difference?

An instant answer to the question is the oft-repeated phrase – ‘Islamic products do not offer interest (Riba). The statement is without a doubt true, but this is not the sum total of Islamic finance.

Riba is indeed deemed haram in Islam, for the reason that it is ‘unfairly’ exploitive in nature. It is ‘unfair’ because Riba requires the lender to return the borrowed money, plus an extra amount. This requires the borrower to work harder to return not just the principal, but also the interest or mark-up levied on the amount.

Secondly, interest is set arbitrarily. The concept treats money as a tradable entity which fluctuates volatilely in the markets. There is no set ceiling; meaning that loaning money may become cripplingly expensive for the borrower.

Then how does Islamic finance work?

Islamic financing is asset-backed and believes that only assets with an intrinsic value may be sold for a profit, instead of exchanging money – which is considered to have no intrinsic value – for interest. Each unit of money has the same value as the other of the same denomination, which is simply why there cannot be a profit on its exchange. Hence, Islamic finance lays its foundation on real, non-liquid assets; the exchange and sales of which result in ‘fair’ profits.

The Pakistani financial industry today offers various Islamic products; in wealth management, asset management and banking; spread over short-, medium- and long-term funds. All investments in such schemes are made strictly in Shariah-compliant instruments under the supervision of a Shariah Advisory Board, which comprises of renowned Islamic scholars.

Stakeholders in the industry must now step forth and present a clear picture of Islamic finance: one which presents it as a way of rethinking economics and finance, instead of just as a cosmetic solution tailor-made for religious investors finicky about where their money is going.


Published in The Express Tribune, August 20th, 2012.

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Reader Comments (20)

  • S
    Aug 20, 2012 - 2:42AM

    Islamic Finanace all the way, we are a Muslim country and that should be the way forward.

    For those who think it is not really Islamic, it is still way better than conventional banking, not just because of interest but also because it takes in to account the rights of both investors and clients, unlike conventional banking where the focus is purely on investors/shareholder


  • BlackJack
    Aug 20, 2012 - 8:53AM

    So Islamic finance will not give me a car loan or a loan to repair my house, because in both cases there will be no asset sale which can then be shared between lender and borrower, and the asset itself depreciates over time in economic value – or do you also not recognize depreciation since that is an reverse form of interest? Seems to be a very restrictive form of lending which refuses to consider money as an asset and time value of money. Also, how does the manager of the Islamic finance institution which borrowers are worthy customers? Is there a minimum projected rate of return from investments or will they lend to any God-fearing muslim who promises to abide by the rules? Would be interesting if this could be explained a bit further.


  • Hardliners
    Aug 20, 2012 - 9:19AM

    A very nice article…… I work for an Islamic Bank and i know how important it is for the economy to convert itself towards Shariah banking since it ensures wrong utilization of money………..


  • DevilHunterX
    Aug 20, 2012 - 9:19AM

    What about inflation? If I borrow Rs. 100 today, will the value of money will be same after 1 year? in Pakistan?


  • Ch. Allah Daad
    Aug 20, 2012 - 9:28AM

    If you have wonderful Riba free products, earn and share your profits honestly, legally and without exploitation, then you need not to bring Islam into it. Recommend

  • yasir
    Aug 20, 2012 - 12:31PM

    The writer can do window dressing theoretically in multiple logics but the fact is in real practice the picture is quite different.Any Islamic bank treasury department
    personnel would bear witness to hilarious sorts of asset backings that makes the institutions activity look dubious.At least in Pakistan Islamic finance is not as per specs.


  • Abdullah
    Aug 20, 2012 - 1:46PM

    True Islamic fundamental banking doesn’t exists still


  • Ali Z
    Aug 20, 2012 - 7:37PM

    Islamic Banking is the way forward and so is Takaful (Islamic Insurance). For those who do not trust it to be Halal, are the ones who are lazy to learn its mechanic and resistant to change.


  • saleem
    Aug 20, 2012 - 9:35PM

    Go out and compare the profit rate charged by Islamic banks for a product and compare it with the charged by conventional banks. It will be close. What it suggests you get more or less the same product with different terminologies and more paper work


  • G. Din
    Aug 20, 2012 - 11:46PM

    “Riba requires the lender to return the borrowed money, plus an extra amount.”
    I think you meant “borrower”, not “lender”, did you? If you didn’t, Islamic banking stands every thing on its head as Indeed Islam generally does.
    “This requires the borrower to work harder to return not just the principal, but also the interest or mark-up levied on the amount.”
    That is not a characteristic that distinguishes so-called Islamic banking from “normal” banking. Paying interest is always a pain in the neck. But, I thought in Islamic banking interest is “haram”!
    “What about inflation?”
    Or, devaluation of the currency, for that matter. Don’t your assets go through the roof by a fatwa from the government?
    @Ch. Allah Daad:
    How true! Islamic banking is a lot of hot air.


  • Saleem
    Aug 21, 2012 - 1:05AM

    A bit like zia’s drama about changing the name of interest to profit and loss sharing!


  • Saleem
    Aug 21, 2012 - 1:11AM

    A bit like Islamic medicine vs Scientific Western medicine. Most sensible people know which one works!


  • Abdullah
    Aug 21, 2012 - 12:53PM

    The face change to portrait the conceptual western economy… no concept of fixation of in Islam only trade sale purchase… have u ever heard bank occurred loss on investment passed to depositor or have any bank lend money asking return when goods are sold no just evaluate of K+spread for specified period? Really Islamic banking can be implemented with religious aspect


  • DevilHunterX
    Aug 21, 2012 - 1:32PM

    I have lost few family members due to Scientific western medicine, and none to Islamic medicine till date.


  • @AsifKhokher (twitter)
    Aug 21, 2012 - 5:45PM

    why not you are allowing my comments to come online. This is against independence of expression.


  • Aug 21, 2012 - 6:01PM

    Islamic financing is asset-backed and believes that only assets with an intrinsic value may be sold for a profit
    @Marium I dont know where to begin. Who thinks Gold has an intrinsic value? Whats the intrinsic value of Gold on a treasure Island? The answer is nothing. If there were 1 coconut on that island, the value of all the gold on that island would be equal to 1 coconut. Thats called Intrinsic value. Intrinsic value of an asset is tied to the efficiency of a currency. Could be fiat or static/commodity based.
    One cant have Banking and Islamic in the same sentence.


  • Ammar
    Aug 21, 2012 - 8:39PM

    Its just about nomenclature. Replace ‘interest earned’ with ‘profit’ or ‘rent’, and voila you have the Islamic Banking system up and running. The system doesn’t really add any value, or exploits customers any less!!


  • Gratgy
    Aug 22, 2012 - 8:56AM

    Pakistan should stop taking loans from IMF, World Bank since these charge interest and hence are not Islamic?


    Aug 25, 2012 - 10:41PM

    Islamic Banking & Finance is presently in a evolution stage and entirely different in approach, aim and functioning. Only 30 to 35 years in age, its approach is humane, ethics-based; it aims true development, judicious distribution of produce of activity (whether profit or loss), its functioning is transparent, honesty promoting and welfare oriented. Since it is based on the ‘outlawing of interest’ principle of Islamic Sharia (religious law) it carries the nomenclature “ISLAMIC”. It has nothing to do with the routine Islamic prayers of Muslims. Thanks to tremendous research efforts of Islamic scholars during last few decades, it is increasingly being welcomed worldwide by followers of all religions. Funds of the deposited by account holders are pooled and invested into the economy through traders, manufacturers as co-partners. Profit generated thereof at pre-agreed ratio (and not rate) is shared periodically. (so is loss as per principles of the concept) under the active supervision of Law experts known as Sharia Scholars. All activities are transparent thereby eliminate scope of corruption, bias, nepotism, injustice, and finally scope of incurring loss. In case of loss due to reasons beyond human control inspite of proper supervision, honest functioning etc. it is humanely treaed as advocated in the principles of the concept. Experts of the concept have desgined and promoted consumer-friendly product as alternative to every product being offered today in the market.
    The collapse of conventional banking industry today is attracting tremendous public attention worldwide. Undoubtedly, it is emerging as a most viable, successful alternative and has got a bright, great future.


  • Irfan
    Aug 26, 2012 - 5:56PM

    Well said, Mr. Syed Ilyas,


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