Conventional Banking Vs Islamic Banking ; What are the differences?
Conventional banking and Islamic banking are two different systems of financial intermediation that have their roots in different cultural and philosophical traditions. Conventional banking is based on the principles of profit maximization and the charging of interest on loans, while Islamic banking is based on the principles of profit and loss sharing and the prohibition of interest.
![](https://www.wallstreetmojo.com/wp-content/uploads/2022/11/Islamic-Banking-Meaning.png)
One of the main differences between conventional and Islamic banking is the way in which they generate profits. In conventional banking, profits are generated through the charging of interest on loans and other financial products. This means that the more money a bank lends out, the more interest it can charge and the more profits it can make. In contrast, Islamic banking does not allow the charging of interest on loans. Instead, profits are generated through profit and loss sharing arrangements, in which the bank shares in the profits or losses of the projects or businesses that it finances.
Another difference between the two systems is the way in which they approach risk. In conventional banking, the risk is typically managed through the use of financial instruments such as derivatives and insurance. In Islamic banking, risk is typically shared between the bank and the borrower through the use of structures such as partnerships and joint ventures. This means that both parties have a vested interest in the success or failure of the project or business being financed.
Overall, the choice between conventional and Islamic banking will depend on an individual’s or business’s financial goals, values, and risk tolerance. While both systems have their own unique features and benefits, it is important for consumers and businesses to carefully consider their options and choose the system that best meets their needs and objectives