3- Islamic Banking distinguishes from Conventional banking

3- Islamic Banking distinguishes from Conventional banking

Conventional banks use interest as a tool of profit but in Islamic banks use assets as a tool Profit, they don’t charge interest.
The basic difference between conventional and Islamic banking is that Islamic banks is asset based banking. An Islamic bank doesn't give loan but provides you with your required asset and add up its profit in their incurred cost.


Islamic Banking distinguishes from Conventional banking in four basic principles


3.1 - Interest Free Transactions

“The interest which you give to increase the wealth of people, will have no increase with Allah: But that which you lay out for charity, seeking favor of Allah (He will increase): it is these who will get a recompense multiplied.”
Ar Rum 39 (First Revelation)


“O you who believe, Fear Allah and give up what remains of your demand for Interest, if you are indeed a believer. If you do not, then you are warned of the declaration of war from Allah and His Messenger; But if you turn back you shall have your principal: Deal not unjustly and you shall not be dealt with unjustly.”
Al Baqarah 278 - 279 (Fourth Revelation)
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RIBA IN HADITH

From Hazrat Jabir Ibn-e-Abdullah (RA)

”The Prophet, may peace be upon him, cursed the receiver & the payer of interest, the one who records it and the witnesses to the transaction & said: “They are all alike [in guilt].”

(Muslim, Termidhi & Musnad Ahmad)

From Hazrat Abu Hurayrah (RA)
The Prophet (PBUH) said:
“Riba has seventy segments, the least serious being equivalent to a man committing adultery with his own mother.”

(Ibn Majah)
From Hazrat Abu Hurayrah (RA):
The Prophet (PBUH) said:
“There will certainly come a time for mankind when everyone will take Riba & if he does not do so; its dust will reach him.”
(Abu Dawud, Ibn Majah)


3.2 - Risk Sharing
Islamic banking is all about asset financing. In Islamic banking, we cannot give personal finance as in conventional banking. we have to finance some product (mostly raw material),,, For Example
In conventional: if you require raw cotton worth Rs.100,000/- then the conventional banking would provide you the money so that you can buy the cotton yourself, whereas In Islamic, would pay the supplier of the raw cotton Rs.100,000/- and ask him to deliver the cotton at the buyer's premises, so this is the basic difference.
In between if the raw material destroys (catch fire, etc) then the risk will be faced by the bank as the asset is under bank's ownership, but if it destroys due to mishandling then you will be responsible for that.

3.3 - Asset & Service Backing
For example if you booked a car through conventional Bank & the delivery would be in the next six months plus you can't revoke the contract you need to pay the installment from the day you get into contract. But in Islamic Finance Bank you'll get into contract as soon you get the car in your possession & if the car is lost it is not your loss it is the loss of the Bank they will provide you another one or they would end up with the contract. Plus you can revoke the contract before you get into it legally. What ever the losses are of banks only for keeping there funds Idle but the only clause is that bank would sell the car at market rate if it is sold below Cost price then bank would deduct this loss from your security because you signed an undertaking for this. This is one way It might help you all to understand Islamic Finance.

3.4 - Contractual Certainty( Gharar free contracts)


Uncertainty, hazard, chance or risk, ambiguity and uncertainty in transactions. Technically, the sale of something which is not present at hand; or the sale of something where the consequences or outcome is not known. It can also be a sale involving risk or hazard in which one does not know whether it will come to be or not, such as fish in water or a bird in the air; or an event where assurance or non-assurance is subject to chance and thus not known to parties of a transaction. Can also mean uncertainty or a hazard that is likely to lead to a dispute in a contract.