Comparison between Islamic banking (interest free) and conventional banking (interest based)
Conventional Banking Islamic Banking
1. The functions and operations are based on manmade principles.
1. The functions and operations are based on the principles of Islamic Shariah.
2. The investor is assured of a predetermined rate of interest.
3. It aims at maximizing profit without any restriction.
2. In contrast, it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur).
3. It also aims at maximizing profit subject to Shariah restrictions.
4. It can charge additional money (penalty and compounded interest) in case of
Defaulters.
4. In Islamic banking is case of defaults the extra amount charged to customer will go for charity not in the bank’s income.
5. Very often it results in the bank’s own interest becoming prominent. It makes no effort to ensure growth with equity.
6. The conventional banks give greater emphasis on credit-worthiness of the clients.
5. It gives due importance to the public interest. Its ultimate aim is to ensure growth with equity.
6. The Islamic banks, on the other hand, give greater emphasis on the viability of the projects.
7. A conventional bank has to guarantee all its deposits.
8. Time value is the basis for charging interest on capital.
9. In its investment product, the investor is promised a fixed rate. In reality, it is a riba based loan activity.
10. The bank-customer relationship; loan lender and borrower.
7. Islamic bank can only guarantee deposits for deposit account. Thus the depositors are guaranteed repayment of their funds, however if the account is based on the mudarabah concept, client has to share in a loss position.
8. Profit on trade of goods or charging on providing service is the basis for earning profit.
9. In its investment product, an Islamic bank promotes the sharing of risk and profit between investor and investment fund manager. There is no fixed profit promised.
Division of profit is based on real profit.
10. The bank-customer relationship, seller, buyer or partner.

11. A conventional bank accepts deposits from its client and forwards them on interest to other clients who require financing. The interest charged on such a transaction is distributed amongst the depositors and the bank
Car financing in Islamic banking:
11. Islamic bank receives deposits on the basis of Musharakah or Mudarabah and invests these funds according to Shariah.
Meezan bank’s car Ijarah unit provides car financing based on the principles of Ijarah and is free of the element of interest. Meezan bank’s car ijarah is a car rental agreement, under which the bank purchases the car and rents it out to the customer for a period of 1 to 5 years, agreed at the time of the contract. Upon completion of the lease period, the customer gets ownership of the car against his initial security deposit. Rental starts after the delivery of asset.
• If the customer fails to pay rental on due date a certain amount is taken from the customer and given to charity by the bank.
• The customer is responsible only for misuse and negligence, not for events beyond control.
• If the customer breaks any term of agreement, bank has the right to terminate Auto
Ijarah. However if there is no violation by the customer, Auto Ijarah cannot be terminated without mutual consent.
Car financing in conventional banking:
• Lease commences the very day on which the price is paid by the bank, whether the customer has taken the delivery or not.
• Expenses incurred in the process of purchase of asset are paid by the customer.
• Lease does not differentiate between wear and tear or losses caused by the negligence of customer and customer is liable for cost incurred due to natural disasters.
• Penalty charges are taken from the customer on late payment. They are taken as income by the bank.
• In a lease agreement, unrestricted power has been given to bank to terminate the lease whenever it wishes.

House financing in Islamic banking:
House financing works on a diminishing Musharakah basis.
In this financing, client and bank jointly own a property, where the Bank will provide a certain amount of financing. Client uses the house for his residential requirement and pays rent to the bank for using his share in the property. The total monthly payment is reduced regularly as client’s share in the property grows. This process keeps on going until the bank’s share becomes zero and the client becomes the sole owner of the property.
House financing in conventional banking:
Lending conventional banks in housing products, purchase development and renovation has reduced mount to Rs 25.6 billion by end of 2014 which was stood at Rs 27.4 billion in 2013, showing a decrease 6.5 percent in this particular head.
The reason being that they target the posh areas and charge very high interest rates from the customers, as compared to the Islamic baking targeting the middle class customers.
Starting a business in conventional/Islamic banking:
If a person wants to start his business he will take a loan on interest basis from a conventional bank and pay the principle amount plus the interest on that, on the other hand if the same person goes to an Islamic bank the Islamic bank asks him about the type of business he wants to start and provides all resources or material to him to start his business instead of giving him only cash and charge some fees on that.