Major Differences Between Islamic And Banking System

569 words - 3 pages

Major Differences between Islamic and Banking System |
Islamic System |
| Conventional System |
Money is a product besides medium of exchange and store of value. | Real Asset is a product. Money is just a medium of exchange. |
Time value is the basis for charging interest on capital. | Profit on exchange of goods & services is the basis for earning profit. |
Interest is charged even in case, the organization suffers losses. Thus no concept of sharing loss. | Loss is shared when the organization suffers loss. |
While disbursing cash finance, running finance or working capital finance, no agreement for exchange of goods & services is made. | The execution of agreements for the exchange of goods & services is must, while disbursing funds under Murabaha, Salam & Istisna contracts. |
Due to non existence of goods & services behind ...view middle of the document...

Rather, they are disbursed on the basis of Windo Dressed project feasibility and credibility of the entrepreneur. | Musharakah & Diminishing Musharakah agreements are made after making sure the existence of capital good before disbursing funds for a capital project. |
Government very easily obtains loans from Central Bank through Money Market Operations without initiating capital development expenditure. | Government can not obtain loans from the Monetary Agency without making sure the delivery of goods to National Investment fund. |
The expanded money in the money market without backing the real assets, results deficit financing. | Balance budget is the outcome of no expansion of money. |
Real growth of wealth does not take place, as the money remains in few hands. | Real growth in the wealth of the people of the society takes place, due to multiplier effect and real wealth goes into the ownership of lot of hands. |
Due to failure of the projects the loan is written off as it becomes non performing loan. | Due to failure of the project, the management of the organization can be taken over to hand over to a better management. |
Debts financing gets the advantage of leverage for an enterprise, due to interest expense as deductible item form taxable profits. This causes huge burden of taxes on salaried persons. Thus the saving and disposable income of the people is effected badly. This results decrease in the real gross domestic product. | Sharing profits in case of Mudarabah and sharing in the organization of business venture in case of Musharakah, provides extra tax to Federal Government. This leads to minimize the tax burden over salaried persons. Due to which savings & disposable income of the people is increased, which results the increase in the real gross domestic product. |
Due to decrease in the real GDP, the net exports amount becomes negative. This invites further foreign debts and the local-currency becomes weaker. | Due to increase in the real GDP, the net exports amount becomes positive, this reduces foreign debts burden and local-currency becomes stronger. |

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