If we take a close look at the banking sector in the UAE, one of the most common types of banks you will come across is Islamic Banks. Islamic banks operate in quite a different way than conventional banks do.
Before you start looking for the best Islamic bank in UAE for your needs, it is essential to understand Islamic banks better. How exactly are these options different from your conventional banks, and who should prefer them over the traditional banking framework?
This is what we’re going to discuss in today’s article and a lot more…
The Ideology Behind Islamic Banks
The main difference between Islamic and conventional banks is the ideology upon which this banking industry was founded.
Interest is prohibited in Islam, regardless of how much. The reason for this prohibition of interest (Riba) is due to the thought of unequal distribution of social income among the population.
But, conventional banks are based entirely on interest, which is the reason why these types of banks are referred to as interest-based banks.
Main Differences Between Conventional and Islamic Banks
Islamic banks produce products that are generally asset-backed and involve trading and renting of assets, as well as participation in profit and loss.
However, conventional banks treat money as a commodity. They lend this commodity against interest as part of its compensation.
Also, in conventional banking, interest is charged regardless of business performance, without any loss sharing. On the other hand, Islamic banks have absolutely no concept of interest, and losses are shared under Islamic financing.
As far as cash disbursements are concerned, there are no agreements revolving around exchanging goods and services during cash disbursement in conventional banking.
There is also no presence of goods and services during the disbursement of funds. Money expansion may also result in an increase in inflation. But, if we talk about Islamic banks regarding cash disbursements, the agreement for exchanging goods and services is mandatory according to Murabaha, Salam, and Istisna contracts. And, unlike in conventional banks, there typically is a presence of goods and services during fund disbursement. But, because there is no expansion of money, there will be no inflation.
Conventional and Islamic Bank
Speaking of inflation, conventional banks tend to increase the prices of goods and services if undergoing inflation. When determining the price of the product, each product price will have to include the aspect of inflation as well. In Islamic banks, however, there is tight control over inflation. Plus, there are no extra charges charged by Islamic banks due to inflation.
In conventional banks, money tends to circulate among only a small number of hands. Because of this, no real growth is witnessed. But, in the case of Islamic banking, real wealth typically goes into numerous hands. As this money tends to circulate among various people. In short, there will be a multiplying effect when it comes to real wealth in the case of Islamic bank.
If individuals cannot pay loans in conventional banks, such a loan becomes a non-performing loan, and it is also written off. But, when it comes to Islamic banking, the ownership is transferred to another entity to help overcome the losses.
