Banking System a Comparative Study

8/8/2019 Banking System a Comparative Study

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THE BANKING SYSTEM


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Defining a Conventional Bank A bank is a trader of short term loans

A bank is dealer in debt his own

and of other people Crowther We can define a bank as an

institution whose debts are widelyaccepted in settlement of otherpeoples debt to each other Sayers


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Defining a Conventional Bank1. A commercial bank is dealer in

capital or more properly a dealer inmoney. He is intermediate partybetween the borrower and thelender. He borrows from one partyand lends to another and thedifference between the terms at

which he borrows and those at whichhe lends form the source of hisprofit. ----Prof. Gilbert


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Defining an Islamic Bank Islamic Bank is a financial institution

whose statutes, rules and proceduresexpressly state its commitment to the

principles of Islamic Shariah and to thebanning of the receipt and payment ofinterest on any of its operations. (OIC.April of1978 Dakar the capital of Senegal.)

Islamic banking is essentially a normativeconcept and could be defined as conduct ofbanking in consonance with the ethics ofthe value system of Islam.


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Islamicvs. Conventional

Banking ComparedIslamic Bank Conventional Bank

The functions andoperating modes ofIslamic banks arebased on IslamicShariah

The functions andoperating modes ofconventional banksare based onmanmade principles

IB promotes risksharing betweenprovider of capital andthe entrepreneur

The investor isassured of apredetermined rate ofinterest


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Maximizing profitshould not beobjective of an IB

It aims at maximizingprofit without anyrestriction

Islamic banks collectand distribute Zakat.

It does not deal withZakat.


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Participation inpartnership businessis the fundamentalfunction of the Islamicbanks.

Lending money andgetting it back withinterest is thefundamental functionof the conventionalbanks

wider scope ofactivities compared toa conventional bank. Amulti-purpose bank

Narrower scope ofactivities whencompared with anIslamic bank.


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The Islamic bankshave no provision tocharge any extramoney from thedefaulters

It can chargeadditional money(compound rate ofinterest) in case ofdefaulters.

It gives importance tothe public interest. Itsultimate aim is toensure growth withequity.

Banks own interestbecomes prominent. Itmakes no effort toensure growth withequity.


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For Islamic banks, it iscomparatively difficultto borrow money fromthe money market.

Borrowing from themoney market isrelatively easier

Since it shares profitand loss, the Islamicbanks pay greaterattention to developingproject appraisal andevaluations.

Since return from loanis fixed, it gives littleimportance to projectappraisal andevaluations.


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Islamic banks givegreater emphasis onthe viability of theprojects

Conventional banksgive greater emphasison credit-worthinessof the clients .

The status of Islamicbank in relation to itsclients is that ofpartners, investorsand trader.

The status of aconventional bank, inrelation to its clients,is that of creditor anddebtors


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Strictly speakingthere is no guaranteefor deposit money

A conventional bankhas to guarantee all itsdeposits.

An Islamic bank can

never be a bankrupt

A conventional bank

has every possibility tobe a bankrupt

Promotes massbanking

Promotes class banking


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Functional Differences between

Conventional and Islamic BanksIslamic Bank Conventional Bank

Collection of deposit

on the basis of profitsharing

Collection of deposit

on the basis ofinterest

Investment followingBuy mode/investment

mode/ lease mode

Extending credit onthe basis of interest

Issues letter ofguarantee

Issues letter of credit


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Functional Differences between

Conventional and Islamic BanksIslamic Bank Conventional Bank

Acting against

Creation of mediumof exchange and credit

Creating medium of

exchange and credit

Investment in sharesand Mudarabah bond

Investment in sharesand securities having

coupon rate of interestNo discounting of bill Discounting of bill


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Lending/investment ofIslamic &

Conventional bankcomparedPoint of diff. Conv. Bank Islamic Bank

Mode of

Investment

Lending Investment

(bui+lease+D.inv)

Safety of theloan

Primeconsideration

No guaranteefor investment

CollateralSecurity

Base of the loan Not required/Less important


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Character of

the loanapplicant

Important to be

considered

Very

important tobe considered

Purpose ofthe loan

Less important Importantconsideration

Liquidityconsideration

Highly importantas it prefer shortterm investmt

Less importantas it goes forterm investmt


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Financial

strength ofthe client

Important

consideration

Should be less

impotant

projectProfitability

Less important Very muchimportant

Diversificationofinvestment

Not a primeconsideration

An importantconsideration


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National

interest

Secondary

consideration

Primary

considerationClosesupervision

Not a routinework

Must be aroutine work

Observationof Shariah Not followed Strictlyfollowed

Banking System a Comparative Study

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