Principles of Islamic banking and finance/PIBF202/Key differences/Video signpost
In this video, Dr. Shamim Siddiqui from Hamdan Bin Mohamed Smart University, provides an overview of the key differences between Islamic and conventional banking
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Video transcript
Conventional commercial banks are the most important among financial institutions. They mediate between those who save from their current income and those who need money for businesses or consumption. They make a profit from the spread between the interest rate they pay on their deposits and the interest rate they charge on their loans. Commercial banks are heavily regulated by the central bank of every country, as their smooth functioning must be guaranteed to avoid any catastrophe in the financial system. Governments have also instituted insurance for bank deposits to provide confidence among bank depositors about the safety of their principals and the accrued interest on them. Without the involvement of interest, conventional banks cannot function. On the other hand, as you are already fully aware by now, Islamic scholars almost unanimously regard bank interest as riba which is strongly prohibited by the Qur’an, the primary source of Islamic law or shari’ah. Islamic banks, therefore, need to devise deposits and investment products that do not involve interest but at the same time provide incentives for savings and investment to all concerned parties. In this session, you will learn the differences between the working of conventional commercial banks and Islamic banks. For this, it will be appropriate first to know the role, functions and operations of commercial banks in a modern economy.
