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Introduction
The principle source of the Shariah is The Quran followed by the recorded sayings and
actions of Prophet Muhammad in the Hadith. As we can see, the solutions to problems can be
found in these two sources, but rulings are made based on the consensus of a community leaned
scholars, independent reasoning of an Islamic scholar and custom, so long as such rulings to not
deviate from the fundamental teachings in The Quran.
Actually, the revival of Islamic banking coincided with the world-wide celebration of the
advent of the 15th Century of Islamic calendar (Hijra) in 1976. Muslims particularly those of the
oil producing countries, received a best due to high of the oil prices, which had hitherto been
under the control of foreign oil Corporations. These events led Muslims' to strive to model their
lives accordance with the ethics and principles of Islam. Islam brings more benefits to people in
creating the good life.
Islamic banking has the same work as conventional banking except that it operates in rules of
Shariah, known as Fiqh al-Muamalat that going Islamic rules on transactions. Islamic banking
be practiced consistent with the Shariah and its practical is good for application of development
of Islamic economics. Islamic banking is being accepted all over the world, for centuries rather
than decades. Islamic banking is the best banking to provide fairness between people. This
system of banking based to the statutes of Islamic law and economics. Paying or collecting
interest which is riba, is prohibited by Islamic law. Other than that, sharing profit and loss is a
banking principle and shareholder capital and deposits are kept separate to ensure fair revenue
sharing.
The top of the head, unlike the conventional banks because the financing of Islamic banks are
restricted to useful goods and services and refrain from financing alcoholic beverages and
tobacco that are morally unacceptable services. We must prevent such goods and services that
are unacceptable to people in a country. So, Islamic banks provide more safety source of
financial compared to the conventional banks.

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Definition of Islamic Banking
Islamic banking refers to a system of banking that is consistent with the principles
of the Shari'ah which is the Islamic rulings and practical application through the development of
Islamic economics. As we can see, the principles which emphasise moral and ethical values in all
dealings have wide universal appeal. To apply the concept of Shari'ah , Islamic Banking will
prohibits the payment or acceptance of interest charges (riba) for the lending and accepting of
money, as well as carrying out trade and other activities that provide goods or services
considered contrary to its principles. Basically, Islamic banking refers to a system of banking
that complies with Islamic law that is Shariah law. The principles govern the Islamic banking are
mutual risk and profit sharing between parties, the assurance of fairness for all and that
transactions are based on an underlying business activity or asset.
The goods of the principles are supported by Islamic banking's core values whereby
the activities that cultivate entrepreneurship, trade and commerce and bring societal development
and beneficial. Activities that involve interest (riba), gambling (maisir) and speculative trading
(gharar) are totally prohibited to the Islamic banks.
Through the use of various Islamic finance concepts such as ijarah, (leasing),
mudharabah (profit sharing), musyarakah (partnership), and financial institutions have a great
deal of flexibility, creativity and choice in the creation of Islamic finance products. Besides, by
emphasising of transactions, the Islamic banking sets a higher standard for investments and
promotes greater accountability and risk mitigation.
Malaysia's Islamic finance industry has been in existence for over 30 years. The
enactment of the Islamic Banking Act 1983 enabled the country's first Islamic Bank to be
established the liberalisation of the Islamic financial system. Malaysia continues to progress and
to build on the industry by inviting the foreign financial institutions to establish international
Islamic banking business in Malaysia to conduct foreign currency business.
The ethical and moral consideration of Islamic banks totally based on the Islamic
Shari'ah. In contrast with conventional banks, Islamic banks do not consider only the credit
worthiness and high interest rate as standard, instead they must apply Islamic moral and ethical
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criteria in their provision of financing. This adds another merit for Islamic banks since there is a
beneficial impact on the productivity in the economy as it reduces the social and economic cost
of such harmful products and activities.
The advantage would be being able to support a financial institution that abides by
Sharia laws. As I understand it, Islamic Finance prevents the charging of interest on loans. But,
they do charge lending fees. In United States GAAP, accountants would look at that lending fee
and the time period of the loan, and will determine that the fee is actually equivocal to a certain
interest rate.
The Islamic banks have their own purpose and have their roles to the Muslims
.They will do Shariah compliant activities, prohibited of interest, solve risk sharing , make
money as potential capital, have sanctity in contract and prohibition on speculative transaction.
The Islamic banks are providing greater social and moral responsibility and fairness in Islamic
property.
As an example, the fixed monthly repayment to help customers balance their
monthly budget. Cost of stamp duty lower by 20%. As set out in budget, stamp duty for an
Islamic property financing is discounted by 20% as compared to a conventional loan. Moreover,
the penalty fee for property disposal within the lock-in period can be potentially lower than a
conventional loan. A conventional loans penalty fee for early settlement is a set percentage,
whereas the Islamic bank will charge based on the banks prevailing cost of funds only.
Different to conventional loans, which are based on Base Lending Rate, Islamic loans are
based on Base Financing Rate (BFR) which the bank can actually adjust based on prevailing
market conditions but not more than the ceiling rate, which is the maximum profit an Islamic
finance provider will earn. For Conventional loans will charge high value of interest to make
profit for them. To make sure our financial is good and clean from hide transactions ,riba and
others, I am a Muslim suggest to choose the Islamic banks as my management of the good
financial.
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Comparison between Islamic Banking and
Conventional Banking
Conventional Banking Features Islamic Banking
Conventional banks are based
on fully manmade principles
Function and operating
modes
Islamic banks are based on the
principles of Islamic Law
(shariah) which is in the Quran.
It aims at maximizing profit
without any restriction. The
interest is prominent. It makes
no effort to ensure growth
with equity.
Aims
It also aims at maximizing profit
but subject to Shariah
restrictions. It gives due
importance to the public interest.
Its ultimate aim is to ensure
growth with equity.
Money is a commodity
besides medium of exchange
and store of value. Therefore,
it can be sold at a price higher
than its face value and it can
also be rented out.
Commodity
Money is not a commodity
though it is used as a medium of
exchange and store of value.
Therefore, it cannot be sold at a
price higher than its face value or
rented out.
Interest is charged even in
case the organization suffers
losses by using bank funds.
Therefore, it is not based on
profit and loss sharing.
Sharing basis
Islamic bank operates on the
basis of profit and loss sharing.
In case, the businessman has
suffered losses, the bank will
share these losses based on the
mode of finance used
(Mudarabah, Musharakah).
It does not deal with Zakat.

Zakat
In the modern Islamic banking
system, it has become one of the
service-oriented functions of the
Islamic banks to be a Zakat
Collection Centre and they also
pay out their Zakat.
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It can charge additional
money (penalty and
compounded interest) in case
of defaulters.
Additional charge
The Islamic banks have no
provision to charge any extra
money from the defaulters.
Small amount of compensation
and it is given to charity. Rebates
are given for early settlement at
the Bank's discretion.
Since income from the
advances is fixed, it gives
little importance to developing
expertise in project appraisal
and evaluations.
Priority
Since it shares profit and loss,
the Islamic banks pay greater
attention to developing project
appraisal and evaluations.
The status of a conventional
bank, in relation to its clients,
is that of creditor and debtors.
Status in relation to client
The status of Islamic bank in
relation to its clients is that of
partners, investors and trader,
buyer and seller.
Conventional banks use
money as a commodity which
leads to inflation.
Effects on economics
Islamic banking tends to create
link with the real sectors of the
economic system by using trade
related activities. The money is
linked with the real assets,
therefore it contributes directly
in the economic development.
A conventional bank has to
guarantee all its deposits.

Assurance
Only guarantee deposits for
deposit account, which is based
on the principle of al-wadiah,
thus the depositors are
guaranteed repayment of their
funds, however if the account is
based on the mudarabah concept,
client have to share in a loss
position.
Time value is the basis for
charging interest on capital.
Profit
Profit is gained on trade of goods
or charging on providing service
is the basis for earning profit.
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Conclusion
Proposed by Anwar Qureshi in the late forties, Islamic banking has expanded
worldly. Over the time role assumed by the banking sector has become vital for the
growth and development of economies and societies. One of the clear drawbacks of
Conventional banks is, they use money as a commodity which leads to inflation. It is
contrary to Islamic banks which promote economic development as they practice
avoidance of economic activities involving speculation (gharar).
Islamic banking and Conventional banking have apparent differences. Islamic
banks which practice Shariah principles that have been outlined in al-Quran are
prohibiting restrictions against the other people. Riba or commonly known as interest,
is Haram (unlawful) in Islam. Islamic law considers a loan to be given or taken, free of
charge, to meet any contingency.
Hence, the creditor will not take advantage on the borrower in a way that will
give oppression (zulm) on him. A second important characteristic of Islamic banks is
that they are in general prohibited from trading in financial risk products, such as
derivative products. In order for banks and their clients to comply with Sharia, over the
past decades, specific products have been developed that avoid the concept of interest
and imply a certain degree of risk-sharing.
Now, Islamic banks are in everywhere which is easy to be accessed. Mostly the
banks of conventional system are also opening their separate Islamic banking divisions
and branches. The decision to choose either Islamic bank or Conventional bank is
depends on ourselves.