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3 Differences Between Islamic and Conventional Banks

Difference #2: Where is your money invested?

In investment accounts, conventional banks costumers do not know where the bank invests their money. More often than not, they invest in non-halal activities. This includes casinos, alcoholic beverages, pork-related businesses, and pornography to name a few.

In deposit accounts, the bank keeps a fraction of the money with them. The rest is loaned out on interest (riba) for various non-halal activities. So, a faith-based consumer indulges in riba in an indirect way. The bank uses that money to loan it to the businesses conducting non-halal activities. This includes conventional banks giving money to buy houses and charging riba.

In Islamic banks, the Shariah scholars mandate to disclose where Islamic banks invest the capital. The investment is only allowed in halal activities. So, faith-based consumers are safe.

Difference #3: Late payment charges

For late payment, the conventional banks will charge a certain percentage of interest. It will be on the outstanding principal amount. It compounds (interest upon interest) if carried forward. But Shariah scholars forbids Islamic banks from indulging into such unethical practices.

Until now, the Shariah scholars didn’t even allow the Islamic banks to charge late payment fees. But then consumers started being delinquent and abused the system. So, the Shariah scholars allowed to impose “Ta’widh“. A compensation for actual loss suffered by the financier.

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In most cases, the cap is set to a minimal fixed dollar amount instead of a fixed or floating percentage rate. Introducing this practice is to discipline the consumers to make timely payments. Special harmonious provisions are set for genuine hardship cases.

To sum up, it is the underlying Islamic contracts that differentiates Islamic banks from the conventional banks. The outcome of both entities may look alike, but the difference is in its composition. Mere outcome does not determine the difference.

It is not only about the end result. Because if it is, then it seems reasonable to be in a relationship with the opposite gender forever. Why perform faith-based rituals since outcome will be the same either way?

Prohibition on consumption of non-halal meat seems unreasonable. A faith-based consumer may choose to buy meat without restrictions. But that is not the case. Instead, we use a proper faith-based procedure to make things permissible.

And Allah knows the best. 

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