Conventional Banking vs Islamic Banking System

Introduction

Most businesses have a need for a line of credit or other financing with a bank. Especially when business is slow or the company is in some way struggling, relations with your banker can become strained. When the banker is worried, he may start asking hard questions. We present some ideas on how to deal with this situation and on how to make your banker all time partner, not just when things are going well.

The key to excellent relations with your banker is having excellent communications. To have him on your side, he needs to understand what you are doing and to be confident of what to expect in the future. You must reach the point in your dealings with him that you tell him what is happening before it happens. The better able you are to project, the more confidence he will have.

It should be self evident that the banker's main concern is being repaid. The objective here is to inspire genuine, earned confidence, not to pull the wool over the eyes of an unsuspecting lender. Be informed, do what is right, and communicate. Since your banker expects you to know your business much better than he does, communicate on an ongoing basis the following elements of your business.

Literature Review

The conventional banking theories assume that banks earn profits by purchasing deposits from the depositors at a low interest rate, then reselling those funds to the borrowers at higher interest rate, based on its competitive advantage at gathering information and underwriting risk (Santos, 2000). Therefore, conventional banks make profits from the spread between the interest rate received from borrowers and the interest rate paid to depositors.

Islamic banking performs the same intermediary function but does not receive a predetermined interest from borrowers and does not pay a predetermined interest to the depositors; the amount of profits is based on the profit sharing agreements with the depositors and also with the borrowers. In addition, there are fee-based...