Product Differentiation between Islamic Banking and Conventional Banking Submitted to: Quazi Sagota Samina Senior Lecturer, Department of Business Administration. East West University, Dhaka. Submitted by: NameID Arafat Rauf2009-2-10-345 FIN 380 Section: 2 Group: 10 Fall: 2011 Date of Submission: 23rd October 2011 Table of Content Executive Summary3 Objective of the Study3 Limitation of the Study3 Analysis4 Bibliography12 Executive Summary Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Sharia’h) principles and guided by Islamic economics.
In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called riba. Generally, Islamic law also prohibits trading in financial risk (which is seen as a form of gambling). In addition, Islamic law prohibits investing in businesses that are considered unlawful, or haraam. Islamic finance has been gaining momentum on a global scale for the last 30 years. Conventional banking is based on collateral. In conventional banks charging interest does not stop unless specific exception is made to a particular defaulted loan.
Interest charged on a loan can be multiple of the principal, depending on the length of the loan period. More than half the population of the world is deprived of the financial services of the conventional banks. Objective of the Study Our objective of the study was to know the product differentiation of Islamic Bank and Conventional bank. In which way they differ from each other. In our case, we have use Shajalal Islamic Bank as an Islamic bank and Uttara Bank as a Conventional bank. We mainly focus on to know the difference of Islamic bank and conventional bank. Limitation of the Study
Although we have tried our best to make this term paper perfect but there were some limitations that obstructed us from doing so. We have faced some problems while preparing this report. Some of the limitations encountered while making this report are as follows: The topic has so much to cover, so initially we faced some problem to choose the appropriate field to talk about. We tried to collect information about Uttara Bank, but as not much information is available we faced some problem to make comparison with Shajalal Islamic Bank. Analysis of the study ISLAMIC BANKING
Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Sharia’h) principles and guided by Islamic economics. In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called riba. Generally, Islamic law also prohibits trading in financial risk (which is seen as a form of gambling). In addition, Islamic law prohibits investing in businesses that are considered unlawful, or haraam. Amongst the governing principles of an Islamic bank are: * The absence of interest-based (riba) transactions; The avoidance of economic activities involving oppression (zulm) * The avoidance of economic activities involving speculation (gharar); * The introduction of an Islamic tax, zakat; * The discouragement of the production of goods and services which contradict the Islamic value (haram) Islamic law considers a loan to be given or taken, free of charge, to meet any contingency. Thus in Islamic Banking, the creditor should not take advantage of the borrower. When money is lent out on the basis of interest, more often it leads to some kind of injustice. (Website of sooperarticles. om) Conventional Banking Conventional banking is based on the principle that the more you have, the more you can get. In other words, if you have little or nothing, you get nothing. As a result, more than half the population of the world is deprived of the financial services of the conventional banks. Conventional banking is based on collateral. Conventional banks look at what has already been acquired by a person Conventional banks go into ‘punishment’ mode when a borrower is taking more time in repaying the loan than it was agreed upon. They call these borrowers “defaulters”.
When a client gets into difficulty, conventional banks get worried about their money, and make all efforts to recover the money, including taking over the collateral. In conventional banks charging interest does not stop unless specific exception is made to a particular defaulted loan. Interest charged on a loan can be multiple of the principal, depending on the length of the loan period. (Website of scribd. com) Uttara bank (UBL) UBL is one of the largest private banks in Bangladesh. It operates through 211 fully computerized branches ensuring best possible and fastest services to its valued clients.
The bank has more than 600 foreign correspondents worldwide. Total numbers of employees are nearly 3,562. The Board of Directors consists of 13 members. The bank is headed by the Managing Director who is the Chief Executive Officer. The Head Office is located at Bank’s own 18-storied building at Motijheel, the commercial center of the capital, Dhaka. Special loan scheme Consumer credit Uttaran Consumer-Credit Scheme : ________________________________________ UBL started Uttaran Consumers Credit Scheme from 1996. UBL offers opportunity of Financial assistance for – •Motor cycle/car- New or re-conditioned. Refrigerator/ Deep Freeze. •Television/ VCR /VCP/VCD •Radio/ Two-in-one/ Three – in – one •Air-Conditioner/ Water Cooler/ Water Pump •Washing Machine. •Personal Computer/ UPS/ Printer/ Type writer •Sewing Machine. •House hold furniture- Wooden & Steel. •Cellular Telephone. •Fax •Photocopier. •Electric Fan- Ceiling/ Pedestal/ Table. •Bi-Cycle •Dish Antenna. •Baby Taxi, Tempo/Microbus (For self employed persons) •Kitchen articles such as Oven, Micro-oven, Toaster, Blender, Pressure Cooker etc. Special Features : •No collateral security is required. •Simple rate of interest. •Quick sanction. •Maximum Loan amount Tk. ,00,000/- •5% incentive on total interest charged Personal Loan : ________________________________________ Personal Loan Scheme for Salaried Officers- •Emergency expenses for own marriage of a service- holder or his dependents. •Emergency expenses of urgent surgical operation/ medical treatment. •Emergency educational expenses of the children for admission/purchase of books, examination fees etc. Special Features : •Any permanent salaried employee aged between 20 to 55 years is eligible to get loan. •No collateral security is required. •Maximum Amount of loan Tk. 1,00,000. •Maximum period of loan upto 3 years.
Deposit scheme: ?Saving account Features : •Minimum amount : Taka 1,000. 00 •Rate of Interest : 4. 50% •Free Cheque-Book facility •Opportunity to apply for – safe deposit locker facility •Collect foreign remittance in both T. C. & Taka draft. •Transfer of fund from one branch to another by oDemand Draft oMail Transfer oTelegraphic Transfer •Transfer of fund on Standing Instruction Arrangement •Collection of cheques through Clearing House. •Issuance of Payment Order / Call Deposit 1. Special Notice Deposit: •Govt. , Semi-Govt. , Autonomous organization and an individual may open SND Account with UBL. 7 days notice required to withdraw. Deposit Amount Below 1 crore Equal and above 1 crore and below 25 crore Equal and above 25 crore and below 50 crore Equal and above 50 crore and below 100 crore Equal and above 100 crore 2. Fixed Deposit Receipt •Any Bangladeshi national residing home or abroad may open FDR with UBL. •FDR may be opened single/joint name for a period of 3, 6, 12, 24 and 36 months. •UBL offers attractive/competitive rate of interest in FDR. Fixed Deposit (FDR) Rate of Interest 13 months & above but less than 6 months ) deposit below Tk. 1. 00 crore11. 50% b) deposit Tk. 1. 00 crore and above but less than Tk. 5. 00 crore11. 75% c) deposit Tk. 5. 00 crore and above12. 00% 26 months & above but less than 1 year11. 00% 31 year & above but less than 2 years11. 00% 42 years & above but not more than 3 years11. 00% 3. Double Benefit Deposit Scheme a) Any adult Bangladeshi National will be eligible to open this account. b) Minimum Tk. 1,00,000/- (Taka One Lac only) and multiples thereof will be accepted as deposit under this scheme. c) The period shall be of 8. (Eight years Six months) years term. d) Deposit may be encashed before its maturity and no interest will be paid if encashed before 1(one) year of deposit. e) Interest will be paid at Savings rate if encashed after 1(one) year. f) Advance will be allowed up to 80% of the deposit after completion of one year g) Full amount including interest will be paid on maturity. h) Govt. tax, Surcharge, Source Tax, Levy, Govt. Excise duty will be recoveredfrom the depositor’s A/C. i) Account holder can appoint a nominee against the account. ) Bank reserves the right to close the account at any time and make amendment / alteration of the terms & conditions of the scheme Without assigning any reason. 4. Monthly Deposit Scheme a) Any adult Bangladeshi National will be eligible to open this account. b) The period of the scheme will be 5 (five) years and 10 (ten) years term. c) Monthly installment will be Tk. 500/-, 1000/-, 2000/-, 3000/-, 5000/- & 10000/- d) Monthly installment to be deposited within 10th day of the month. After due date a penalty of Tk. 50/- will be realized from the A/C holder.
If the A/C holder fails to deposit 3(three) consecutive monthly Installments, the account will be automatically closed. e) No cheque book will be issued against the account. f ) Deposit may be encashed before maturity. But no interest will be paid if encashed before 1(one) year of deposit. f) Advance will be allowed up to 80% of the deposit after completion of one year g) Interest will be paid at Savings rate if encashed after 1(one) year of deposit. h) Advance will be allowed up to 80% of the deposit after completion of one year. ) Full amount including interest will be paid on maturity. j) Govt. tax, Surcharge, Source Tax, Levy, Govt. Excise duty will be recovered from the depositor’s A/C. k) Account holder can appoint a nominee against the account. l) Bank reserves the right to close the account at any time and make amendment / alteration of the terms & conditions of the scheme Without assigning any reason. (Website of Uttara bank) Shahjalal Islami Bank Limited (SJIBL) Commenced its commercial operation in accordance with principle of Islamic Shariah on the 10th May 2001 under the Bank Companies Act, 1991.
During last ten years SJIBL has diversified its service coverage by opening new branches at different strategically important locations across the country offering various service products both investment & deposit. Islamic Banking, in essence, is not only INTEREST-FREE banking business, it carries deal wise business product thereby generating real income and thus boosting GDP of the economy. Management Team is strong and supportive equipped with excellent professional knowledge under leadership of a veteran Banker Mr. Md. Abdur Rahman Sarker.
Their Vision is to be the unique modern Islamic Bank in Bangladesh and to make significant contribution to the national economy and enhance customers’ trust & wealth, quality investment, employees’ value and rapid growth in shareholders’ equity. Islamic Mode of Investment Bai Mechanism: Bai means purchase and sale of goods in cash or on credit or in advance at an agreed upon profit, which may or may not be disclosed to the client. Majority of investments of Islamic banks are extended through this mechanism. A good number of investment products have been designed to facilitate mainly working capital financing which goes as follows:
Bai-Murabaha Murabaha LC(Sight/Deferred): Through this mode of indirect facility, the bank facilitates import of goods of the client at fixed rate of service charge (LC commission) on invoice value. LC may be opened at 100% cash or at a different ratio. Murabaha Post Import TR : This is a post import finance under the principle of “Bai”, extended to retire Shipping Documents under LC opened. We buy the imported goods and sell the same to the importer at a cost plus an agreed upon profit repayable today or on some date in the future in lumpsum or by installments.
Usually payment is made by lumpsum from the sale proceeds of the consignment. Possession of goods remains with the client. Collateral security is usually obtained to secure the finance. Murabaha Post Import Pledge : As like as Murabaha Post Import TR with an exception to security. Goods remain under the control of the Bank. Collateral security may or may not be obtained. Bai-Muajjal Bai-Muajjal Commercial TR: It is an agreement between bank and client whereby bank delivers goods to the client upon deferred payment, i. e. the client shall pay the price at some future date at a time, by lumpsum or by installment. Under this mode of nvestment, bank is not supposed to disclose cost price and profit separately. Goods are delivered on trust and Trust Receipt is obtained for legal implication. Bai-Muajjal (Real Estate): Mode of operation and principle of this product are alike Bai-Mujjal Commercial TR. Difference is with the purpose, i. e. the facility is only extended against construction or purchase of building, apartment etc. Bai-Muajjal (WES Bill): Investment facility under this Mode is extended to liquidate ABP liability at maturity, when the client cannot liquidate the liability as a result of non-repatriation of the related export proceeds.
Bai-Muajjal (Term): Under this mode of investment, term facility is given to meet client’s requirement, which is repaid by a specific repayment schedule. Purpose is a bit different, such as to meet BG claim, etc. Bai-Salam Bai-Salam (PC): This is export finance. Bai-Salam is a term used to define a sale in which the buyer makes advance payment, but the delivery is delayed until sometime in the future. Usually the seller is an individual or business and the buyer is the bank. The Bai-Salam sales serve the interest of both parties: a.
The seller- receives advance payment in exchange for the obligation to deliver the commodity at some later date. He benefits from the salam sale buy locking in a price for his commodity, thereby allowing him to cover his financial needs whether they are personal expenses, family expenses or business expenses. b. The purchaser benefits because he receives delivery of the commodity when it is needed to fulfill some other agreement, without incurring storage costs. Second, a Bai-Salam sale is usually less expensive than a cash sale.
Finally a Bai-Salam agreement allows the purchase to lock in a price, thus protecting him price fluctuation. (Website of SJIBL) Islamic Banking Vs Conventional Banking: An Islamic bank is distinguishable from its conventional counterpart by some basic principles, each of which is derived from the Quran, sunna, or both. The main difference between Islamic and conventional banking is that Islamic teaching says that money itself has no intrinsic value, and forbids people from profiting by lending it, without accepting a level of risk – in other words, interest (known as “riba”) cannot be charged.
There are two major differences between Islamic Banking and Conventional Banking: 1. Conventional banking practices are concerned with “elimination of risk” where as Islamic banks “bear the risk” when involve in any transaction. 2. When Conventional banks involve in transaction with consumer they do not take the liability only get the benefit from consumer in form of interest whereas Islamic banks bear all the liability when involve in transaction with consumer. Getting out any benefit without bearing its liability is declared Haram in Islam.
To make money from money is prohibited – wealth can only be generated through legitimate trade and investment. Any gains relating to this trading are shared between the person providing the capital and the person providing the expertise. (Website of wiki. answers. com) The unique features of the conventional banking and Islamic banking are shown in terms of a box diagram as shown below:- Conventional BanksIslamic Banks 1. The functions and operating modes of conventional banks are based on fully manmade principles. 1. The functions and operating modes of Islamic banks are based on the principles of IslamicShariah. . The investor is assured of a predetermined rate of interest. 2. In contrast, it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur). 3. It aims at maximizing profit without any restriction. 3. It also aims at maximizing profit but subject to Shariah restrictions. 4. It does not deal with Zakat. 4. 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. 5.
Lending money and getting it back with compounding interest is the fundamental function of the conventional banks. 5. Participation in partnership business is the fundamental function of the Islamic banks. So we have to understand our customer’s business very well. 6. It can charge additional money (penalty and compounded interest) in case of defaulters. 6. The Islamic banks have no provision to charge any extra money from the defaulters. Only small amount of compensation and these proceeds is given to charity. Rebates are give for early settlement at the Bank’s discretion. . Very often it results in the bank’s own interest becoming prominent. It makes no effort to ensure growth with equity. 7. It gives due importance to the public interest. Its ultimate aim is to ensure growth with equity. 8. For interest-based commercial banks, borrowing from the money market is relatively easier. 8. For the Islamic banks, it must be based on a Shariah approved underlying transaction. 9. Since income from the advances is fixed, it gives little importance to developing expertise in project appraisal and evaluations. 9.
Since it shares profit and loss, the Islamic banks pay greater attention to developing project appraisal and evaluations. 10. The conventional banks give greater emphasis on credit-worthiness of the clients. 10. The Islamic banks, on the other hand, give greater emphasis on the viability of the projects. 11. The status of a conventional bank, in relation to its clients, is that of creditor and debtors. 11. The status of Islamic bank in relation to its clients is that of partners, investors and trader, buyer and seller. 12. A conventional bank has to guarantee all its deposits. 12. Islamic bank an 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.. (Website of zaharuddin. net) Bibliography Here are some web addresses we use in our study: I. Official website of SJIBL, see http://www. shahjalalbank. com. bd/default. asp II. Official website of UBL, see http://www. uttarabank-bd. com/ III. “Similarities and differences between Islamic banking and conventional banking”, see http://wiki. nswers. com/Q/List_similarities_and_differences_between_Islamic_banking_an d_conventional_banking IV. ‘Islamic Banking”, see http://www. sooperarticles. com/finance-articles/demystification-islamic-banking-166518. html V. “Islamic-Banking-vs-Conventional-Banking”, see http://www. scribd. com/doc/17116904/Islamic-Banking-vs-Conventional-Banking VI. Rahman Zaharuddin, “Differences between Islamic Bank and Conventional Bank” see http://zaharuddin. net/index. php? option=com_content&task=view&id=297&Itemid=72 (all are accessed in 21st October 2011)