Shari’ah banking and regular banking: What’s the difference?
Many people think Shari’ah banking is specific to Muslims. This is not the case. While this form of banking is based on Islamic principles, it is a great option for anyone looking for an alternative to conventional banking systems. Here’s a breakdown of the differences between Shari’ah banking and regular banking.
What are the fundamental differences between regular and Shari’ah banking?
The biggest difference between the two banking systems relates to interest and usury.
- In regular banking, the bank earns money through the charging of interest. When lending money, the bank does not take on any of its clients’ risk.
- In Shari’ah banking, the charging of any interest is forbidden. Instead, the bank shares the risk with its clients, sharing in both profits and losses.
Unlike regular banking, Shari’ah banking is asset-based. What does this mean?
- In regular banking, money is treated like an asset, which means that it is seen as a product rather than just a medium of trade.
- Shari’ah banking does not see money as having intrinsic value over and above being a medium of trade. It is an asset-based form of financing, based on real assets and inventories. Profits are generated through the sale of actual assets.
Another difference relates to speculation and gambling.
- In Shari’ah banking, any kind of speculation or gambling is outlawed.
- Many of the financial practices engaged in at regular financial institutions, such as investing in certain types of derivatives and / or hedging instruments that are purely for speculative gains, for example, would not be permitted under Shari’ah banking.
Shari’ah banking places an emphasis on ethical investments.
- In Shari’ah banking, investing in or transacting with certain industries and companies is not permitted on ethical grounds.
- In regular banking, no specific industry or type of business is prohibited from transacting. However, this does not mean that regular banks don’t adhere to any ethical standards. Our values and code of ethics ensure financial growth with respect and integrity.
Would I be interested in Shari’ah banking?
There are many reasons why you might want to investigate Shari’ah banking. These reasons are not limited to ones based on your religious or cultural background. Shari’ah banking is a good option for anyone who is looking for:
- A modern form of banking based in traditional values.
- A form of banking that seeks to uphold specific ethical principles.
- A form of banking without usury or interest.
- A form of banking without any speculation involved.
- An asset-based form of banking where risk is shared between the client and the bank.
Visit our Shari’ah Banking page for more information.