(By Atif Aziz) Conventional banking or interest based banking is a banking system in which interest is charged on money against stipulated period of time. While Islamic banking or Modern banking is interest free banking system which is based on profit and loss sharing.
Conventional banking develops a habit of saving in the minds of people and the money remains idle which is kept in banks. Money is increased by the addition of interest. This habit of saving and leaving the money idle without any useful business activity causes accumulation of wealth in the hands of few. This causes unemployment, inflation and slowing down of development process in the nation. Interest based system brings fiscal deficit in the balance sheet due to flow of fake money in the market.
On the other hand Modern banking develops a habit of spending amongst the people and money is circulated in the market. The money is increased by business activity and money is distributed on profit-loss sharing basis. The sharing activity is an effect of business activity which in turn helps in the development of the nation. Business activities also generate employment and maintain inflation under limits. This also helps in raising the standard of living of the population.
Conventional banking system exploits the poor and the needy by giving loans at a very high rate of interest whereas in Modern banking there is an option of Qard-e-Hasana in which no interest is charged on loan. Conventional banking causes increased inflation which in turn causes price rise of the commodities, the effect of which is unrest in the minds of poor people that in turn increases criminal activities like theft, dacoit, militancy, terrorism and uneven development of the nation. There is an increased risk of bankruptcy in CB which is not there Modern banking system.
Modern Banking system is the solution of all the above problems as it maintains inflation to a reasonable level and people remain satisfied together with financial justice, peace and harmony in the society.
Some examples to explain modern banking system are listed below:
· Murabaha: Murabahah or murabaha is a particular kind of sale, compliant with shariah, where the seller expressly mentions the cost he has incurred on the commodities for sale and sells it to another person by adding some profit or mark-up thereon which is known to the buyer.
· Ijara: It is a rental agreement whereby Financial Institution leases an asset for a specific rent and period to the client. Ijara is an exchange transaction in which a known benefit arising from a specified asset is made available in return for a payment, but where ownership of the asset itself is not transferred.
· Diminishing Musharaka: It is a form of declining partnership between Financial Institution and client generally used to finance real estates.
· Musharaka: It means a joint enterprise formed conducting some business in which all partners share the profit accordingly.
· Bai Salam: It is a form of sale contract by Financial Institution which purchases goods for spot payment with deferred delivery. Bai Salam (transliterated as Bai us salam) is a contract in which advance payment is made for goods to be delivered at a future date. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. Bai Salam covers almost everything which is capable of being definitely described as to quality, quantity and workmanship. For Modern banking system this product is an ideal for agriculture financing. However, this can also be used to finance the working capital needs to the customer.
· Istisna: This mode of financing is designed to transact business through an order to manufacture or supply. It is a contract of exchange with deferred delivery, applied to specified made-to-order items. General agreement upon principles of practice is difficult to identify, however, it is often stated that the nature and quality of the item to be delivered must be specified. The manufacturer must make a commitment to produce the item as described. The delivery date is not fixed. The item is deliverable upon completion by the manufacturer. The contract is irrevocable after the commencement of manufacture except where delivered goods do not meet the contracted terms. Payment can be made in one lump sum or in installments, and at any time up to or after the time of delivery. The manufacturer is responsible for the sourcing of inputs to the production process.
These points, discussed above which if implemented by any financial institution whether big or small in any nation like India, would help remove poverty, financial disparity, crimes, theft and dacoit etc. This would bring peace in mind and smiles on the faces of the people.
By Atif Aziz