Difference and Similarities in Islamic A

ACC 4561 : ACCOUNTING FOR ISLAMIC BANKS
Differences and Similarities in Islamic

and Conventional Banking
Group 1:
Amalia Bt Othman 1213956
Nur Alia Bt Ahmad Zemani 1216640
Nor Fadzrina Bt Zulghafar 1221660
Khairun Nisa’ Bt Ahmad 1121662
Nur Atikah Bt Zainal 1314756
Introduction
Any financial system is expected to assist in running the economy by providing the
following
services grouped in two headings:
Savings mobilization
Provision of general utility services (not against sharia, hence no restriction for IFI)
Introduction
• There exists difference in mechanism of funds mobilization from savers to
entrepreneurs as described following.
• Savings mobilization consists of two phases i.e.accepting deposits and
extending financing and investments.
1. Deposits: Deposits are collected from savers
under both type of institutions for reward
Conventional Bank Islamic Financial Institution
• reward is fixed and predetermined • deposits are accepted through
• return is higher on long-term deposits Musharaka and Mudaraba
and lower for short-term deposits. where reward is variable
• total risk is born by the bank and total • Higher weight for profit sharing is
reward belongs to it after servicing the assigned to long-term deposits and
depositors at fixed rate lower weight for short-term deposits
• risk and reward both are shared with
depositors
2. Financing & Investments:
Conventional bank offering loan for a fixed reward
Islamic Financial Institution can charge profit on investments but not
interest on
loans.
2.1 Financing & Investments:
Overdrafts/Credit Cards
Conventional Bank Islamic Financial Institution
• offer the facility of overdrawing from account of the • As for facility of financing is concerned that is not offered
customer on interest. by Islamic banks except in the form of Murabaha
• Credit card provides dual facility to customer including • however facility to shop/meet requirement is provided
financing as well as facility of plastic money through debit card
• a customer is charged with interest once the facility availed • Murabaha only profit is due when the commodity is
• default customer is charged with further interest for the delivered to the customer.
extra period • claim only the original receivable
• customer can avail the opportunity of rescheduling by • amount agreed in initial contract.
entering into a new agreement to pay interest for extended • how to deal with intentional defaulters:
period • to blacklist the defaulter for any further
financing facility, to stipulate in the contract that in case of
default all installments will be due at once, to stipulate
in the contract a penalty shall be imposed but the same
shall not form income of IFIs rather it will go in charity
2.2 Financing & Investments: Short Term
Loans
Conventional Banking Islamic Institution Banking
• provided to customer to meet working capital • As for inventory investment provided by

requirements of firm Islamic banks through Murabaha.
As for meeting of day to day expenses of
business financing is provided through
participation term certificates where by
profit of a certain period is shared by IFIs on
prorata basis.
• Personal consumption loans are not issued by
IFIs how ever any individual can acquire
anything for his personal use under Murabaha
2.2 Financing & Investments: Short Term
Loans
Islamic Institution Banking
• Differences;
• cannot get cash under
Murabaha.
• Second asset is purchased by IFI initially then transferred to customer hence IFI participate in risk.
• Third refinancing facility is not available under Murabaha.
• Fourth in case of default price of the commodity
cannot be enhanced however penalty may be imposed if stipulated in original contract of Murabaha however same
cannot be included in income of IFI.
• Fifth only those assets can be supplied by IFIs under Murabaha whose
general and/or intended use is not against the injunctions of Shariah
2.3 Financing & Investments: Medium to Long
Term Loans
provided for fulfilled through
Islamic Financial
Conventional
Institution
Banking
purchase or Murabaha, Bai

building of fixed Muajjal and Istasna
assets by firms to profit sharing
expand or replace under Musharaka
the existing assets. and Mudarabah
2.4 Financing & Investments: Leasing
Conventional Banking
• usufruct of an asset is transferred to lessee for agreed amounts of rentals.
• ownership may or may not be transferred.
Islamic Financial Institution
• Provided under Ijara
• Differences;
• rental under Ijara are not due until asset is delivered to the lessee for use.
• additional rent cannot be demanded in case of default except a penalty (if stipulated in original contract of
lease
• during period of major repair rent cannot be demanded by IFI.
• if asset is lost or destroyed IFI cannot claim further installments
2.5 Financing & Investments: Agricultural
Loans
Conventional Banking
• Short-term loans : for seeds and fertilizers
• long-term loans : to develop additional lands and purchase ofequipments.
• provides credit facility by charging interest.
Islamic Institution Banking
• Under Bai Salam cash is provided to farmers for purchase of seeds and fertilizers
• Murabaha facility is used for purchase of equipment
• Musharaka and Mudaraba is used for development of additional land
2.6 Financing & Investments: House Financing
2.7 Financing & Investments: Investments
• to maintain liquidity conventional banks have many avenues including government securities, shorter
Conventional
term loans and money at call and short notices, leasing companies’ bonds, investment in shares etc.
Banking
• IFIs avenues are very limited to create required liquidity at the same time to earn some revenue by investing in
short term and liquid securities.
• IFIs cannot invest in government securities, short term loans, bonds and money at call and short notices
because of interest based transactions.
Islamic Financial • Investment in market able securities, IFIs are not free to invest in any equity security due to two reasons:
Institution
1)Halal business of the underlying firm is required..
2)Second financial operations of underlying firm should be interest free.
2.7 Financing & Investments: Investments
• Kse Meezan Index(KMI) - major conditions to qualify a security as Sharia compliant :
• the core business of the company should be Halal
• illiquid assets should be equal to 20% of total assets of the company.
• ratio of all interest based debts including preferred stock should be less than 40% of total assets
of the company
• ratio of non Sharia compliant investments to total assets of the company should be less than 33%
• revenue from non compliant investments should be less than 5% of total revenue of the company
and even then IFIs are required to purify their earnings by spending this non compliant revenue as
charity
Islamic Financial • market price per share should be greater than the net liquid assets per share.
Institution
• Sukuk (Islamic Bonds) - ownership certificates and not mere debt securities hence all risks and
rewards are shared by Skukholders.
Conclusion
Islamic financing is working within the Sharia frame work following certain restrictions:
IFIs cannot provide finance for an activity which is prohibited by Sharia
IFIs cannot lend any amount in cash for interest however need is fulfilled either through supply of
required asset or through profit and loss sharing.
profit can be shared as per agreement between the parties involved however loss must be shared
according to capital contribution/ownership.
THANK YOU

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ACC 4561 : ACCOUNTING FOR ISLAMIC BANKS

Differences and Similarities in Islamic

• provided to customer to meet working capital • As for inventory investment provided by

purchase or Murabaha, Bai

IFIs cannot provide finance for an activity which is prohibited by Sharia

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