Judging From The Difference Between Islamic And Conventional Banks

Differences between Islamic Banks and Conventional Banks (Howhomestudio-Unsplash image)

YOGYAKARTA - Indonesia has two types of banking, namely Islamic banks and also Conventional banks. Of course, these two types of banks are familiar to us, not to our ears? Let's discuss the differences between Islamic banks and conventional banks!

Getting To Know Islamic Banks

By definition, Islamic banks are banks that carry out activities based on sharia principles, or Islamic legal principles regulated in the fatwa of the Indonesian Ulema Council (MUI).

Getting To Know Conventional Banks

Meanwhile, conventional banks are banks that carry out their activities conventionally that refer to national or international agreements, and are based on state formal law.

Not only the difference from the definition, let's look at the differences between Islamic and conventional banks in the following article:

I. Implementation Principle

The first and conventional difference in Islamic banking is the implementation of the principles of each bank. The principle of application between Islamic and conventional banks is clearly different.

Conventional banks use conventional principles with reference national and international regulations based on applicable laws. Meanwhile, the principle of Islamic banks is sourced in Islamic law referring to the Qur'an and Hadith and regulated by the Ulama fatwa. So that all financial activities adhere to Islamic principles.

II. Operating System

The operational system is also a comparison of Islamic banks and conventional banks. In conventional banks, the operational system enforces the implementation of interest rates and agreements universally sourced from national provisions. The contracts between banks and bank customers are mostly carried out based on the agreement on the number of interest rates.

Meanwhile, Islamic banks do not practice interest in their transactions. For Islamic law, interest is included in the type of usury. So that the sharia bank operating system uses a contract for results or benefits. The agreement between customers and banks is sourced in the distribution of profits and involves buying and selling activities.

III. Destination Establishment

Background and destinations were established as differences between Islamic banks and conventional banks. Conventional banks have an orientation of profits with a free value or adhere to the principles that the general public has.

Unlike Islamic banks, the purpose of its establishment is not only profit-oriented, but also sharia value distribution and implementation. Banking financial activities are carried out not only looking at world effects, but also looking at the afterlife as well.

IV. Fund Management Process

Because Islamic banks practice Islamic principles, it also affects fund management policies. So that the difference between Islamic banks and the next conventional bank is the fund management process.

In conventional banks, fund management can be carried out in all profitable business lines under the auspices of the law. Meanwhile, customer money in Islamic banks must be used according to Islamic provisions. Sharia banks are required to manage customer funds in business lines permitted by Islamic rules. As a result, customer money should not be invested or managed in the business sector contrary to Islamic values, such as cigarette companies, drugs, and so on.

V. Relationship Between Banking Customers-Banking Institutions

The position of customers and banking institutions also affects the differences between Islamic banks and conventional banks. In conventional banks, the relationship between customers and banking institutions is debtors and creditors. Conventional bank customers function as creditors, while banking functions as debtors.

Unlike Islamic banks, relations between customers and banks are divided into 4 types, including sellers, partnerships, leases, and tenants. In the use of the murabahah contract, the istish, and greetings, the bank functions as the seller and customer as the buyer. Meanwhile, the contract for musyarakah and mudharabah treats the partnership bond. Akad ijarah positions the bank as the tenant and customer as the tenant.

VI. Flower System

The difference between Islamic and conventional banking is most prominent in the implementation of the interest system. Commercial banks use interest rates as a basic reference and profits. Meanwhile, Islamic banks do not use interest systems, but yields or benefits. The proceeds are obtained from the distribution of profits between banks and customers.

VII. Fines Management

Finally, the comparison of Islamic banks and conventional banks is the management of fines. When you are late in carrying out payments in conventional banks, there are fines imposed on customers. Moreover, the interest rate can increase, if the customer does not pay until the deadline is set.

Meanwhile, Islamic banks do not have provisions for the burden of fines for customers when late or unable to pay. Instead, the bank will carry out joint negotiations and agreements.

Although some Islamic banks have set fines in certain cases, the customer's fines are not enjoyed by the bank, but are budgeted as social funds.

In addition, you also need to know the Difference between Commercial Banks and BPRs.

So after knowing what the difference between Islamic banks and conventional banks is, see other interesting news on VOI.ID, it's time to revolutionize news!