London School of International Business (LSIB)

How does Islamic banking differ from conventional banking in the context of the Rqf Level 5 Certificate in The Concepts of Islamic Finance and Banking course?

How Islamic Banking Differs from Conventional Banking in the Context of the Rqf Level 5 Certificate in The Concepts of Islamic Finance and Banking Course

Islamic banking and conventional banking are two distinct systems that operate on different principles and values. In the context of the Rqf Level 5 Certificate in The Concepts of Islamic Finance and Banking course, it is important to understand the key differences between the two systems.

Islamic banking is based on the principles of Shariah law, which prohibits the payment or receipt of interest (riba). Instead of charging interest on loans, Islamic banks provide financing through profit-sharing arrangements, where the bank and the customer share the risks and rewards of the investment. This is known as the principle of mudarabah.

On the other hand, conventional banking operates on the basis of interest-based transactions. Banks lend money to customers at a predetermined rate of interest, which is charged on the principal amount borrowed. This interest is the primary source of income for conventional banks.

One of the key differences between Islamic banking and conventional banking is the concept of risk-sharing. In Islamic banking, both the bank and the customer share the risks and rewards of the investment, which promotes a more equitable distribution of wealth. This is in contrast to conventional banking, where the burden of risk falls solely on the borrower.

Another important difference is the prohibition of investing in certain industries in Islamic banking. Shariah law prohibits investments in industries that are considered unethical or harmful, such as alcohol, gambling, and tobacco. Islamic banks are required to ensure that their investments are in line with Islamic principles, which promotes ethical and socially responsible investing.

Furthermore, Islamic banking emphasizes the importance of ethical conduct and social responsibility. Islamic banks are required to operate in a transparent and ethical manner, and to ensure that their investments benefit society as a whole. This focus on ethical conduct sets Islamic banking apart from conventional banking, which is often criticized for its lack of transparency and ethical standards.

In conclusion, Islamic banking differs from conventional banking in several key ways, including the prohibition of interest-based transactions, the emphasis on risk-sharing, the restriction on investing in certain industries, and the focus on ethical conduct and social responsibility. By understanding these differences, students pursuing the Rqf Level 5 Certificate in The Concepts of Islamic Finance and Banking course can gain a deeper appreciation for the unique principles and values that underpin Islamic banking.