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Before differentiating between Islamic and Conventional banking system it is important to understand bank. Bank The term bank is either derived from Old Italian word banca or from a French word banque both mean a Bench or money exchange table. A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank links together customers that have capital deficits and customers with capital surpluses. Characteristics / Features of a Bank The characteristics or features of Banks are: 1. Dealing in Money Bank is a financial institution which deals with other people's money i.e. money given by depositors. 2. Individual / Firm / Company A bank may be a person, firm or a company. A banking company means a company which is in the business of banking. 3. Acceptance of Deposit A bank accepts money from the people in the form of deposits which are usually repayable on demand or after the expiry of a fixed period. It gives safety to the deposits of its customers. It also acts as a custodian of funds of its customers. 4. Giving Advances A bank lends out money in the form of loans to those who require it for different purposes. 5. Payment and Withdrawal A bank provides easy payment and withdrawal facility to its customers in the form of cheques and drafts; it also brings bank money in circulation. This money is in the form of cheques, drafts, etc.

6. Agency and Utility Services A bank provides various banking facilities to its customers. They include general utility services and agency services. 7. Profit and Service Orientation A bank is a profit seeking institution having service oriented approach. 8. Ever increasing Functions Banking is an evolutionary concept. There is continuous expansion and diversification as regards the functions, services and activities of a bank. 9. Connecting Link A bank acts as a connecting link between borrowers and lenders of money. Banks collect money from those who have surplus money and give the same to those who are in need of money. 10. Banking Business A bank's main activity should be to do business of banking which should not be subsidiary to any other business. 11. Name Identity A bank should always add the word "bank" to its name to enable people to know that it is a bank and that it is dealing in money.

Difference between Islamic and Conventional Banking Islamic and conventional banking has some basic differences in theory and practice which draws a line of difference between the two entities. Although the basic function of the two institutions is to collect savings and transform them into junk amount and then lend to business firms, government, public sector organizations and individuals, yet the mode of collection of surplus funds from the savers and lending it to the borrowers is different. Some basic difference between Islamic and Conventional banking systems are:-

Conventional Banking System Islamic Banking System The functions and operating modes of The functions and operating modes of Islamic Banking is based on Islamic Conventional banking is based on fully principles and shariah. manmade principles (largely capitalism theory). The Conventional bank uses the money as a commodity which is bought and sold and on such two-way transactions they charge interest on it and make huge profit. Islamic bank use money as a medium of exchange to facilitate trade transactions. Islamic bank supplies money to traders to purchase real assets and to industrialists to purchase plants or raw material to augment production process and produce valueadded products. The execution of agreements for the exchange of goods & services is a must, while disbursing funds under Murabaha, Salam & Istisna contracts. The Islamic banks, on the other hand, give greater emphasis on the viability of the projects. Islamic Banks focuses on Investment.

In disbursing of any finance like cash finance, running finance or working capital finance, no agreement for exchange of goods & services is made. The conventional banks give greater emphasis on credit-worthiness of the clients. Conventional banks focus on lending.

Conventional banks deals in paper or Islamic bank deals in Assets. money. Conventional banking emphasis on ability Islamic Banking emphasis on soundness of to repay and look financial criteria. project and apply moral criteria in investment.

Conventional Banking System The relationship in Conventional banking between customer and bank is lender and borrower. The objective of the Conventional bank is to maximize the wealth of the shareholders and in this way accumulate wealth through the institution of interest.

Islamic Banking System The relationship in Islamic banking between customer and bank is Seller, buyer or partnership. The objective of Islamic bank is to stimulate business activities through profitand-loss sharing and in this way it accelerates circulation of wealth and facilitates distribution of income. For Conventional banks which are interest For Islamic banks it is must be based on based borrowing from the money market is shariah approved transactions relatively easier. Conventional banking aiming for profit Islamic banking aiming for profit that without religious or moral boundaries. adheres to Islamic discipline that is limited to that which benefits society. Conventional banks charge a compound Islamic Banks also charge compensation penalty on a loan if there is a late payment. for late payment, but it doesnt go to the bank earnings. Instead it is channels directly to charity.