Islamic finance is a financial system that operates according to “Sharia” principles. Sharia, which is an Arabic term, means, “The way to the source of life” It has all the features of a conventional financial system such as capital markets, fund managers, investment firms and insurance companies. However, these systems are governed by Islamic laws. A core concept of Islam is that Allah is the owner of all wealth in the world, and humans are only the trustees of the wealth. Therefore, humans need to manage wealth according to Allah’s commands, which promote justice and prohibit certain activities. The law does not forbid Muslims from enjoying wealth, they have the right to enjoy whatever wealth they acquire and spend in sharia-compliant ways. They need not feel reprehensible about being wealthy as long as their behaviour aligns with Islam. Islamic banking and conventional banking differs in certain aspects, while the conventional banking follows the interest based principle, Islamic banking is based on interest free principle and principle of profit and loss sharing and in performing their businesses as intermediaries. An Islamic bank is essentially a partner with its depositors and also a partner with its entrepreneurs this agreement is done to avoid the payment of interest. The difference between the two banking systems also lies in terms of governance structure, Islamic banks must comply with the rules posed by the Holy Quran and meet the expectations of Muslim community by providing acceptable financing modes of Islam.
Conventional banking on the other hand is based on debtor-creditor relationship between the bank and the customer, interest is the consideration between the borrower and the banker reflecting the opportunity cost of money.