Nowadays, between Islamic finance and conventional finance is the

 

Nowadays,
it seems that a lot of people have been
confused and unaware about Islamic financial. Some
people thought that Islamic product is only can be used for muslims. So,
people need to change their perception about Islamic product which can only be
used by muslim. The truth is, it can be used by variety of people. When we talk
about Islam, we know that Islam is not just about
laws and religion. Islam is more than people think about. Islam is principle of life that deals with various aspect which are social, ethic, culture and economic manner.
In term of finance, the Islamic product
that contributed is Islamic finance. Islamic
finance is a financial system that operates according to Islamic law that based
Syariah complaint which is Al-Quran and Hadis (source) while conventional
finance is that we used now1
(Islamic Finance for Dummies by Faleel Jamaldeen). There are several major
differences between Islamic finance and conventional finance which are the
function, risk sharing and interest.

            Firstly, the difference between Islamic finance and conventional
finance is the function. The system of conventional bank that we used now that operated
based on the principle while Islamic bank system that operated based on the
principles of Islamic Syariah. In addition, the perception of Islamic product
were following the Syariah principle, ethical and fair practice and transparent
in terms. In Islamic finance, they strictly follow the laws and regulations
because the key for imposing these laws and ethics are to promote justice. In Islam,
justice is important to all people to protect
the right of people and giving others equal treatment. Islam is promoted
justice to all people is because to show the moral virtue. Therefore, in order to protect the people right justice is a
key of Islamic finance industry grows and develops well in order to
compete with other products. On the other hand, conventional finance is essentially based on debtor and creditor relationship
between depositors2. By the same token,
in bank conventional systems they lend money to borrowers to make a profit from
the higher interest charged on the principle amount which is give burden to
borrower to pay back. By knowing with these different type of bank functioning,
people will learn a lot and aware in managing their wealth.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

            Secondly, the different between Islamic finance and
conventional is risk sharing. People can make an evaluation through this step
what are the differences and it teach us about risk sharing in financial
market. In conventional financing, the customer bear all the risk of paying to bank
the loan from the amount of money they borrowed while in Islamic financing
promotes risk sharing between provider of capital and the user of fund which
are between investor and intrepreneur. For example, if the customer used
conventional in finance had loss or bankcruptcy so they need to bear all the
risk of paying back the loan or their name will be blacklisted. However,
Islamic finance operates on the principle of profit and loss sharing because
Islam hand encourage risk sharing in financing transaction. As we know, Islam
is promoted justice so the bank will bear the half of the risk that inherent by
the customer. For example, when a risk shared among two or more parties, the
burden faced by each party is reduced based on made of finance used “Mudarabah” and “Musharakah”3 (Islamic
Finance for Dummies by Faleel Jamaldeen). Other example of Islamic product
which is “Takaful” which they will bear the all risk that happened to their Takaful
member or if nothing happen they will give the profit of contribution amongst Takaful
member. There will have something beneficial if we choose the right system that
guarantee our future.

Thirdly,
the different between Islamic finance and conventional is interest. In conventional finance, bank will charge additional
money which is the amout borrowed as a compound interest or penalty to customer
if customer make loan in case of defaulters. While, in Islamic finance, the
bank consider interest they charged on loan or usury as “riba” and it does not
mean in Islam. In term of “riba” has been subjected to various forms of
regulations and restrictions. Islamic finance system is very concerned and
strictly prohibit of taking interest on loans. Otherwise, interest has given a
burden to borrower to pay back because the amount of money borrowed has
increase so high which is including their interest. For example, in Islamic
finance, they prohibit no usury or unlawful (interest) in term of “riba”, no
certainty or trickery in term of “gharar” and no compounding of interest and
unfair fees. In Islam, it has syariah principkle applied such as Akad Mudarabah
(buy-sell), Musharakah Mustanaqishah (capital sharing) and Ijarah Wa’iqtina
(leasing with the option of ownership) instead of interest3(Islamic
Finance for Dummies by Faleel Jamaldeen).

As
a conclusion, in order to be good person an responsibility as a Muslim person
we know that Islam is prohibited against transaction that involve gambling,
fraud and oppression toward people. Therefore, we need to be wise in managing
our finance and wealth according to Allah’s commands which promoting justice
and prohibited certain activities. It is important to acknowledge the several
major differences between Islamic finance and conventional finance which are the
function, risk sharing and interest. After all, as a consumer of financial
product we need to be wise in managing our financial well and the most
beneficial. It is no use crying over split milk if we have loss in managing our
finance.

1 http://www.dummies.com/personal-finance/islamic-finance/what-is-islamic-finance/

2

3 http://www.dummies.com/personal-finance/islamic-finance/islamic-finance-for-dummies-cheat-sheet/