5 Things That Makes Islamic and Conventional Saving Accounts Different

Islamic saving accounts and conventional saving accounts offer similar day-to-day banking services. However, Islamic savings accounts work according to Shariah Law practices. While the conventional banks work based on interest based operation. Saving account is adeposit account at a bank that lets a customer to maintain their cash/money while also earning or not earning income/profit on the deposited cash/money.

5 Differences Between Islamic and Conventional Saving Accounts

The Underlying Mode

The conventional banks have no specific underlying mode in the saving account. While Islamic saving account comes under the rules of mudaraba to provide a return on investment. Some Islamic banks also used wadiah or qard contracts, and the Islamic bank will give hibah (instead of profit) to the customer at its discretion.

Permissible investment

The conventional banks use the funds for any kind of investment and other purposes regardless of its shariah-compliance. Therefore, the conventional bank may subsequently earn non shariah-compliant return. On the other hand, Islamic banks only use the deposited fund for investment in shariah-compliant business.

Interest and Profit sharing

Islamic savings avoid earning money on interest, while conventional savings offer you a certain amount of interest based on the amount deposited. Conventional banks accept deposits on the loan basis for all deposit types such as term deposit, saving, and current account. Therefore, the interest-based return is provided for the saving account.

On the other hand, Islamic savings accounts work based on profit and loss sharing instead. The Islamic saving accounts use mudharaba contract. The client’s funds are invested in various businesses and share the return between the bank and the client based on agreed profit sharing ratios, whereas the loss is also shared per investment ratio.

Bank and Customer Relationship

In the conventional bank, the customer acts as creditor who provides the fund, and the bank acts as the debtor who borrows the fund from the customer. While in Islamic banks, the customer is the rabbul maal who provides the capital, and the bank acts as mudharib (entrepreneur) who run the capital to generate profit. In other words, the relationship between the customer and bank is based on partnership.

Allowed Transaction

The conventional savings account will permit you to use your debit card in any business or market that accepts credit cards. But, Islamic savings accounts will enable you to transact in only halal businesses. Therefore, companies that sell alcohol will not accept Islamic debit cards as they are deemed non-halal. Practically, even if you were purchasing not halal-certified meat, the transaction should not be done with an Islamic debit card or account.

In summary, Islamic banks function following the Mudaraba Principle. The client acts as the Financier, and the bank acts as the Fund Manager. Customers expect to profit, but the amount can fluctuate. That is, the risk exists for both the Financier and the fund manager. Generally, the bank receives most of the profit, and the Financier gets the remaining profits.
Comparably, conventional savings accounts work based on the creditor and debtor relationship. Usually, banks use the customer’s money to lend to others or invest in some businesses which are not always halal. Indeed, the customers do not take the risks, and the bank pays the agreed interest rate.

An Islamic bank account is for you if you want to follow the shariah principles, avoid riba or interest, and involve in non halal business.

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