Islamic banks differ from conventional American banks in many ways. Islamic banks design instruments and financing modes in the boundaries prescribed by Islamic law. Conventional American banks are not subjected to any religious pretexts that define the code of financial ethics but the laws ascertained by financial regulators of the country. American banks are promised a fixed markup rate from the loan that they lend but Islamic bank share both the profit and loss from the forwarded loan.
American banks do not encompass any religious taxes to support the community but just the state taxes apply. However, Islamic banks collect the zakat (Islamic tax for benefitting community) and disperse it among the needy segments of the society. Conventional Islamic banks simply lend the money and are concerned about the principal as well as compound interest payments they receive. However, Islamic banks engage partnerships with clients and partner in the losses or profits of clients. Therefore, they work on understanding the nature of client’s business inside out to monitor their performance. In addition, American banks do not concern the project evaluation or appraisal of their client’s business. This is because they are receiving a designated amount of interest and client’s business proceedings does not affect them. However, Islamic banks carry out project evaluation of their client because they are a partner in losses as well. In American banking system if an installment is not paid on time or defaulted a compounded interest charge is levied on it. However, in Islamic banking it is prohibited to charge any such late surcharges and care is taken to assess the actual problems faced by the defaulter. If payment was defaulted due to genuine reasons no penalty is imposed but if it was done deliberately then a small compensation is charged. This compensation is not added to the bank’s revenue but is dispersed to charity causes. American banks may focus only their personal growth targets and revenue growths. However, Islamic banks are required to focus on growth of their partners in business i.e. clients and keeping public interest at heart of future objectives. American banks can borrow money from money markets easily.
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