Difference Between Islamic and Conventional Banking!

The recently announced Islamic Branchless banking service from UPaisa and Meezan Bank sparked a debate among the top bankers and consumers on what an Islamic banking is and what is the real halal way of paying an electricity bill or making a fund transfer for that matter.

What is Islamic Banking?

For the sake of definition, for those who don’t know it, Islamic banking is primarily a banking system where profits, proceeds, revenues or charges of a service aren’t re-invested/consumed for interest-based revenue generating activities, un-ethical businesses or un-social transactions.

For example when you pay a bill, say Rs. 5,000, then this money stays with the bank or mobile financial service company for a certain duration (even if its for few hours) until it is transferred to electricity company.

Islamic Banks don’t invest their reserves for interest-based revenue generating activities

This layover of funds, also known as float income, at times amount into billions or even trillions of rupees and if you are paying your bill through Islamic Bank or Islamic Branchless Service then this money won’t be used for interest generating activities during this, such as interest-based loans, stock investments etc.

In both systems, while money is residing within the system it is used to earn profits. The difference here is that in an Islamic system, it may be further invested in Sharia compliant businesses, while in conventional system it may be invested in Non-Sharia compliant businesses or business with interest-based returns.

Further points to be noted here are:

  • State Bank of Pakistan has a separate ‘Islamic Sharia’ department in place, which is responsible for verifying the system in-light of Sharia before providing Islamic Branchless Banking license.
  • Islamic Sharia Department of SBP also keeps on checking the practices, investments and returns of Islamic Banks to ensure that they are indeed Sharia compliant during the run.
  • State Bank is also bound to re-invest ‘Islamic bank’s cash reserve’ in trade which is free of riba or in any un-ethical businesses such as gambling, loans etc,.

According to State Bank, following Banks and Branchless Banking services in Pakistan are Sharia compliant:

  • Albarakha Bank
  • Bank Islami
  • Burj Bank
  • Dubai Islamic Bank
  • Meezan Bank
  • MCB Islamic Bank
  • Meezan-Upaisa Islamic Branchless Service

Samir heads the sponsored content department at ProPakistani. He also looks after the Life section.


  • I do not see Faysal Islamic Bank name in the list.

    • M Waseem Akhtar

      Faysal Islamic is a window of Faysal Bank. Its not a separate entity.

      • Hassan Raza

        i also agree with you.. same as HBL bank give us HBL islamic banking what ever you say .

  • Saleem

    We are not responsible for anybody else activities so one must not be bothered how banks or branchless banks are making use of our money deposited in our accounts. Islamic Mobile Banking etc is a marketing gimmick and nothing else. A common man is generally exploited with emotional mantras, religious statements, and patriotic slogans because these are the things that make people give or take even life of others.
    Just live your life to the fullest and don’t dig into small small things. Be visionary and grow… this is help whole nation to grow. That’s it.

    • HassaanM

      Totally agree with you.

    • Muneeb Raja

      I dont support Islamic Banking because I don’t know much about it.
      But you are responsible for where you put your own money. If you put it in interest-based account, then you are directly involved. If you put it in interest-free account then you are involved indirectly!

      Just want to say that saying a bad practice bad is admitting that there is a fault. But if you say bad thing is good then you are admitting it as part of your life.
      (Here ‘you’ means me, you and all).

    • Muhammed Ovais Alam

      Religion doesn’t hold US back.
      It’s OUR limited vision and thinking which is holding us back.

      AND sood is HARAM no matter what your family/friend/boss say.

    • Abuhajira

      I do not agree with you on the issue. While there is merit in saying that we are not concerned with how someone else uses the money, it may not be completely correct from Shar’i point of view.

      This is not a mantra. It is a simple common sense for those who study islamic studies. Is the bank acting as a wakeel on behalf of the electricity department, and re-investing the money in the elec. dept’s name. If so, then it is their matter.

      However, if the company acts as the wakeel of the consumer and pays the elec. dept. on his behalf, then the money given to the bank becomes the consumer’s money held in wakalah by the bank. re-Investing this money will not be by the bank rather by the consumer on whose behalf the bank is investing.

      Actual structure may differ whereby the bank may choose to keep the profits/interest payouts for its own benefit, BUT in strict shar’i terms this would be problamatic to say the least.

  • Stone

    The difference between Traditional Banking & Islamic Banking: Traditional banking says, Profit ho ga and Islamic Banking says InshaAllah profit ho ga :)

    • M Waseem Akhtar

      Why don’t you just shoot chicken and eat it……..its meat anyways…………… Mode of transaction does matter.

    • facebook post logics for a facebook generation. if you want to learn the real differences then read the actual books on islamic banking instead of relying on facebook posts.

    • Abuhajira

      To be extremely honest, that “insha’Allah” makes a huge difference. And I am not talking about the spiritual aspect of saying insha’Allah, rather in the legal technical terms.

      The conviction of the profit takes the risk of the investment away. This makes the investment capital into a loan. Just as in loan you are entitled to seek the entire sum regardless of the actual usage of the capital. Profit upon such sure-shot investment becomes interest. Conventional system makes the credit-union or the bank liable to pay it out.

      On the other hand, the insha’Allah profit instills the risk that it is quite possible that the investment may not yield the advertised or quoted return, just as any investment in a business where the person can say all the “Allah Qasams” that there will be profit, but you know for sure that the conviction of profit will ONLY materialize once you have the profits in your hand! This is the Shariah method.

    • Stone

      All of you gentlemen failed to understand the pun behind this……for Islamic banking to exist in actuality, the core banking system prevalent needs to be Islamic. No matter how YOU look at it, every investment made through Islamic or non Islamic banking ends up in the same interest based system. So whether it’s mode of transaction or the legal/spiritual actualization of profit, it EVENTUALLY goes in to the same banking system.

      As for Arif: After reading your comment, I know what you mean about the FB generation. I am a 34 year old professional with an MBA and 12 years of varied experience in multinationals being mistaken for the FB generation by the FB generation :)

      • Abuhajira

        Is that the Pakistani Structure wherein the islamic-banking model works under/dependent on the interest based banking model? An citation for that would be helpful.

        But if it is a hunch, then that should not be sufficient. On a more technical level we are on verge of haajah and dharurah here. A country that has withholding taxes, transferal taxes, taxes on paying taxes .. it is a crime to even possess capital.

        I have not misunderstood or failed to understand the pun here. I provided a subtle yet flagrant (if that could happen) difference between secular banking and islamic banking. There are definitely intricacies involved. Is there is i’anah alal ma’siyyah or not, if so at which level.

        When we pay for an item through out ATM card, that becomes a hawalah towards the bank. But the bank does not renders out cash from it rather credit. Making money off that credit. Are you then directly responsible for what the bank has done? Should you be concerned that your money just went to earn the bank its interest over a credit? All these are viable discussions for an islamic banking.

        In South Africa we had entire division of a bank working independently for islamic provisions instead of relying on its main interest-based division. There was no inter-credit exchange, neither was one’s transactions dependent on another. There are many who think they understand islamic banking, and then there are those who kind of do have a sense of it ;)

        • Stone

          See you did NOT get the pun. My point was not against Islamic banking as a system but as it exists in this country. As for the hunch, no it is not a hunch, it is a known fact. Please listen to people like Bilal Qutab and you will come to know how the so called Shariah compliance is achieved here. Besides him, I have had the chance to speak to several people involved in the banking sector and one of my teachers who is a UK return Financial Analyst and teacher of Financial Management. So no matter what you believe or do, your money does end up in the interest based system.

          If I remember correctly, Meezan bank is apparently the cleanest when it comes to Islamic banking and then it Dubai Islamic. Otherwise, it’s just conventional banking in the guise of traditional banking to help you sleep at night.

          • Abuhajira

            What you have explained is “NOT” a pun. It is extrapolating on the discussion of the difference. The pun in your OP is “Insha’Allah profit hoga”. This is the same pun Inam posted after you on the same day in the pic form. I understand this pun, but I used your pun as a platform to explain the correct shar’i outcome of that “Insha’Allah”. perhaps you didnt understand that.

            Regarding banking system then, when a claim is made “So no matter what you believe or do, your money does end up in the interest based system” with two financial analyst (teachers or no teachers), then that is not a sufficient citation. I requested you to post a citation for the structure which is used which shows how the money gets involved.

            If you are talking about Syed Bilal Qutab, then he is an architect by profession and comes as a Sufi Scholar or a motivational speaker on media. He is not an Alim however. EVEN if someone is an Alim, Islamic Finance is a specific field. Not every “General Practitioner” gets to give you diagnosis on cardiology or neurology. So forgive me if I do not accept him as the credible voice in a field of Islamic Banking and Finance.

            Secondly someone being a Financial Analyst does not mean he knows how the intricacies of Islamic Banking works. Unless ofcourse he has done side courses towards AAIOFI and has some clue towards the Islamic Banking standards. I have had quite a few meetings with consultants in banks about “Islamic Finance Models”, generally the undrstanding of the Islamic Shar’i requirements vary from mediocre to poor, except a select few who have a bright insight into the matter.

            Now I will not say that there is NO possibility of intermixing of funds, there definitely is. But with all what you have said so far, I do not see any concreteness or evidences to support your claim.

            • Stone

              Right…….so financial analyst don’t know about their field, a guy who has studied religion deeply doesn’t know about it because he is an architect by profession yet whatever you say has to be agreed on because???

              • See my dear friend. Now you have diverted from discussing the subject matter and are discussing personalities. I am half interested in your financial analyst friend or Mr. Bilal Qutab. You presented them as your reliance for the field of “islamic knowledge” and “islamic finance”. Hence I commented.

                So please enlighten me about them. Where did Bilal Qutab study Islamic Studies. Who are his teachers?

                Where did your respected teacher study Islamic Banking and Finance. Being in UK, I know for sure many universities offer graduate level courses in Islamic Finance.

                Other than that, I know for certain that a normal “Financial Analyst” does not deal with structural, theological and juristic issues of Islamic Banking and Finance. This is because the two are completely separate models.

                P.S My info is in my profile brother.

  • Dr Nabeegh

    Even ‘islamic’ banks follow one and only interest based system in Pakistan i.e KIBOR. It is juxt like to say HALAL SHARAB.

    • According my limited knowledge , there is an alternate to KIBOR in islamic banking, Kindly see https://www.meezanbank.com/NewsDetail.aspx?iNewsID=101

    • M Waseem Akhtar

      Kibor is just a profitability benchmark just like medical stores where standard profit rates for retailers is 15%. Kibor rate is a market practice and Islam allows to charge profit on market rate.

  • HassaanM

    Connect the dots:

    PTCL > Ufone > Upaisa > Meezan Upaisa > ProPakistani

    This is completely in line with the pro-PTCL trend we are seeing here on this website. Not too long ago they advertised a 3-year free internet service from PTCL Charji as lifetime. What is to say this is not another paid/misleading content?

  • Mainichi

    What about SCB’s Saadiq account?

  • Inam

    Here is the difference between Islamic and not so Islamic Banking.

  • Asif

    Just check various calculators for different products on Islamic and conventional banks (with same data) and see the difference.

  • Sohaib Asif

    With due respect to all the people here who said Islamic and conventional banking is just a marketing gimmick or just a different name to gain market share. You must first understand the concept of Islamic Banking . The Irony of people here including me is that we make very bold and big statements and are very quick in making an opinion about things without first understanding the concept or underlying reality . Islamic banking is totally different from conventional banking and the above article is not comprehensive in any way to get guidance about Islamic Banking. I would request you all to be a little more careful when talking about things related to Islam. Don’t tarnish the image of Islam and Islamic Banking because of your ignorance and lack of knowledge.

    • Ahmad Khan Sabri

      Totally agreed with you…

    • Asim

      So y dont u share some major differences between conventional & islamic banking. Though we can understand better.

    • Muneeb Raja

      Right! But I want to know about Islamic banking..

      Why not you publish an article about it? ProPk may add it on their site
      or give a link to an existing article by anyone? It would be a great help!

  • Lazy Sapper

    Of all these Meezan is better.

  • Farhan Tahir

    Fools are fooling the masses by giving Alcohol , like Halal alcohol ….
    same way baking , which is always based on interest, then none of its part or anything it includes can be Islamically halal.. so there is nothing like Islamic banks.. stop fooling people

  • Eli Ehsan

    interesting blog-splaining of word “Interest” here! if Im not mistaken then Islamic banking isn’t against the “traditional” interest filled transactions But Ribba!! which is another way of saying Interest in arabic…. :D lol

  • Abdullah

    Here is the difference between Islamic and conventional banking – NOTHING

    Shame on the scholars on the boards of these banks they are legalising kufar. The SCB is an unislamic body which deals in riba and legalise riba in the country amongst other unIslamic practices contrary to economic system that Islam presents. Because Muslims do not want to be part of this system they introduced Islamic banking selling same old wine with new names and bottles.

    These scholars on the board of these banks remain silent about corrupt businesses and say this and that part of it is halal. Isnt their responsibility to talk against Riba in general? MCB has an interest based branch and they join their “Islamic wing”

    This has far reaching impact – not only many practising Muslims are joining these so called Islamic banking while delegating responsibility saying the scholar know better it is legalising this framework in the eyes of the people. It is also saying to people that you do not really need an Islamic State and you can have two in one i.e. parallel Islamic and kuffar systems basically SECULARISM!

    Islamic banking is even present in non Muslim countries e.g. Britain where they have formed Islamic Bank of Britain which is regulated by their body called the FSA.

    Islam came to separate Haq from falsehood NOT to become part of it. These scholars may be making few bucks giving out these fatawas but they will NOT earn pleasure of Allah swt.

    • Abuhajira

      Perhaps parts of your rant are reasonable, while other aspects are simple unawareness of islamic banking mechanism.

      Mufti Taqi Saheb explicitly mentions in the introduction that the Islamic Financing models and banking strategies are indeed a “heelah”. Shame on the ulama will come way later, but first and foremost it will be on every single individual of this corrupt country where the president can stand and request scholars to find a loophole for the interest.

      Shame is for those individuals from the top leaders ALL the way down to the street hawker who would not flinch an eye to make an additional Rupee whether hook or by crook. Stealing, Bribery, fraudulant dealing, eating one’s own family member’s inheritance.. EVERY ambit of the life is plagued with the same fitna!

      However, the use of hiyal (heelah) has been taught by Rasulullah salallahu alayhi wasallam himself when faced with corrupt medium. This islamic financing is supposed to be that crutch which we as regular investor shamelessly want to be the golden egg laying batakh!

      There are indeed things we hope could flourish. I have seen banks who keep the interest-bearing dept completely separate from islamic banking. I do not know the structure of islamic banking in Pakistan. But considering that everyone is out to make a quick buck, I wont be surprised that bankers also want to cast a wool on peoples eyes just like almost every other individual in this country.