A proposal on

“The Comparison of Islamic Banking with Conventional

Banking”

Submitted by:

Submitted to:

Department of management Sciences

Virtual University of Pakistan

Submission date 19/06/10

Table Of Contents

CHAPTER 1:____________________________________________________________2

1.1 INTRODUCTION OF PROJECT____________________________________________2

1.2 BACKGROUND_______________________________________________________5

1.2.1 Introduction to Allied bank of Pakistan________________________________7

1.2.2 Introduction to Meezan bank________________________________________7

1.3 OBJECTIVES:________________________________________________________8

1.4 SIGNIFICANCE:_______________________________________________________9

CHAPTER NO 2: PROJECT PROCEEDINGS______________________________10

CHAPTER NO3: METHODOLOGY:______________________________________12

3.1 DATA COLLECTION SOURCES:_________________________________________12

Primary source:_____________________________________________________12

Secondary source:___________________________________________________12

3.2 DATA COLLECTION TOOLS/ INSTRUMENTS:________________________________13

3.3 SUBJECTS/ PARTICIPANTS_____________________________________________13

3.4 FIELDWORK/ DATA COLLECTION_______________________________________14

3.5 DATA PROCESSING:__________________________________________________14

Bibliography:___________________________________________________________15

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Chapter 1:

1.1 Introduction of project

“The comparison of Islamic banking with commercial banking” is the topic, which is

considered to be hottest topic now a days in the banking sector. Last few years have

witnessed a dramatic increase in Islamic banking in the world over and it will be amazing

to work on such type of topic. Therefore I have decided to work on “The comparison of

Islamic banking with commercial banking”. Many misunderstandings about Islamic

economics arise and whole population is confused between the two facts of considering

economics as the ultimate goal of life and considering it as a necessity in order to have a

prosperous life through lawful means. Even common sense can be sufficient to show that

the fact of an activity being lawful or estimable or necessary separate from it being the

ultimate goal of human life and the center of thought and action. It is, therefore, very

essential to make the distinction as clear as possible at the very beginning and provide

awareness to the whole population.

The confusion between these two banking systems has a great impact on the environment

as a whole in my view population is double minded whether the commercial banking is

on their right or the Islamic banking. Therefore the background of my study is to make

distinction as clear as possible.

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Islamic banking has grown rapidly over the past few years globally. At least two hundred

Islamic banks and financial institutions have been set up. According to a research report,

the growth rate of these institutions is 15% per annum with a huge amount of capital

invested in the system. This project is all about how Islamic and commercial banking

differs through its products and services, difference between asset based financing and

money based financing. The project will also explore the roles played by both the banks

in the economic and social development, role playing in the social development, in

addition to providing awareness about riba free investment. The major motivation to

choose this topic is an acute shortage of previous, reliable work in this area. Although

researchers have analyzed the topic in the past, however, very little material is available

in the Pakistani market. I want to conduct a thorough analysis of the system to compare

the Islamic and conventional banking in Pakistan to fill the information gap which exists

as well as giving clear understanding as to which things results in to payment of interest

and which payment of profit/markup . An other issue / a topic of research in my project

will be whether the profit or mark up given/charged by the banks is infect Islamic or

containing element of interest.

I have decided to to research the given topic by taking one represetnative bank from each

group. For this purpose, I have chosen Allied Bank of Pakistan from the conventional

banking sector whereas Meezan bank has been chosen from the Islamic banking sector.

This project will collect primary data from these two banking institutions and generalize

the results to the entire sector.

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1.2 Background

The Islamic banking is based on the Islamic values and faith with in the limits of Islamic

law in all its action and deeds. Hazrat MOHAMMAD (peace be upon him) and His

companions showed it practically in their lives as to what is an Islamic banking which we

as muslims have to follow up to the infinite day. The Islamic banking in its origin was to

keep the valuables of the people intact for the given time or desired time. One example is

that when the non muslims decided to kill (GOD forbid) Hazrat Mohammad (peace be

upon him decided to leave Macca but He was also holding valuables of the peoples for

safe custody due to which He has to return those before leaving Macca. He called Hazrat

Ali at night in his home and gave all the valuables(amanat of peoples) to him and advised

to return them to the peoples and left Mecca city during night by passing through non

Muslims who had gathered to kill Him.

When we want to differentiate between an Islamic bank and the conventional bank, the

key difference is that Islamic banking is based on Shariah Foundation and all

dealing ,and business transactions are derived from Shariah law based on the principles of

QUARAN and HADEES. The major leading principles of an Islamic banking are as

under:

The absence of interest based transactions.

The avoidance of economic activities based on speculation and oppression

Levy of Islamic tax i.e. zakat.

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In Islamic banking when a loan is given or taken, it is always free of charge. The creditor

does not take any advantage of the borrower’s weak position and the loan is returned by

paying only the principal amount after the agreed period. However in Islamic banking,

the banks earn profit by not receiving a pre-determined interest from borrowers and do

not pay a predetermined interest to the depositors; the amount of profits is based on the

profit-sharing agreements with the depositors and also with the borrowers.

Islamic banking is considered as a different banking stream as it prohibits interest and

replaces it with profit share, and the profit share depends on the extent of the risk

participation of the parties.

The conventional banking is based on interest which is considered the price of the credit.

When the money is lent out on the basis of interest, it is just like gaining undue benefit on

account of the weak position of the borrower which leads to injustice. The conventional

banking theories assume that banks earn profits by purchasing deposits from the

depositors at a low-interest rate, then reselling those funds to the borrowers at higher

interest rate, Thereby making profits from the spread between the interest rate received

from borrowers and the interest rate paid to depositors.

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1.2.1 Introduction to Allied bank of Pakistan

Allied Bank Limited was the one of the first bank to be established in Pakistan. History

started from the name of Australasia Bank in 1942 and renamed as Allied Bank of

Pakistan Limited in 1974 and then Allied Bank Limited in 2005. In 2004 the Bank

ownership transfer to Ibrahim Group. Today with the extensive back round of more than

60 years and network of more than 800 branches all over the Pakistan and offers variety

of technology based products and services to its clients. I will highlight and research

nearly all the products and services offered by the bank in my project report.

1.2.2 Introduction to Meezan bank

Mezan Bank is one the first banking institutions in Pakistan to offer current accounts

which stand on the principle of al-wadiah, whereby the depositors are guaranteed

repayment of their funds. At the same time, the depositor does not receive remuneration

and fee for depositing funds in a current account. The funds accumulating in these

accounts can only be used to balance the liquidity needs of the bank and for short-term

transactions on the bank's responsibility. In addition to these Islamic measures the bank

has a lot of products which are distinctly Islamic in nature and are interest free. This

project will research all these products and also perform a comparative analysis of these

products with similar ones offered by Allied Bank.

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1.3 Objectives:

The major objective of the project is to compare the Islamic banking system with the

conventional banking system of Pakistan. This project will be based on primary data and

will aim to achieve the following salient objectives:

i) To find out how financial transactions execute in Islamic banking and commercial

banking

ii) To provide information about Investments pool in Islamic banking and

commercial banking.

iii) To find out differences in the operational workings of both types of banks

iv) To find out differences in management hierarchy of Islamic and conventional

banks

v) To find out the variations in the products and services offered by conventional

and Islamic banks.

vi) To determine the main elements by which the Islamic banks are gaining over

welcome performance over the last few years

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1.4 Significance:

The potential benefit of my project will be towards the public as they will get awareness,

the definition and forbiddance of Riba and the injunctions relating to its unlawfulness

from different angles. On the one hand, there are severe warnings of the Qur'an and

Sunnah and on the other it has been taken today as a vital part of the world economy. If

they once come to know the difference between Islamic banking and Commercial

banking I hope they will get potential benefit and start investing in Riba free investments.

As the income from Riba also know as “HARAM” and if you invest your “HALAL”

income in Riba the whole income plus interest, which you are gaining through Riba, will

turn in to “HARAM”. The main potential benefit, which my project will give to general

public, is the comparison between Riba and Riba free profit/markup

My project will help whole population in a number of ways, which are stated below:

i) Aware population from the warnings of the Quran and Sunnah relating to

Riba.

ii) provide correct information about Islamic banking and commercial banking

iii) Inform population, the difference between running finance/cash finance/

project finance/demand finance and murabaha, mudarba, musharaka etc.

iv) Help to know the working of Islamic banking and commercial banking.

v) Channels of investments used by both the banks.

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Chapter No 2: Project proceedings

After the completion of this proposal, the final project write up will include the following

chapters and headings:

Section I

I. Introduction

(a) Introduction of the topic

(b) Back Ground of the Project

(c) Introduction of Allied bank

(d) Introduction of Meezan Bank

(e) Objectives of the Project

(f) Significance of the project

II. Processing & Analysis

(a) Data Collection Sources

(b) Data Collection Tools

(c) Data analysis

Products offered by Allied bank and Meezan Bank

Services offered by Allied bank and Meezan Bank

Comparative analysis of the products and services

Survey results and interpretations

III. Methodology

IV. Summary

V. Findings

VI. Recommendations

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VII. Conclusion

Section II

I. Introduction of Student

(a) Last Degree Obtained

(b) Organization’s Name

(c) Designation

(d) Experience (Years)

II. Appendix/ Appendices

III. Bibliography

IV. Index

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Chapter No3: Methodology:

3.1 Data Collection Sources:

Primary source:

The most common method of generating primary data is through surveys. Survey is a

research technique in which information is gathered from a sample of people using a

questionnaire. In questionnaire the list of questions are structured/ prepared and provided

to public to answer the question according to their own views. Just like that I will use

primary source in data collection in the shape of questionnaires where by asking from the

depositors/ borrowers their point of view about both the systems. I have also planned to

have detailed interview of the Country Head Islamic banking of Bank Islami Ltd and

discuss in detail about their achievements, the trend of the public towards Islamic

banking, the areas of investment of the bank, and other related matters. I will also

conduct interview of a few depositors as well as borrowers about their satisfaction level

on receiving/paying profit /markup as well as receiving /paying interest. The interview

will also be conducted of a few leading banks who have opened separate

branches/counter of Islamic banking.

Secondary source:

Secondary sources also plays vital role in the research projects some Secondary sources

of data are statistical bulletins, government publications, State bank quarterly report, IBP

journals, information published or unpublished, case studies, online data, web sites, and

the Internet. I will use secondary data whenever I will need it.

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3.2 Data collection tools/ Instruments:

The data collection tool will be the questionnaire. I will prepare a questionnaire of 20

questions for this project with and will give this to employees and customers of the

banks to fill in. The questionnaire will consist of 5 point Likert scale type responses to

record the opinion of the respondents. These responses will range from 1 for strongly

agree to 5 for strongly disagree. The choice of Likert scale ahs been made here so that the

data collected can be easily processed and analyzed as it will be entirely numerical in

nature.

3.3 Subjects/ participants

The subjects under study in this project are the employees and customers of the banks.

The population of the survey for project will be the entire customer base i.e.

depositors/borrowers, and employees of the Islamic banking and conventional banking

sectors of Pakistan. This is a huge population to carry out a study on. So I shall use

purposive and convenience sampling to draw a sample of 100 employees and 100

customers ( depositors, borrowers) in order to complete this project. Fifty employees and

fifty customers will be used as a sample from Allied bank and Meezan bank each. This

would give a broad scope to the project and would make results more valid.

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3.4 Fieldwork/ Data Collection

The fieldwork for this project will be entirely done by me. I will personally collect the

data required for this project in order to bring it to fruition. I shall personally visit the

braches of Allied bank and Meezan bank in order to collect data from employees and

customers.

3.5 Data processing:

There are two parts for data processing in this project (as is evident from Project

Proceeding). The first part consists entirely of qualitative data in which a deep analysis

and comparison will be made of the products and services of Allied and Meezan bank.

This part will be carried out in MS Word. However, the second part of the data

processing concerns summarizing and presenting the quantitative data collected through

the questionnaires. The data processing for this part will be carried out with the help of

MS Excel. I plan to include frequency distributions and charts to summarize and process

the data. The final summarized and tabulated data will be presented in MS Word format

in the shape of the final project report.

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Bibliography:

Institute of bankers in Pakistan (IBP) journal published annually /quarterly

showing performances in key areas by banks.

Different books on Islamic and conventional banking practices.

Accounting Issues in Islamic banking, Omer Abdi Ali, (2002)

Unerstanding Islamic banking, Joseph A. DiVanna

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