Digital banking has transformed the financial landscape, offering customers convenience, speed, and accessibility. However, within this realm, two distinct types of banking models exist: Shariah-compliant digital banking and conventional digital banking. The key difference between the two lies in the principles they follow. While conventional banking operates on interest-based transactions and profit maximization, Shariah-compliant banking adheres to Islamic finance principles, which prohibit interest (riba), uncertainty (gharar), and unethical investments.
Core Differences Between Shariah-Compliant and Conventional Digital Banking
Interest (Riba) vs. Profit-Sharing
Conventional Digital Banking: Customers earn interest on savings accounts, fixed deposits, and loans. Banks charge interest on loans and credit cards.
Shariah-Compliant Digital Banking: Interest is strictly prohibited. Instead, banks offer profit-sharing accounts, where earnings are derived from Shariah-compliant investments. Loans are replaced with Murabaha (cost-plus financing) or Mudarabah (profit-sharing agreements).
Example: In a conventional bank, depositing money in a savings account earns a fixed interest rate of 5% annually. In a Shariah-compliant bank, a profit-sharing savings account may provide returns based on the bank’s actual profits, which could be 4.5% or 5.5% depending on investment performance.
Loan and Financing Structure
Conventional Digital Banking: Loans are offered with interest, whether it’s a personal loan, car loan, or mortgage.
Shariah-Compliant Digital Banking: Financing is structured differently, using contracts like Murabaha (buy and sell arrangement) or Ijara (leasing agreement).
Example: If you want to buy a car, a conventional bank would lend you the money at an annual interest rate. A Shariah-compliant bank, on the other hand, would purchase the car and sell it to you at an agreed profit margin, allowing you to pay in installments.
Ethical Investment Guidelines
Conventional Digital Banking: Banks invest in all industries, including those that may not align with Islamic values, such as gambling, alcohol, and tobacco.
Shariah-Compliant Digital Banking: Investments are limited to ethical, Halal businesses. Banks conduct strict Shariah screening to ensure compliance.
Example: A conventional bank might invest in companies that manufacture alcoholic beverages, while a Shariah-compliant bank would only invest in halal industries such as healthcare, agriculture, and technology.
Credit Cards and Overdraft Facilities
Conventional Digital Banking: Credit cards charge interest if payments are not made on time, and overdraft facilities come with interest fees.
Shariah-Compliant Digital Banking: Islamic banks offer Tawarruq-based (commodity-based) or Ujrah-based (service fee-based) credit cards. Instead of charging interest, they apply a transparent profit margin or service fee.
Example: A conventional bank credit card with a 20% annual interest rate will accumulate high debt if the balance is not paid. A Shariah-compliant credit card might charge a fixed service fee for card usage instead of compounding interest.
Insurance (Takaful vs. Conventional Insurance)
Conventional Digital Banking: Insurance policies operate on risk transfer, where the insurer takes on the financial risk in exchange for premiums.
Shariah-Compliant Digital Banking: Offers Takaful, a cooperative risk-sharing model where participants contribute to a common fund to assist those in need.
Example: A conventional car insurance policy involves paying a fixed premium to a company that takes on all the risk. A Shariah-compliant Takaful plan ensures that all participants pool their contributions, and payouts are given to those who suffer losses.
With the rise of fintech, both banking models now offer digital solutions such as mobile banking apps, internet banking, and contactless payments. However, the main distinction remains in their underlying financial structures.
Using a mobile banking app: In both models, you can check balances, transfer funds, and pay bills. However, in a Shariah-compliant app, financing products are structured differently.
Getting a home loan online: A conventional bank’s digital platform might instantly approve a mortgage with a fixed interest rate, whereas a Shariah-compliant digital bank will offer home financing through Diminishing Musharakah, where the customer and bank co-own the house until full payment is made.
Both Shariah-compliant digital banking and conventional digital banking provide modern financial solutions, but they operate under different principles. For customers who seek to align their financial activities with Islamic ethics, Shariah-compliant banking ensures compliance with Islamic finance rules while offering the same convenience of digital platforms. As digital banking evolves, the accessibility of Shariah-compliant financial products is expected to grow, giving customers more choices to manage their finances ethically and efficiently.