Conventional lessened by large margin. All this issues

Conventional
banks charge average fixed interest rate regardless of the profitability of the
project. Islamic banks charge proportional cost of financing in according to
the profitability of the project which is totally opposite to the system of
conventional. Conventional banks o not always utilize their full investment
opportunities. Some portion is remained unused. On the other hand, Islamic
banks make the best use of their investment opportunities which were untapped
in the economy. There is a direct link between the success of the project and
the income of Islmaic Banks. In other words, the rise and fall in the projects’
return financed by a bank increases or decreases its net income.  Thus the Islamic banking system is very much
concerned about the performance of the project for which it provides financing.

 

Productivity
is hampered in folds in conventional banks. First of all the capacity and
resources are not used to recover non performing loans rather these are being
involved in choosing new projects. Loan loss provision is another reason for
reduced profitability. On the other hand,
Islamic bank practice profit-loss-sharing mechanism which is a fruitful way to
recover loans.  The borrower faces a
fixed or nonflexible loan payment schedule in conventional banks. It burdens
them with a uncertainty in cash flows. Consequently, the economy with more of
conventional banks faces a cyclical volatility in its performance. This instability
continues because of the fixed payment schedule. But the Islamic banks receive
a certain portion of the income derived by its investments in addition to the principal
payment. And it is not obligatory to make payment when there is no earning. Loss
is also shared by the Islamic banks in proportionate basis. This mechanism encourages
the entrepreneurs to a good extent. They need not to pay a higher (fixed)
amount when lower profit is earned. In this way the gap or spread between
profits and payment commitment is lessened by large margin. All this issues
have uphold the consumers’ faith in Islamic banks more than conventional banks.
And thus deposit is also higher in case of Islamic banks. As it is said before
that stability and performance comes hand in hand with consumer confidence,
Islamic Banks have managed to outperform in stability factor as well.

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