Conventional Bank And Islamic Bank Case Study

CHAPTER I

INTRODUCTION

1.1. Background of Study

Based on Law No. 10 of 1998 bank as an intermediary’s institution has an important role between parties who have the funds with the parties who need the funds. Bank compiles the fund from the surplus unit and distributes the fund to the deficit unit in order to improve the standard living of people. In running the business, the bank divided into Conventional Bank and Islamic Bank that run their business in the Syariah principle. Conventional bank gains their profit form the interest rate that received from borrowers and the low interest paid to the depositor (Santos 2000). While Islamic bank actually plays the same role as the conventional bank but it cannot to receive a pre-determined interest from borrowers and also do not pay a pre-determined interest to the depositors. The fee-based banking services are almost same with the conventional bank as long the Islamic bank does not receive and pay the predetermined interest. Interest is prohibited in Islamic bank but it replaced with the profit sharing concept (Arif 2006).

Differences between conventional banks and Islamic banks are in the goals, riba and risk sharing practices. Conventional banks are profit oriented especially for privately owned banks whilst Islamic banks have the objectives to promote, maintain the banking services activity based on sharia principles (Khan, 1983 cited by Haron (1997)). Since both conventional and Islamic banks are a profit-making organization they have the same purpose is to gain more profit in their business activities. Every business must comply with the Syariah principle such as riba is prohibit in Islamic banks but it does not applied to the conventional