Islamic Finance - Traditional banking system
The fundamental tenet of conventional banking is the concept of lending while charging interest and borrowing while paying interest. A savings account represents a loan taken out by the bank from the depositor(s), for which the bank agrees to reimburse the depositor(s) with interest. According to the bank's records, it is a liability. On the other hand, when a bank funds a client, let's say to buy a house, the client is simply given a loan to enable the client to buy a house. The bank assesses interest to the borrower. The bank often charges interest on these loans at a greater rate than it does for depositors. The bank's net interest income is the difference between these two rates. This succinct description of conventional banking's characteristics reveals that an interest mechanism serves as the cornerstone of all banking operations. In other words, the intermediation of interest, which is essentially a fee or premium on money when it is given out, makes it feasible for funds to be mobilized from the surplus unit in the society (depositor) to the deficit unit (borrower). Money has a premium since it has been classified as a commodity, and the lender expects to be compensated for lending out his money.
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