Syariah

8 Differences Between Sharia and Conventional Financing

Admin BFI
22 March 2024
1652
8 Differences Between Sharia and Conventional Financing

In recent years, the concept of 'Sharia' has become increasingly familiar, especially in the context of financing. Sharia financing is often seen as an alternative solution for many people. However, what are the key differences between Sharia and conventional financing?

 

Although many financing institutions offer both options, many people still lack clarity about these services. To help you understand the differences between Sharia and conventional financing, let's explore them one by one.

 

 

1. A Brief Overview of Sharia and Conventional Financing

The definitions of these two financing methods clearly highlight the significant differences between them. Here is a brief overview of each:

 

1.1 Sharia Financing

In general, Sharia financing refers to the provision of financing or funding to the public based on Sharia principles. According to POJK No. 31/POJK.05/2014 on Sharia Financing Business Activities, the business activities of a Sharia Financing Company are as follows:

  1. Sales Financing: This is a type of financing that involves the provision of goods through a sales transaction, carried out in accordance with the Sharia financing agreement approved by all parties involved.
  2. Investment Financing: This refers to the provision of capital for productive business activities for a certain period, with profit sharing based on the terms and conditions set out in the Sharia financing agreement agreed upon by the parties involved.
  3. Service Financing: This includes the provision or supply of services, either in the form of providing benefits from an asset, providing loans (advances), and/or providing services with or without payment of fees (ujrah), which is regulated in accordance with the agreement in the Sharia financing agreement.
  4. Other Sharia Financing Business Activities: These may include various activities subject to the approval of the Financial Services Authority (OJK).

 

1.2 Conventional Financing

Conventional financing is the act of disbursing funds to the public by financial institutions. The terms commonly used to describe conventional financing are "credit" or "loans."

 

In general, credit or loans is a form of debt in the form of a sum of money provided by an individual or financial institution to be lent to a debtor, usually with additional interest. According to the loan agreement, the debtor is obliged to repay the amount of the debt plus the agreed interest.

 

According to the definition of the Financial Services Authority, a loan refers to a type of debt that involves various types of tangible assets, although it is often associated with money loans. In a loan transaction, there is a redistribution of financial assets over time between the borrower and the lender.

 

Interest is one of the mechanisms used by banks to achieve maximum profit. Therefore, interest in the context of loans or credit is a number of fees or costs for the use of money given to customers. This is an important element in a bank's efforts to generate profit.

 

The success and smooth running of lending or credit greatly affects how much interest income can contribute around 70% to 90% of a bank's total income. Therefore, loan interest is considered a major pillar in the activities of conventional banks.

 

2. Differences Between Sharia and Conventional Financing

Sharia and Conventional Financing

Of course, Sharia and conventional financing have their own respective rules that prospective customers should be aware of. Here are some of the key differences between Sharia and conventional financing:

 

2.1 Legal Basis

The first difference between Sharia and conventional financing lies in the legal basis they follow. Sharia is based on the principles of Islamic law as stated in the Quran and Hadith. On the other hand, conventional financing refers to positive law and regulations applicable in a country without considering Sharia principles.

 

2.2 Interest Rates

One of the most striking differences between Sharia and conventional financing is the interest rate system. Conventional financing uses fixed or variable interest rates over time, while Sharia financing applies a profit-sharing system (profit and loss sharing) instead, reflecting the principles of fairness and sustainability.

 

2.3 Fines

Another difference between Sharia and conventional financing is the fines charged for each type of financing. In conventional financing, fines or penalties for late payment are common. On the other hand, in Sharia financing, the principles of fairness and sustainability encourage a more cooperative approach, and fines are generally avoided. Fines in Sharia financing can take the form of social contributions or charity.

 

2.4 Source of Funds/Capital

The source of funds for Sharia financing comes from funds that are managed in accordance with Sharia principles, such as mudharabah and wakaf. Conventional financing, on the other hand, can use any source of funds available in the financial market, including deposits and interbank loans.

 

2.5 Supervision of Financing Activities

Basically, the supervision of conventional and Sharia financing activities is regulated by Law Number 10 of 1998 concerning Banking. However, the difference between Sharia and conventional financing lies in the party responsible for carrying out the supervision.

 

All activities carried out by conventional financing are generally supervised by the board of commissioners. On the other hand, the supervision of Sharia activities involves various institutions, such as the national Sharia board, the Sharia supervisory board, and the board of commissioners.

 

2.6 Types of Financing Products

In addition to the fundamental differences, the differences between Sharia and conventional financing also lie in the types of products offered. Sharia financing, for example, can include special packages such as Umrah financing or products with a stronger social element.

 

3. Sharia Financing at BFI Finance

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