Five Differences Islamic Banking and Conventional Banking –  Many people do not understand yet the differences between Islamic banking and conventional banking. This is not surprising. Because many people find it difficult to understand some of the terms used by Islamic banking compared with conventional banking.


The differences between Islamic banking with conventional banking are in the “terms” and the “basic principles of service“. These two things often make people confused. To help you better understand the differences between the two types of banking, here are five things you need to understand and take note of the Islamic banking:

  1. Akad

All transaction or agreement made in Islamic banking must comply with the principles of the Islamic Shariah, based on the Qur’an and Hadith and acquire fatwa from the Indonesian Ulema Council (MUI). The contracts or transactions in Islamic banking that widely use such as akad al-Mudharabah (profit sharing), al-Musharaka (partnership), al-musaqat (farm cooperation), al-Ba’i (profit sharing), al- ijara (leasing), and al-wakalah (agency).

For conventional banking, the contract or agreement letter is made based on the positive law in Indonesia.


  1. Gains

Islamic banking uses the approach of profit sharing (al-mudaraba) to gain profits, while conventional banking in other hand uses the cost basis for calculating the profits.

In conventional banking, “interest” given to customers is actually derived from the banking profits by lending to other customers with higher “interest”.


  1. Fund Management

Islamic banking will refuse to disburse credit to be invested in business activities that violate Islamic law, such as trading of illicit goods, gambling and manipulative activities (ghahar).



In the other hand, the conventional banking will disburse credit without having to know where the money is distributed, as long as the debtor can pay the installments regularly.

Five Differences Islamic Banking and Conventional Banking – fto by
  1. Bank & Customer Relations

The relationships between Bank and the customers is also an important factor that distinguishes Islamic banking and conventional banking. For Islamic banking, the customer is treated as a partner. This treatment is managed because the bank and customers tied in the very transparent “akad”. No wonder, a lot of customers in Islamic banks are claiming to have a fairly strong emotional relationship with their banks.

Five Differences Islamic Banking and Conventional Banking In conventional banking, the relationship between customer and the bank is more on the relationship of creditor and debtor or lender relationship with the recipient. However, lately, the banks are also trying to strengthen the relationship with customers.

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  1. Installments & Promotions

Islamic banking implements the installment system at a fixed amount based on the bank’s profits that have been agreed between the bank and the customer according to the “akad” (the credit agreement). In addition, promotional contents of Islamic banking must also be conveyed in clear, and transparent statements.

Five Differences Islamic Banking and Conventional Banking While conventional banking has plenty of promotional programs to attract customers. Such as the promotion of a fixed interest rate or a fixed rate for a certain period, before finally giving fluctuating interest rates or floating rate to customers.

In general, as a financial institution, the way of working between Islamic banks and conventional banks is the same and not different, it depends on how you put your point of view.

3 Ways How to Calculate Mortgage Interest



Many mortgage recipients do not know how to calculate their mortgage interest. They will begin to realize the importance of this skill after their mortgage installments suddenly raise dramatically as a result of the rise of interest rates.


However, it should be admitted, the counting process of mortgage loans is a bit complicated and cumbersome. For the first, you need to know which bank you have to choose and how that bank applies the credit interest calculation system.


Basically there are three kinds of mortgage interest credit calculation are usually implemented by bank, namely:



  1. Calculation of Credit with Flat Rate (Fixed)

This calculation is included in the most convenient and simple calculation of interest.

The interest from flat credit will be the same every month and it is also has equal principal installments every month.

With the same principal and interest installments then you will pay the same installments until the closure of installment.

In addition to mortgages, this type of flat credit interest calculation is also used in the Unsecured Loan (Kredit Tanpa Agunan (KTA)).


The formula:

Total Interest = Interest per month x loan duration in months

Interest per month = (loan amount x interest rate percentage per year): 12


Sample case:

You borrow money from Bank A for Rp 200 million with a flat rate of 12 percent per year. Loan tenor is 15 years or 180 months.


You must pay total interest of Rp 360.000.000.


While the interest installment you have to pay is Rp 2.000.000 per month.


  1. Calculation of The Effective Interest Loan

Loan interest is calculated on the ending cash balance of principal installment every month, so the mortgage loan will vary each month

Interest rate will decrease, so that the installments will also be smaller. For example, the second installment will be smaller than the first installment, and so on. The term is also known as sliding rate.



Interest per month = (period end balance X interest rate percentage per annum): 12


Sample case

You borrow from Bank B for Rp 200.000.000 with effective interest of 12 percent per year. Approved Mortgage is Rp 10 million per month.


The calculation will be like this:


The first month: 1% of interest x Rp 200.000.000 = Rp 2.000.000


The second month: 1% of interest x Rp 190.000.000 = Rp 1.900.000

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  1. Calculation of Credit with Annuity Interest

Widely used by mortgagee banks in Indonesia.

The calculations are more complicated than the two types of interest above; sometimes it must use special software.

Interest is calculated based on the unpaid principal installments

The goal is to facilitate customers’ payment each month because installments will be the same.

Using the composition of interest and principal installments of different amounts, in which, if the mortgage interest shrinks, then the principal installment enlarges.

Usually starts with great interest installments in the early years. Upon entering the middle years of loan tenor, interest installments will shrink while principal installments will be enlarged.



Annuity morgage formula

P = principal

I = annual interest rate

t = time credit in the month.


Sample case:

You borrow money from Bank C for Rp 200 million with interest rate of 12 percent annuity for 15 years or 180 months.


month 1

Installment interest = Rp 2.000.000

Principal = Rp 400.336

Total installment = Rp 2.400.336

The remaining loan = Rp 199.599.663


month 2

Installment interest = Rp 1.995.996

Principal = Rp 404.339

Total installment = Rp 2,400,336

The remaining loan = USD 199 195 324


170 months

Installment interest = Rp 248.857

Principal = Rp 2.151.478

Total installment = Rp 2.400.336

The remaining loan = Rp 22,734,314

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