Non-interest banking transactions are based on tangible assets and real services. The table below shows some of the principles and practical differences between non-interest and conventional banking.
1. Money is a commodity besides being a medium of exchange and store of value.
2. Time value of money is the basis for charging interest on capital.
3. Interest is charged on loans typically with a security taken by the bank and no further risk is assumed.
4. With asset financing (e.g. car, home financing), the bank lends you money on interest and you purchase the asset.
5. Conventional banking recognises and applies the principle of compounding interest.
1. Money is not a commodity; though it is used as a medium of exchange and store of value.
2. Profit on trade of goods or rent charged for asset use is the main basis for earning profit.
3. Bank takes asset risk by acquiring the asset before renting, selling or sharing in its returns.
4. Non-interest banks must first take ownership of the asset and then either rent the asset or sell it on to the customer (on a cost plus basis with deferred payment).
5. Profit charged or rent charged do not compound.