Deposits are not interest-oriented but profit-loss sharing oriented whereby investors' principal repayment is not guaranteed but entitled to a predetermined share of actual profit realised by the business. No penalty on defaulters. However some Muslim countries allow charging a small percentage of late payment penalty as a deterrent but the amount need to be channelled to charity and not treated as part of business income. Islamic banks are restricted to participate in economic activities which are unethical and prohibited by Shariah such as businesses involving alcohol, prostitution, pork, environmental pollution etc. Islamic banks need to do charity by paying zakah (compulsory religious levy) out of their income.
Deposits are interest oriented and the investor is assured of a predetermined rate of interest with a guaranteed principal repayment. Normally charge compounded rate of interest in case of default.
There are no such restrictions for conventional banks. There are no such requirements to do charity.
(Understanding the Objectives of Islamic Banking: A Survey of Stakeholders' Perspectives By: Dr. Asyraf Wajdi Dusuki, Paper published in International Journal of Islamic and Middle Eastern Finance and Management; Vol.1, Issue 2. 2008 (Published by Emerald Group Publishing).
There is no standard way of defining what an Islamic bank is, but broadly speaking an "Islamic bank is an institution that mobilises financial resources and invests them in an attempt to achieve predetermined islamically -acceptable social and financial objectives. Both mobilisation and investment of funds should be conducted in accordance with the principles of Islamic Shari'a".