What is Islamic Banking?

17.11.2014
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What is Islamic Banking?

Islamic banking is a commercial activity that is consistent with Islamic Law or Sharia’h (Fiqh Mualamat) which is ‘the Islamic rules on financial / large commercial transactions’. One of the highlights of Islamic Banking is that it promotes a greater degree of fairness and equity in the conduct of business.

  1. What is riba?
    Riba is paying or charging interest on a loan or deposit. Any amount, big or small, over the principal, in a contract of loan is ‘riba’ which is prohibited by the Holy Quran and Sunnah, regardless of whether the loan is taken for the purpose of consumption or business. Moreover, in todays business, riba may come in other forms such as penalty for late payment of debt, discounting of commercial paper, factoring of receivables etc.
  2. Partnership
    The banks help a businessman with all the money required to start his business. Later when this business grows, banks get their share which they had lent him earlier.
  3. Mudarabah
    Is a profit-sharing partnership contract between a capital provider (Rab-ul-Mal , customer who deposits/ provides money in the for of saving/fixed accounts ) and a Mudarib (Fund Manager , Bank which invests to generate profit ) in a joint investment- a transaction or a project or a fund to generate profits.
  4. Ijarah
    Is a leasing contract between a Lessor (owner of leasable asset, here it is generally bank ) and a Lessee (user of leasable asset, here generally customer ), granting temporary possession and use of a leasable asset for a determined period of time, in return for determined rental payments.
  5. Profit Sharing
    If a business is shared by two or more persons the profits as well as loss earned through that business is to be shared by them equally.
  6. Musharaka
    Profit/loss sharing (risk sharing) contract between two parties (bank and a corporate customer) to jointly finance a transaction, project or a venture , to generate profits. Here profits are shared as per pre agreed ratio  but losses are shared according to the equity ratio i.e.  money invested by each partner in the business.

This way, we see that Islamic banking has been growing and expanding in the international markets since 2000. Therefore, it has become essential for banks and businessmen to learn and include Islamic banking system in their daily transactions. Thus, help in increasing their profits as well as expanding their business.

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