Islamic Banking and Finance: What You Should Know

Islamic banking also known as Islamic finance is gaining immense popularity among the masses. It simply refers to financial activities that adhere to Shariah. Two fundamental principles of Islamic banking are the sharing or profit and loss and the prohibition of the collection and payment of interest by lenders and investors.

In most instances, Islamic banks make a profit through equity participation, which requires a borrower to give the bank a share in their profits rather than paying interest. The good news is some conventional banks have windows or sections that provide designated Islamic banking services to their customers.

It is important to note that employees of institutions that abide by Islamic banking are trusted to not deviate from the fundamental principles of the Quran while they are conducting business. When more information or guidance is needed, Islamic bankers turn to learned scholars or use independent reasoning based on scholarship and customary practices.

Among the key differences between conventional banking systems and Islamic banking is that Islamic banking prohibits usury and speculation. Shariah strictly prohibits any form of speculation or gambling, which is known as maisir.

Shariah is also against taking interest on loans. Moreover, any investments involving items or substances that are prohibited in the Quran are also prohibited. In this way, Islamic banking can be regarded as a culturally distinct form of ethical investing.

To earn more money without the typical practice of charging interest, Islamic banks use equity participation systems. Equity participation means if a bank lends money to a business, the business will pay back the loan without interest and rather give the bank a share in its profits.

In the event that the business defaults or doesn’t earn a profit, then the bank also doesn’t benefit, In general, Islamic banking institutions tend to be more risk-averse in their investment practices. In this regard, they tend to avoid businesses that could be associated with economic bubbles.

As we conclude, you should remember that Islamic banking is grounded in the tenets of the Islamic faith as they relate to commercial transactions.