Islamic Banking
Islamic banking is a financial activity that complies with Shariah, that is, Islamic law. The sharing of profits and losses and the prohibition of interest charging are two foundational principles of Islamic banking.
Islamic Banking explained
An Islamic bank differs from a traditional one by following ethical principles when providing banking products and services to customers. The concept of Islamic banking implies the priority of Islamic moral norms and values. Islamic banking is based on the principles of the Islamic faith that apply to commercial transactions.
The Quran is the main religious script of Islam, the teachings of which are the basic of Islamic banking. All transactions in Islamic banking must be agreed with Shariah, which is the set of laws of Islam built on the postulates of the Quran. The regulations for commercial transactions in Islamic banking are called fiqh al-muamalat. While doing business, employees of financial institutions following Islamic banking must not deviate from the basic tenets of the Quran.
The key differences between typical banking systems and Islamic banking lie in prohibitions of usury and speculation. Any possible form of speculation or gambling, known as maysir, is strictly forbidden by Sharia. The collection of interest on loans and credits is also prohibited. Besides, any investments related to items or substances prohibited by the Quran, including alcohol and pork, are also not permitted. That is why Islamic banking can be regarded as a culturally distinct type of ethical investing.
Equity participation systems are another way to make money by Islamic banks, since charging of interest is prohibited. This means that if a bank lends funds to a business, the loan will be repaid without interest, but the bank will receive a share in its profits. But if a company defaults, and there is no profit, then there is no benefit for the financial institution.
Islamic banking institutions are considered to be more risk-averse in their investment practices. As a rule, they are less involved in financial bubbles and other dubious stories. Around the world, there are about 418 commercial banks that comply with Islamic principles (2019 data).
The volume of the Islamic finance market is constantly increasing and expanding, and its growth phase is associated, among other things, with the recovery of the economies of Muslim countries, in particular, those that benefited from the increase in oil prices. An Islamic bank operates entirely using Islamic principles, while some traditional commercial banks provide Islamic banking services through special windows.
More about Islamic Banking
Islamic banking refers to the Medieval era, when businessmen from the Middle East began to carry out financial transactions with Europeans. Initially, the same financial principles were applied as in Europe.
Gradually, with development of trading systems and appearance of local branches of European banks in the Middle East, these banks began to comply with the local customs of the region, namely, to work on a technique of profit-and-loss sharing as interest-free financial institutions.
Islamic banking gained its popularity in the modern world in the 1960s. A large number of banks that refused to charge interest were opened in 1975. Not only Muslim countries founded banks according to Islamic principles, Islamic banks also began to emerge in Western Europe in the early 1980s. National non-interest financial systems have been developed by countries such as Iran, Sudan, and Pakistan.
