What Does Islamic Banking and Finance Mean?

Islamic banking and Islamic finance, or Shariah-compliant finance, is the use of money in legal ways under Islamic law. Two essential rules of Islamic banking are that lenders and buyers can’t charge and collect interest, and everyone should share in the profits and losses.

How the practices of Islamic banking work

Islamic rules are followed by more than 560 banks and over 1,900 joint funds worldwide. Islamic financial assets rose from $2.17 trillion in 2015 to about $4 trillion in 2021. They are expected to rise to about $5.9 trillion by 2026, according to a study from the Islamic Corporation for the Development of Private Sector (ICD) and Refinitiv in 2022.

The economies of Muslim countries, especially those that have done well as oil prices have gone up, are a big reason for this rise.

Note

S&P Global Ratings says that the global Islamic finance industry grew in 2021 and 2022 because more bonds were issued, and the economy in the financial markets continued to improve. Even though there was a pandemic in 2020, Islamic funds grew by more than 10%.

Regarding business, Islamic banking is based on the teachings of the Islamic faith. Islamic banking is based on the Quran, Islam’s most important holy book. Shariah is the Islamic law book that all activities must follow. It is based on the teachings of the Quran.”Fiqh al-muamalat” are the rules that govern business deals in Islamic banking.

People working for Islamic banking institutions are expected to follow the Quran’s basic rules while doing their jobs. When Islamic bankers need more information or advice, they either talk to learned experts or use their judgment based on knowledge and what has always been done.

Islamic banking does not allow usury or gambling, which is one of the main differences between it and other types of banking. Shariah forbids all kinds of speculation or gambling. This is called maisir.

Shariah also says that you can’t charge interest on loans. Also, investments in things or drugs that are against the Quran are not allowed. This includes gambling, alcohol, and pork. 5 This is one way that Islamic banking can be seen as a culturally unique way to spend ethically.

An Islamic window is a service a regular bank offers based on Islamic principles. An Islamic bank is a bank that is run entirely by Islamic principles. Some commercial banks have separate windows or areas for Islamic banking services.

Islamic banks use equity participation methods to make money instead of charging interest, which is what most banks do. People who work for a bank will give the bank a cut of their income if the business borrows money from the bank and then pays it back without interest.

The bank also loses money if the business doesn’t pay back the loan or make a profit. It is generally thought that Islamic banks are less willing to take risks when they spend. Because of this, they usually stay away from businesses that might be linked to economic bubbles.

Where Islamic Banking Came From

Usually, Islamic banking practices can be linked to businesspeople in the Middle East who started doing business with Europeans over money in the Middle Ages.

At first, they followed the same money rules as Europeans. But as trading systems improved and European countries opened branches of their banks in the Middle East, some of these banks adopted the local customs of the area where they were first located. These mainly included no-interest financial systems that shared profits and losses.

By doing these things, these European banks could also meet the wants of Muslim businesspeople in the area.

In the 1960s, Islamic banking came back to the modern world. Since 1975, a lot of new interest-free banks have started.

Most of these Islamic banks were started in Muslim countries, but in the early 1980s, Islamic banks also opened in Western Europe. The governments of Iran, Sudan, and (to a lesser extent) Pakistan have also set up national banking systems that don’t charge interest.

A Case of Islamic Banking

People often say that the Mit-Ghamr Savings Bank in Egypt opened in 1963 and was the first Islamic bank in the modern world. Mit-Ghamr gave loans to businesses based on a plan where both parties would share the profits.

Due to political issues, the Mit-Ghamr project was shut down in 1967. During that year, the bank was cautious and only approved about 40% of its business loan applications. In times when the economy was doing well, however, the bank was said to have a failure rate of zero.

What does Islamic banking stand for?

Regarding business, Islamic banking is based on the teachings of the Islamic faith. The Quran, the most important holy book in Islam, is where the rules of Islamic banking come from. In Islamic banking, all deals must follow Shariah, Islam’s set of laws based on the Quran. “Fiqh al-muamalat” are the rules that govern business deals in Islamic banking.

What’s the difference between Islamic banking and regular banking?

One main difference between Islamic banking and other types of banking is that Islamic banking doesn’t allow usury or gambling. Shariah forbids all kinds of speculation or gambling. This is called maisir. Shariah also says that you can’t charge interest on loans. Also, investments in things or drugs that are against the Quran are not allowed. This includes gambling, alcohol, and pork.

What do Islamic banks do to make cash?

Islamic banks don’t charge interest to make money. Instead, they use equity participation methods, which are like profit sharing, to make money. People who work for a bank will give the bank a cut of their income if the business borrows money from the bank and then pays it back without interest. The bank doesn’t get paid if the business doesn’t pay back the loan or make a profit.

Conclusion

• Islamic banking, also called Islamic finance or Shariah-compliant finance, uses money or banking services that align with Islamic law.
• Two essential rules of Islamic banking are that lenders and buyers can’t charge and collect interest, and everyone should share in the profits and losses.
• For Islamic banks to make money, borrowers must give the bank a share of their income instead of paying interest. This is called equity participation.
• Some regular banks have windows or areas where customers can only get services from Islamic bankers.