Banking plays a vital role in every country’s economy. The modern era works mainly around the banking system. Banking is essential for every aspect when transferring money from one place to another, providing loans, or saving money in a safe and secured area. Due to many benefits and facilities, banks have become an integral part of the world’s economic growth. There are two various banking systems: conventional banking and the other is Islamic Banking. Islamic banking, which also means Islamic finance or Shariah-compliant finance. Islamic banking means the banking system which runs according to the principles of Shariah (Islamic laws and principles). Islamic Banking supports an interest-free plan. The principles of Islamic banking are taken from the Qur’an itself. In Islamic banking, all transactions must be according to Shariah (based on the teachings of the Qur’an). The rules on which commercial activities of Islamic banking are performed are referred to as fiqh al-muamalat
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BACKGROUND OF ISLAMIC BANKING:
In the 1960s, Islamic banking was introduced in the modern world, and till 1975, many new interest-free banks were opened; many of these institutions were founded in Muslim countries. During early 1980, many Islamic banks were opened in various western countries. In the 20th Century, several Islamic banks came into existence and applied these principles to private or semi-private institutions within the Muslim community. Their number and size increased day by day, and by 2009, there were over 300 banks and 250 mutual funds around the world working according to Islamic principles. The Mit-Ghamr Savings Bank, established in 1963 in Egypt, is the first example of Islamic banking in the modern world. When Mit Ghamr started giving loans, it was according to Islamic Shariah like they began to provide interest-free loans as interest is strictly prohibited in Islam. They introduced a profit-loss sharing system.
PRINCIPLES OF ISLAMIC BANKING:
Islamic banking follows basic principles of Shariyah:
Investment and financing of Halal activities only
Profit and loss sharing
Prohibition of Riba (Interest)
Prohibition of speculation
Learn more about the Islamic rules of Banking.
According to Islamic Shariah, the Islamic banking system does not deal in transactions involving interest or Riba (The interest rate is the amount a lender charges a borrower against a debt or loan). So, Islamic Banking facilitated interest-free loans and debts to their customers and introduced profit-loss sharing criteria to both parties.
LOANS AND DEBTS:
Such banks provide loans so that the bank will buy the goods or property from the seller and does agree with the buyer to sell it to them at a higher price. As there is an exchange of goods, not money, the banks are allowed to enter into such a transaction and make a profit. This way of the transaction as Murabaha
Similarly, when Islamic Bank lends money to a party, they provide all the money to the entrepreneur who is needed to start a business. As the company begins and grows, the party has to give a certain amount to the bank until they reach the amount shown as Debt; the bank will also receive a bonus amount as an additional profit until the party pays the loan.
PROHIBITION OF HARAM ACTIVITIES
Moreover, Islamic banking does not involve transactions having the element of Gharar or Maiser. Islamic Banks cannot deal in any Haram or forbidden transactions in Islam. Islamic banks work on producing returns through investment methods that are, according to Shariah-compliant. Operating according to the Shariah principles, Islamic banking operations are based on sharing the profit loss risk that may arise through trading and investment activities. Gambling is considered as Haram in Islam. Islamic Banks do not support any activity which encourages gambling and other such activities. All these working principles make Islamic Banking different from conventional banking as conventional banking does not follow such rules in their banking system while Islamic Banking by following Islamic Shariah has made the banking system much more accessible and does not put much burden on people. As it follows Islamic rules and principles, many business sectors and individuals have involved themselves in Islamic Banking transactions. Due to its Islamic friendly nature, Islamic banking has been introduced in most countries. Some countries which have introduced Islamic Banking on a national level are Saudi Arabia, Malaysia, United Arab Emirates, Kuwait, Qatar, Turkey, and Pakistan
Muhammad Junaid is a Senior Analyst, Search Engine Expert, and CEO of Online Quran Academy. Extensive experience in SEO, Analytics, Research, and Blogging. Work for years with local and international enterprises for 7+ years. Also, represent well-known brands in the UAE.