Islamic Banking - Financial Industry

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The basic principle of Islamic banking follows the laws of Sharia, known as Fiqh al-Muamalat (Islamic rules on transaction). The term "Islamic banking" is synonymous with "full-reserve banking" & "Sharia-compliant banking." The most prominent feature of these laws is usury - the prohibition of paying or collecting interest on money. The Islamic terminology for this is riba or ribaa. The Sharia also forbids engagement in investments that include financial unknowns such as purchasing & selling futures, as well as businesses that are haraam - dealing in products that are contrary to Islamic law & values such as alcohol, pork, gossip or pornography. These principles apply to all individuals, companies & governments.

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Banks that comply with Islamic law are prohibited to charge interest or late payment fees, which is also thought about a kind of riba. To minimize risk, banks will often need a huge deposit on goods & property, or insist on large collateral. It is lawful for the Bank to charge a higher cost for a lovely if payments are deferred or collected at a later date since it is thought about a trade for goods than collecting interest. Sharia-complaint banking products include Mudharabah (profit sharing), Wadiah (safekeeping), Musharakah (joint venture), Murabahah (cost and) & Ijarah (leasing). Another way that banks work within Islamic laws while trying to turn a profit is by purchasing an item that the customer wishes, & then selling the item to the customer at a higher cost.

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The Mudharabah is a partnership between an entrepreneur & the bank. The bank is named the rabal-maal & the entrepreneur as the mudarib. The bank provides all of the necessary capital to start a business & the entrepreneur does the work of managing the business. Profits are split at an agreed ratio until the preliminary money of the rabal-maal are paid off. The rabal-maal is also compensated with additional money based on the profits of the business in terms historicallyin the past agreed on. In the event that the business folds, the rabal-maal shoulders the cost & the mudarib is not compensated.

Musharakah is similar to Mudharabah, in which an entrepreneur seeks money for a business venture & pays the bank back with a ratio of profits. However, there's often over parties who contribute money & become partners who can influence the business depending on the amount of money invested. The entrepreneur also contributes money & shares in the risk. Any loss is proportional to the amount of capital invested in the business.

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Wadiah is a technique in which a person deposits money in to a bank & receives a "gift" from the bank. The bank is the keeper of the money & will refund the whole amount at the demand of the depositor. The bank rewards the amount of time the depositor keeps the money in the bank with a hibah or gift, which is not guaranteed. The hibah is similar to interest, but lawful according the Islamic law.