DEFINITIONof 'Islamic Banking'

Abankingsystem that is based on the principles

ofIslamiclaw (also known Shariah) and guided by
Islamiceconomics. Two basic principles behindIslamic
bankingare the sharing of profit and loss and,
significantly, the prohibition of the collection and
payment of interest.
DEFINITIONof 'Islamic Banking'
Islamic bankingisdefinedasbankingsystem which
is in consonance with the spirit, ethos and value system
ofIslamand governed by the principles laid down by
IslamicShariah. Interest freebankingis a narrow
concept denoting a number of bankinginstruments or
operations which avoid interest.
Islamic banking(Arabic: ) isbankingor
banking activity that is consistent with the principles of
sharia(Islamic law) and its practical application through
the development ofIslamic economics. As such, a more
correct term for Islamic banking is sharia compliant
Islamic banking and finance
Sharia prohibits acceptance of specific interest or fees
for loans of money (known asriba, orusury), whether
the payment is fixed or floating. Investment in
businesses that provide goods or services considered
contrary to Islamicprinciples(e.g. pork or alcohol) is
alsoharaam("sinful and prohibited").
Islamic banking and finance
Although these prohibitions have been applied
historically in varying degrees in Muslim
countries/communities to prevent unIslamic practices,
only in the late 20th century were a number of Islamic
banks formed to apply these principles toprivateor
semi-privatecommercialinstitutions within the Muslim
community.
Islamic Banking Model

Conventionally, a financial intermediary

accepting deposits and granting loans with
fixed commitment of return on both sides
An Islamic Bank, also financial intermediary
(accepting deposits and investing in
Shariah compliant manner to earn profit
and sustain losses to be shared by
managers and fund providers
Resources Investments
Deposits + I Islamic Modes
Capital B of Financing
 Islamic banking vis--vis Conventional
Islamic banking vis--vis Conventional
banking
banking
Islamic Banking Conventional Banking
Deals in documents and goods Deals in documents only
Risk sharing Risk transferring
Reward is profit Reward is interest
Profit is not predetermined Prefixed Interest
Leads to Islamic economics Leads to Capitalism
Value based Value neutral
Assets based financing Non Asset based financing
Relationship: Investor Manager, Only Debtor and Creditor
Partner, Debtor- Creditor
Shari'ah compliance besides No Shariah compliance
the conventional regulations
Permitted in Islam (riba-free) Prohibited