What is Islamic banking
Islamic banking, based on the principles of Shari’ah law, is not specific to Muslims only, and is available to anyone who wants to bank differently.
If you are looking for modern banking that upholds traditional values then Islamic, or Shari’ah Banking may well suit your needs.
What is Islamic Banking?
In a nutshell, Shari’ah Banking is a system based on the principles of Shari’ah law, the religious law forming part of the Islamic tradition, and guided by Shari’ah economic principles. There are two principles underlying Islamic banking:
- How profit and loss are shared
- The collecting of interest, (known as ‘riba’) by lenders and investors, is prohibited.
Who can apply for Shari’ah Banking?
Shari’ah Banking is not specific to Muslims only. Anyone from all walks of life, and religious outlook, can participate in Shari’ah compliant banking products.
How does Shari’ah Banking work?
- As Shari’ah Banking follows Islamic principles, the bank’s undertakings also follow Islamic morals; Shari’ah compliant finance can therefore never be used for ‘unethical’ industries
- Because it follows these traditional values, Shari’ah Banking prohibits participation in speculative markets, as this is seen as tantamount to gambling under Shari’ah Law, which is prohibited
- Also, investments are not allowed in prohibited industries like tobacco, pornography, alcohol, arms and weaponry.
- Islamic banks lend funds based on trade (real economic activities) rather than pure finance. That means Islamic financing is backed by real goods or assets. Transactions that have no real or physical assets are considered null-and-void. This is known as asset-backed banking, which means there must therefore be a physical asset present to conclude a transaction
- The bank will then sell the asset to you at a mark-up or, alternatively, you can pay the bank for the use of that asset.
How do you invest money with Shari’ah Banking?
Because Shari’ah Banking excludes earning interest, you will be able to earn money by entering into a profit-sharing agreement with the bank.
This means the money you deposit into your account is invested in Shari’ah compliant financing and investments, and the resulting profits generated from these investments are shared with you.
A Shari’ah Fixed Deposit, for example, is an investment solution that works in the same way as a normal fixed deposit.
You can invest a lump sum for a fixed period of time (30 days to 5 years), but instead of receiving interest, you will receive a share of the profit from the bank’s investment of your funds in Shari’ah compliant assets; the profit made is then shared with you in a pre-agreed profit sharing ratio.