What is Shari’ah 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.
In Arabic, the word Shari'ah means, 'the path to a source of water'.
The Shari'ah is not a religion in and of itself, but rather a body of laws that anyone can follow. Religion removed – and treated as an alternate financial or economic system – like all economic systems, the Shari'ah economic system has different definitions. The main difference between this system and other economic systems is the definition of money.
- Definition of money in conventional economic systems
- In conventional economic systems, money is defined as:
- A unit of account
- A medium of exchange
- A store of value
As a result of the last definition (a store of value), conventional economic systems treat money as an asset and thus, give out money and charge for the use of money (interest-based banking).
How the Shari'ah economic system defines money
The Shari'ah economic system does not recognise money as being a store of value due to it being fiat in nature. It thus deems it as currency and only meeting the first two definitions.
As a result, money cannot be given out 'on rent' but is instead an actual asset (as defined in this economic system) with intrinsic value. Money in Shari'ah Banking is, therefore, not the subject of contracts but rather an actual asset. This asset is either given out on rent or sold to the client. The rent or markup on the sale is the means through which the financial institution generates their economic benefit.
Clear boundaries of use
The second aspect of Shari'ah Banking that is unique is that consumers of this solution would know with absolute certainty that money within the system will not be used in the following industries (not an exhaustive list):
- Arms / Weapons
- Transactions purely for speculation
As we can see from this, Shari'ah Banking is not specific to those who follow the faith of Islam but anyone who aligns to these principles of economic thought.