Islamic banking
- Islamic banking refers to a system of banking that is compliant with the principles of Islamic law, known as Sharia.
- It operates based on the principles of risk-sharing, ethical investing, and the avoidance of interest-based transactions (riba).
The fundamental principles of Islamic banking includes :
Prohibition of Riba:
- Islamic banking prohibits the charging or paying of interest.
- Instead, it promotes profit-sharing arrangements, where the financial institution shares profits and losses with the clients.
Asset-Backed Financing:
- Islamic banking encourages asset-backed financing, ensuring that all financial transactions are backed by tangible assets or services.
Risk-Sharing:
- In Islamic finance, both profits and losses are shared between the bank and its clients.
- This principle encourages a fair distribution of risk and reward.
Prohibition of Speculative Activities:
- Islamic banking discourages speculative practices and investments in businesses that are considered haram (forbidden), such as those related to alcohol, gambling, and other unethical activities.
Ethical Investments:
- Islamic banks are encouraged to make investments in socially responsible projects that benefit the community and do not harm the environment or society.
