Question

What is a fundamental principle of Islamic Banking that distinguishes it from conventional banking?

• A. Interest-based transactions
• B. Risk-sharing between the bank and its clients
• C. Exclusive focus on profit maximization
• D. Securitization of financial assets

Answer 1

Answer:

B. Risk-sharing between the bank and its clients

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.