Financial Glossary Header Image

Islamic Banking

Updated on March 14, 2023

Islamic Banking refers to Islamic finances that are Shariah compliant for fulfilling the purpose of social responsibilities ethically and are based on certain core principles. These principles are

Sharing all profits and losses of the business (mudarabah)
Safekeeping (wadiah)
Prohibition of taking interest (Riga) on the original value

The concept of Islamic Banking stresses on meeting financial obligations in an ethical manner and works towards elimination of using exploitative means on funds and on the faith. The presence of Shariah based banking dates back to over 400 years and today more than 520 banks and 1700 mutual funds are Shariah compliant. The value of Islamic financial assets are projected to grow to about US$3.7 trillion by the end of 2024.

The financial principles that govern the commercial transactions under the Islamic Banking are known as Fiqh al-muamalat. The primary difference between conventional banking and Islamic Banking is the prohibition of interest, usury and speculation. These banks instead use the equity participation system to earn money.

The premise for sanction of loans under Islamic Banking is that if a business is given a loan under Islamic Banking, they have to repay the same without interest but provide the bank with a share in their profits. In case the business has defaulted in repaying the loan,the banks will also not receive any benefit.