Islamic banking refers to a system that operates as per sharia. Usually, money in Islam doesn’t have intrinsic value. This means you cannot sell for profit, and you can only use it as per Islamic law.

This law prohibits paying some fee for renting cash, referred to as riba, for a certain period. Plus, it prohibits all sorts of investments in businesses, which are regarded as haram or against Islam principles.

Basically, it is believed that these principles are derived from Quran, and people have been practicing them since then.

Is Islamic Banking Interest-Free?

Islamic banks are certainly not different from their conventional counterparts. Usually, they can operate an interest free credit card.

However, unlike the activities of Islamic banks are based on the premise of fairness and justice, not just to maximize profits.

In general, the profit rates of finance companies and Islamic banks are usually driven by the movement of interest rates.

How it Works

Businesses, which are interested in Islamic finance products can approach Islamic banks and other sharia-compliant financial institutions.

These banks may fund your business with various financial products based on what you need specifically. You can use those products for:

  • Project financing
  • Equity-based funds
  • Working capital
  • Letters of credit
  • Equipment lease

Profit-Loss Sharing System

While Islam usually excludes interest earning from any financial activity, this doesn’t mean financiers may not earn profits.

For them to do so, financiers must ascertain that profits they make are associated with the risks undertaken on investments. If there are no risks, the gains they make may represent interest instead of profit.

To know how Islamic systems differentiate between interest and profit, you must look at the difference in the economic ideology.

In capitalist systems, entrepreneurs and capital are regarded as two different production factors. The entrepreneur risking to lose cash earn profit, while are the returns on capital are interests.

Principles

Islamic banking strictly complies with sharia law. According to some studies, Islamic banking is a bit like Islamic social media in the sense that there are certain clear-cut regulations. It also depends on the several prohibitions, which are not all the time illegal in countries where financial facilities are operating.

Some activities, such as selling pork and producing alcohol, are strictly prohibited in Islam. These activities are regarded as haram. So investing in such activities is also forbidden. Apart from prohibiting activities, other principles include:

  • Uncertainty
  • Speculation
  • Charging or paying an interest

Strings Attached

To start with, in Islamic banking, you must work for profits, and lending cash to people who require it doesn’t count as work.

Under sharia, cash shouldn’t be allowed to generate more money. Rather, banks should offer some services to earn some profits.

Final Touches!

Islamic banking is one of the ways to manage to cash within moral Islam principles. It usually covers things such as borrowing, saving, and investing in purchasing a house.

Islamic banking also supports and encourages partnership – meaning, both risks and profit need to be shared where possible. This might be between two people, businesses, or a business and an individual.