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WHAT IS ISLAMIC BANKING? HOW WILL EARN WITHOUT CHARGING INTERESTS?

Islamic banking is one of the types of banking which deals with Islamic law. According to the Islamic Law, the banking process happens as the below

•  No Interest in the acquired funds.

• The Investment in business that deals with goods and services considered ‘haram’ is prohibited. Example: pork, alcohol, gambling, pornography, etc.

• Gambling or speculation should be minimized. So that it will rule out investment in options, and futures

Evolution of Islamic Banking

• Tabung Haji in Malaysia is the best example of the successful Islamic Banking process. It started its service from 1963. With the response to the high demand for no-interest policy, this bank got a higher deposit percentage. Actually it began with 1,281 depositors later that increased to 8,67,220 depositors and deposits over one billion Malaysian dollar

• This created a way to accept some other Islamic banks by the rest of the world. Especially in Egypt where there are existing small-scale Islamic banks. Naseer Social Bank in Cairo was the result of its success. These banks are also implemented in Non-Islamic countries too. The United Kingdom is the first Non-Islamic country to start this type of bank.

Modes of Islamic banking or finance sector

Generally, as per the process, Islamic banks never encourage interests. They operate this bank on the basis of the risk-sharing basis. Some modes of the Islamic banks are

1. Mudarabah:  In this process, the depositors provide funds upon the bank and the bank invests the funds into the business. The acquired funds are shared among the depositors and the bank. These profits are shared in a pre-determined profit sharing ratio. But the loss is fully upon the bank only.

2. Murabaha: Murabaha is one of the most common procedures used by Islamic Banks. This mechanism works on the basis as the bank purchases the asset as per required to the depositor and sell it to the same depositor with a cost-plus-profit basis.

3. Ijara: This is a type of bank deals with the leasing section. Generally, this bank gives a bike or car for a time period for a specific amount. The specific amount will be directly given to the actual owner of the asset.

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