The 4 Biggest Principles of Islamic Banking

Islamic banking is a much misperceived kind of banking in the eyes of many people out there. I personally reside in UAE and hence have an idea of how Islamic banks in UAE operate and how they are getting their profits. In short, an Islamic bank is the one that invests money in order to achieve acceptable financial and social objectives. In this kind of banking, the investment and mobilization of funds is usually conduced according to Sharia laws and principles. There are four big principles that make up Islamic banking and provide it with its essence.

1. Prohibition of Usury

Islamic way of handling the finances is already explained by the prophet and the god and hence the most important principle is not receiving or giving any kind of interest. Interest is known as Usury or Riba. According to Islam, it is not fine to generate profits from money. If Riba is involved in financial aspects, then the well-being of a society is jeopardized and this is what the investors and Islamic banks believe at most. If the investor is more interested in the interest rate and less interested in doing good, then the progress meter can go really down. Usury is not only forbidden in Islam but in Christianity and Judaism as well.

2. Ethical Standards

The second, and another equally important, principle is associated with ethics. It is strictly said that when you plan to invest your money somewhere, make sure that the outcome is wholesome and good. For this, some very serious consideration is required. The Islamic banks study the terms and policies of businesses thoroughly and this is how a typical Islamic bank should operate. Then the environment is also involved. Even the activities that a particular business is involved in should be looked into just to make sure that the money is not used for haram purposes.

3. Social and Moral Values

The Quran says that you should support and care for the destitute and poor. If you are an Islamic financial institution, then it is your responsibility to offer your services to those who need you. This does not mean that you donate money to someone; instead you offer them loans that are interest-free. The charitable donations are also compulsory but as long as the bank is making profits on its own. It also includes university loans or hospital loans, but these loans are liable to a shorter period of time of maximum one year.

4. Business Risk and Liability

The fourth principle involves the basic concept of being fair to each other. Parties, the lender and the consumer should share the profit a risk of any kind of endeavor. It means that if the bank invests somewhere and gets profits, then it will be compulsory for it to share the profit equally. However, if the bank suffers some kind of loss, then the consumers will also be affected by that. In short, no one is bigger and no one is smaller.

Source: mawarid.ae