Islamic Finance is a system of financial governance and management based on the main beliefs and principles of Islam. The Islamic principles or Islamic Laws are referred to as Shari’ah in Arabic. In Islamic banking, there is no involvement of interest (termed as Riba in Arabic) as it is declared Haram (prohibited) in Islam. The prohibition of interest stems from both a philosophical, as well as a socio-economic reasoning, defined under Islamic Economics.

The following Quranic verses clarifies the meaning of Riba. "O those who believe, fear Allah and give up what still remains of the Riba if you are believers. But if you do not do so, then be warned of war from Allah and His Messenger. If you repent even now, you have the right of the return of your capital; neither will you do wrong nor will you be wronged."

( ???? ?????? , Al-Baqara, Chapter #2, Verse #278-9) “Allah will destroy Riba (usury) and will give increase for Sadaqat (deeds of charity, alms, etc.) And Allah likes not the disbelievers, sinners.”

( ???? ?????? , Al-Baqara, Chapter #2, Verse #276) “O you who believe! Eat not Riba (usury) doubled and multiplied, but fear Allah that you may be successful.”

( ???? ?? ????? , Aal-e-Imran, Chapter #3, Verse #130) One of the ahadith quoted by Ali ibn at Talib (RAA) has defined Riba An Nasiyah in similar words.

The Holy Prophet said:

"Every loan that draws interest is Riba."

Concepts in Islamic Banking

Generally, in Islamic finance, risk is shared by both the parties; the Islamic bank as well as the client. The products offered by Islamic banks are unique as they are free from interest-based arrangements. Islamic Banking involves neither receiving nor paying of interest. Some of the most popular Islamic Banking products are: Musharaka:

It is the partnership between two or more parties in which all the parties invest as well as manage the business. Generally the profits are shared in a predetermined ratio; it may or may not be according to the investment made by each party. However, losses are shared according to the investment made by both the parties.

Mudaraba:

This is also a form of partnership in which one of the parties invests and the other manages the business. The profits are shared between the two parties according to any predetermined ratio whereas the loss has to be borne only by the party who has invested the capital. Salam:

Salam is advance payment provided by the investor.

Ijara and Ijara wa-Iqtina: Ijara is very similar to leasing in conventional banking.

Diminishing Musharaka:

It is a form of partnership in which both parties invest capital but gradually the share of one party diminishes and the share of other party increases through equity re-purchases. Islamic Banking products are gaining popularity not only in Islamic Countries but also in Non-Islamic countries as well (Minna Kumar, 2010). Also in Malaysia apparently more than 50% of Islamic Banking customers are Non-Muslims as they prefer a banking system that encourages fair and ethical dealings promoted in Islamic Finance.

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