What Is Islamic Banking

Islamic banking is the practice of engaging in financial transactions and investment activities according to Islamic law.

Islamic banks offer various services, including loans, deposits, investing, currency exchange, and other wealth management products. The profit generated by an Islamic bank is called "profit on account," which means it does not have to be shared with partners outside the company. This profit can only be used for charitable purposes or distributed among shareholders according to their investment in the bank. One exception to this rule is insufficient funds available for lending or meeting customer demand for other services. Profits may be transferred from one branch office to another branch office within the same group of companies so long as they are engaged in similar types of business.

Most Islamic banks follow the principle of "participatory banking," which means that their account holders share the bank's income or expenses. For example, any interest earned on deposits will be returned to the account holder under the loan agreement later instead of being transferred to an account outside of the bank. The only difference is that it will not be an interest-bearing account. However, the bank does benefit from the spread between loan and deposit rates, which is its margin or profit.


The History of Islamic Banking:

The history of Islamic banking is a somewhat complex and interesting one. The roots of Islamic banking can be traced back to the time of Prophet Muhammad, who established the principles necessary to finance trade long before the invention of money. It has been speculated that he was motivated by Tawriyah (the prohibition against interest) and such regulation as Zakhalah (the ban on speculation). With this context in mind, modern-day interpretations and extensions of these principles have led to what we now call Islamic banking.

The Principles of Islamic Banks:

The principles of Islamic banks are grounded in both Shari'ah (Islamic law) and Tawriyah, which forbids paying or receiving interest. This means that there are few standard practices in regular banks, such as paying interest, taking out mortgages or bonds that guarantee fixed returns. Instead, some transactions share risk (Mudarabah), equity (Musharakah), and leasing (Ijara). The bank does not pay interest but instead makes money by purchasing an asset and selling it for a profit.




There Are Three Types of Islamic Banking Products:

  • Investment accounts, which are allowed to earn a predetermined rate of return known as Mudarabah (Profit and Loss Sharing).

  • Deposits that are not allowed to earn a predetermined rate of return known as Murabahah (Profit based on Cost Allocation).

  • Financing, which involves the principles of Mudarabah (Profit and Loss Sharing) or Ijara (Leasing).


The Benefits of Using an Islamic Bank Account:

You'll feel more confident in your savings.

You'll feel more confident with your savings and money management because Islamic banking focuses on preventive measures, such as diversification of funds and prohibition of speculative financial products. Islamic banking will help you in saving for your future goals instead of borrowing money.

Your money will be protected from usury.

Your money will be safe from the risks of usury that you face in conventional banking. Usury is prohibited in Islam. Islamic banking forbids the practice of collecting interest on loans and investments. You can avoid hidden costs by withdrawing money from an Islamic bank account at any time without imposing any extra charges.

You are guaranteed to make a profit.

You'll have the opportunity to purchase shares in corporate entities without getting involved with lending money, making investments, or other financial transactions forbidden by Islamic law. Your money is not at risk of inflation because the government's asset base secures your bank account. You are guaranteed to get your money back.



Give back to the community by using an Islamic bank account.

Having an Islamic bank account will help you get the best economic benefits, but it will also be of great benefit to the community. By using a statement in an Islamic bank, not only are you getting the opportunity for financial security, but you are also giving back to your community by ensuring that your money is being used in a halal way. This prevents you from having bad feelings of guilt when using your money for something that may harm other people.

Feel better about your finances with an Islamic bank account.

The Islamic bank account is an excellent option for those who want to have a halal way of managing their money. The Islamic banking system allows the customer to use the service on a day-to-day basis, making it easier for them to maintain their lives financially. The Islamic banking system also encourages the customer to save some of what they earn so that they can have a savings account and an investment account that will help them in the future.



How Does an Islamic Bank Work:

An Islamic bank has the same banking products, services, and features offered in typical banks. Customers can perform all their transactions in an Islamic bank without being subject to interest rates. One of the more popular products offered by the Islamic bank is a time account. This is different from typical banks because they limit how long you can store money at the bank. This is not a problem in an Islamic bank because they have no interest rate on time accounts. As for the savings account, they also do not have interest rates on them. The bank performs all transactions with your money and then lends it to another person who needs a loan, and they charge that person an agreed-upon rate of return. Islamic banks can also offer car loans and home mortgages, but you will only be paying back the principal amount of the loan.

Islamic banks are usually based around the Islamic religion, so many of the employees are of this faith. They have to comply with all laws but can still be very strict in how they conduct business. All of the transactions you make will be on paper, which is similar if not identical to regular banking. You will also be able to write checks on your account and use ATM machines to withdraw money.

Islamic banking is already a thriving business with thousands of branches located all over the world. It offers many great benefits for those who work in it and those who want to take advantage of its services. As long as people have money, they will always need a place to store it, and an Islamic bank is a great place to do that.



Two Types of Islamic Banks:

They are the Mudarabah Bank and the Murabahah Bank. The Mudarabah bank is owned by at least one individual in which that person provides some consideration to the shareholders. The profit rate is based on market rates. The second type of Islamic bank is the Murabahah Bank. This bank is owned by either a person or an institution, in which the person or institution makes available all funds to be invested.

The difference between these two types of banks is that Mudarabah bank has actual ownership of the company, whereas Murabaha bank does not.

How to Open an Account in An Islamic Bank:

To open an account in an Islamic bank, a person needs to follow a few guidelines. A customer needs to appoint a guarantor who will be the representative of their account. All customers need to sign up for a general undertaking form, a legal document that will guarantee the banking transactions of the customer. After signing the agreement, the person can deposit money into their account and transact with it so long as they have funds on it. A customer needs to provide a copy of their national identification card. And the bank needs two people to support his or her transactions at all times. The bank may ask for a copy of the identification card from the second person.




Islamic banking is a type of finance that operates under Islamic principles and laws. It offers the same products, services, and features as typical banks without interest rates on time or savings accounts. One important thing to note: You must be Muslim to open an account at an Islamic bank.

Islamic banks are distinct from traditional financial institutions in that they do not have interest rates on time accounts or savings accounts. They're also supervised like normal banks. All of their activities are recorded on paper, and the bank is run by people who adhere to Islamic laws and guidelines. This is crucial for Islamic banking to work.

All types of financial services and loans are available to you through Islamic banks, which operate similarly to conventional banks. The primary distinction is that instead of paying interest on a loan, you will just pay the amount loaned to you. When obtaining money from your account, you can also write checks and utilize ATMs.