Introduction to Islamic Banking
Islam, being a very comprehensive religion, encompasses many areas typically thought of as secular, including the financial sphere. Islam presents moral guidelines for business transactions, trading, investment, and exchange markets.
The totality of religious codes in Islam, including spiritual, economic and political, is known as the Shariah. The Shariah is the system of Islamic laws, based upon the Quran and the teachings of the Prophet Muhammad (pbuh) that tells Muslims what is allowable and what is forbidden. Another name for the Shariah is simply, “Islamic law.”
Islam’s system of economic rules is called Islamic economics. When we talk about Islamic banking, we’re talking about a system of banking that is consistent with Shariah principles or Islamic law, and is governed by Islamic economic concepts.
The most prominent and well-known feature of Islamic banking is the prohibition of the collection and payment of interest, ie. usury, or in Islamic terminology riba or ribaa. This is an absolute prohibition, applying equally to governments, banks, investment funds, corporations and individuals. For the most part Islam also forbids trading in financial unknowns, or the financial risk markets, such as the buying and selling of futures.
Furthermore, it is haram (forbidden) to deal in any way in businesses that sell products that are themselves Islamically unlawful, such as liquor, pork, pornography, or gambling. This includes financing or investing in such businesses. In the last fifty years many Islamic banks have been founded to provide a halal (Islamically lawful) outlet for Muslims to invest their money.
In future articles on this website, we will discuss the history of Islamic banking, the various types of Islamic banking products that are available in today’s market, the recent proliferation of Islamic banks and the effect it is having on world financial markets, and we may even look at specific Islamic banks and their offerings.