ADCB Islamic Banking Your guide to Islamic Banking

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Islamic Finance is a financing activity that complies with Shari’ah (Islamic Law). The concept can also refer to the investments that are permissible under Shari’ah. Islamic modes of financing view money simply as a medium of exchange rather than as an object of trade. As such money should not “beget” more money.

Currently, prevailing Islamic Financing modes practised are Murabaha, Ijara, Mudaraba, Musharaka, Salam and Istisna. Islamic modes of financing share the common property of generating legitimate ‘trade profit’ in conformity with the common Shari’ah maxim, ‘al-kharaj-bi-al-daman’ which means ‘profit (is justified) with risk’.

The six modes mentioned above are the generic Islamic Financing modes that characterise the bulk of Islamic banking and finance operations commonly in practice. Other than these six generic modes, there are other Islamic finance modes in practice, such as Investment Agency (Wakala bil Istithmar). Conventional retail banks operate through interest-bearing loans, and Islamic banks perform the same operation through Islamic modes of financing.

Lending / Financing

Conventional Islamic
Based on lending and borrowing money based on interest Works as a trading / financing institute and not as a money lending institute
Late payment charges on delayed payments are applied Unilateral undertaking by customer to pay donation amount on delayed payments is applied
All types of industries are financed: only businesses deemed illegal by the law of the land are not supported It does not permit financing to businesses deemed illegal by the law of the land, as well as non-Shari’ah Compliant businesses /activities, such as alcohol and tobacco.
Generally does not get involved in trade and business as it acts as a money lender One of the Islamic banking business models is based on trade; thus, it needs to actively participate in trade and production process and activities
No Shari’ah framework is followed It has a strong Shari’ah governing framework in terms of Shari’ah supervision led by an Internal Shari’ah Supervision Committee that approves the transactions and products in the light of Shari’ah rulings
Almost all the financing and deposit products are loan-based Recognises loans as non-commercial and excludes them from the domain of commercial transactions and they are interest-free
Money is considered a commodity and lends it against interest as compensation Money is treated as a medium of exchange, having no intrinsic value
The relationship of the customer and bank is Creditor-Debtor The relationship of the customer and bank is Seller-Buyer and Partner
Compensation is always through interest Compensation is always based on price (Thaman and Ujra)