Understanding Islamic Banking

Difference from Conventional Banking

At first glance, it may seem as though there is little to differentiate between Islamic and conventional banking. Both systems accept deposits from consumers and commercial entities and offer various financing solutions to them. However, specific considerations have been taken to separate the two and ensure that Islamic banking meets Shari’ah principles.

Understanding Islamic Banking

An interest-free financial system is a contracted definition of Islamic banking that reflects the ideology of Islamic Shari’ah, which Islamic banking is based on. Effectively, it can be defined as a banking system that adheres to the high ethos and moral values of Islam that is governed by the principles laid down by Islamic Shari’ah standards.

Specific financial contracts conforming to Islamic principles have been approved by Islamic scholars to be used in financial transactions. Every transaction that Islamic banks engage in is structured based on one or more of these contracts. This system discourages all unethical practices and plays a crucial role in establishing a transparent economic system. In addition, the prohibition of risk-free return and the permission of trading are the foremost ideas behind Islamic banking and finance.

Furthermore, Islamic banks are overseen by an Internal Shari’ah Supervision Committee (ISSC). ISSC’s are committees comprised of Islamic scholars responsible for ensuring that all operations of that particular bank comply with Shari’ah standards and principles.