What is Islamic Banking? Its Introduction and Concepts

Banking is a concept that has been used in our society in different form and shapes. The history of banking is as old as 2000 BC when there were trading system and the gold coins. There are different banking systems in the world but the most famous ones are conventional banking and the Islamic banking. The main function of conventional bank can be summed up in one sentence: The banks borrow to lend. They borrow in the form of deposits and lend this money to earn interest. In contrary, Islamic banking system is based on the principle of partnership. In Islamic banking, the shareholders, the depositors and the borrowers-all would participate on profit-loss sharing basis. Here you will get the complete information about what is Islamic banking and is it really Islamic?

 

what is Islamic banking

 

Introduction to Islamic Banking

Islamic banking is a finance management system that is based on the Islamic rules of Sharia. The main concept of the Islamic banking is the prohibition on collection of interest and its utilization for the business purposes. Banking in Islam is a saving money framework that depends on the standards of Islamic law, additionally known as Shariah law, and guided by Islamic financial matters. Two fundamental standards behind Islamic banking concepts are the sharing of benefit and misfortune. Gathering interest or Riga isn't allowed under Islamic law.

Islamic banking concepts have an indistinguishable reason from traditional managing an account aside from that it works as per the guidelines of Shari'ah, known as Fiqh al-Muamalat. Banking in Islam as an account exercises must be polished reliable with the Shari'ah and its pragmatic application through the improvement of Islamic financial aspects. A significant number of these standards whereupon banking in Islam is based are regularly acknowledged everywhere throughout the world, for quite a long time as opposed to decades. These standards are not new but rather their unique state has been changed throughout the hundreds of years.

Islamic Banking Concepts in Early Ages of Islam

The history of banking in Islam goes back to the earliest reference point of Islam in the 7th century. The first spouse of prophet Muhammad's, Khadija, was a dealer, and he went about as a specialist for her business, utilizing a significant number of similar standards utilized as a part of contemporary concepts of Islamic banking.

In the Middle Ages, exchange and business activity in the Muslim world depended on Islamic rules as account standards, and these thoughts spread all through Spain, Baltic States, and Mediterranean, giving a portion of the premise to western standards. From the 1960s to 1970s, the modern world accepted the Islamic banking system.

How Does Islamic Banking Work?

It is important that you understand the rules to know how does Islamic banking work. There is consensus among the Shariah scholars that credit price of a commodity can genuinely be more than its cash price. The Islamic Fiqh Academy of OIC and Sharia Boards of all Islamic banks, approve the legality of this difference. However, no addition to price once mutually agreed.

Keeping in mind the end goal to procure cash without charging premium, Islamic banks utilize value support frameworks. This implies if a bank credits cash to a business, the business pays back the advance without premium, yet it gives the bank an offer in its benefits. In the event that the business defaults on the advance or do not win any benefits, the bank does not get any benefit either. Detailed study of Islamic banking services is covered in mba Islamic finance and Islamic banking courses, which are offered by AIMS.

Is Islamic Banking Really Islamic?

Yes, we must say that Islamic banking is really Islamic, if it is being practiced on the basis of rules and regulations defined by Islamic Sharia. In case any organization is not following the rules defined in Quran, Hadith, Ijma or Qayas, they are not allowed to claim themselves an Islamic bank. To lessen hazard, the bank just affirmed around 40% of its business credit applications, yet the default proportion was zero.

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