What is Islamic Banking

The Future of Finance

1. Highly protected

In the Quran, Allah says:

"O you who believe! When you contract a debt for a fixed period, write it down. Let a scribe write it down in justice between you. You should not become weary to write it (your contract), whether it be small or big, for its fixed term, that is more just with Allah; more solid as evidence, and more convenient to prevent doubts among yourselves" [2:282]

The above verse illustrates Islam's emphasis on having a written agreement for every form of transaction. While some may deem it unnecessary, it is essential as it serves as a means of protection. Whether it is in the form of a formal contract or not, written agreements protect the rights and interests of both the halal-conscious consumer, and the bank. Additionally, it serves as a form of ‘checks and balances’ for every transaction that is carried out.

Islamic banking has the interest of the halal-conscious consumer at heart. It protects against financial risks, and from non-compliance of the Islamic Law through products, regulations, and an Islamic framework of governance. Additionally, it protects the leasing of assets. In the process of a lease, the bank is liable to pay all expenses incurred. For mainstream banking, all costs incurred in process of purchasing an asset are the expense of the consumer. This includes the costs incurred due to natural disasters.

If you are in the market searching for a bank that provides maximum protection and has your best interests at heart, Islamic banking is the banking system for you.

2. Interest-Free

The most well-known feature of Islamic banking is that it is interest-free.

In the Quran, Allah says:

"God has permitted trade, but forbidden riba (interest)" [2:275]

As a result, all financial transactions within the Islamic banking system are void of interest. This stems from the Islamic ruling that money is only a medium of exchange; it has no inherent value, and as a result, cannot increase in value on its own.

According to Islamic Law, all profit must be accrued through a form of labor, and lending money does not count. One of the ways in which banks generate profit is through rendering services or the buying and selling of halal goods. To generate income without charging the halal-conscious consumer any interest, they utilize the equity participation system. In this way, businesses pay back loans that are void of interest, but they provide a share of their profits to the bank.

Regarding the benefits of the equity participation system, it promotes good welfare amongst people. It provides everyone with equal access to loans by ignoring the liabilities of repaying off a loan that is laden with interest.

Additionally, to grow the halal-conscious consumer's investment, Islamic banks engage in financial trade and budget deficits through foreign and domestic sources. In turn, they could also delve into diversified investment portfolios that; yield a high return, have minimal risk, and provides adequate liquidity. The profits generated from the sources above are divided between the halal-conscious consumer and the respective bank.

3. Low-risk business involvement

An additional benefit of Islamic banking is that it does involve high-risk business activities.

In a hadith, on the authority of Abu-Said al-Khudriy, it was reported that: "The Prophet (s) has forbidden the purchase of the unborn animal in the mother's womb, the sale of the milk in the udder without measurement, the purchase of spoils of war prior to their distribution, the purchase of charities prior to their receipt, and the purchase of the catch of a diver" (Ahmad and Ibn Majah).

From this hadith, we can glean that Islam is firmly against any form of commerce that takes on the form of a gamble. Business ventures that involve speculation or where future outcomes are not easily predicted, are prohibited. Islamic banking is primarily based on tangible assets. In turn, this helps protect the halal-conscious consumer against participating in high-risk investments that can lead to a loss of property or profit.

When compared to mainstream banks, Islamic banking approaches investments from an intentional and insightful, decision-making process. A prime example of this is the US-based LARIBA. They offer Islamic banking services that are governed by a board of Muslim directors who make decisions, based on sound Islamic rulings.

4. Promotes business partnership

When it comes to starting a business, Islamic banking is a sound option, especially for small and mid-size enterprises (SMEs). They provide SMEs with the opportunity to start a business by sharing the profit and loss generated by both parties. In other words, this means that Islamic banks share the risk that may occur for the company. By choosing to bank Islamically, businesses are offered an opportunity for expansion as they offer SMEs the chance to take over the shares until they own it.

Conclusion

Islamic banking is more than an "interest-free" enterprise. It is a holistic system that comprises of Islamic finance, and a system of economic and social justice. Additionally, it deals with a myriad of concerns such as property rights, allocation of resources and the proper role of government. If you would like to maintain a healthy and Islamically sound financial status, switch to Islamic banking today.

Works cited:

1. Emirates Islamic; Advantages of Banking Islamically