A bank or banking institution, they accept funds and giving loans with the aim of profit. The word Bank derived from Italian word banca or French word banque both mean bench or money exchange table.
Islamic Finance or Banking
Islamic banking system is a type of financial services based on the islamic Shariah (Islamic law). Islamic concept of banking is based profit and loss share and shared risks in mutually not involved interest (Riba) and any haram related transactions. Conventional banks operations only based in interest, the Islamic banking operations not include any type of interest.
Sources of Islamic Finance
The main Shariah sources are classified in to four types. Quran, Hadith, Ijma and Qiyas.
- Quran: It is one of the principle source of Islamic Shariah. It is the direct word of Allah.
- Hadith: It is another source of Islamic Shariah. The words, actions and practices of Prophet Muhammad (pbuh).
- Ijma: The common opinion of the Islamic scholars on legal matters
- Qiyas: Analogical reasons
Principles of Islamic Finance
- Interest: All type of interests are prohibited in islamic financial transactions
- Profit and Loss sharing: The bank and the customer must share the profit and oss mutually
- Uncertainty and Gambling: Islamic banks not allowed any type of uncertainty transactions and any type of specuation. The Shariah not accept the speculative transaction.
- Sharing Risks: Islamic banks promote the risk sharing. The parties are sharing risks and reduce the risk burden in both parties.
- Do not invest funds any prohibited activities or business Like, Haram Transactions, Drugs, Alcohol, pork and etc…
Type of Contracts in Islamic Finance
- Mudarabah and musharakah
Mudarabah and musharakah are the type of partnership contract between two parties, in mudarabah, where one party provides fund they called Rabb al Mal (owner of the capital) and another party managing business, they called Mudarib. After the business the profit amount share between the Rabb al mal and Mudarib, incase any loss the rabb al mal bearing fully. In musharakah, the both parties investing money and both are managing business and the loss and profit share mutually.
Murabaha Contract is a type of sales contract, the seller and buyer agree to the mark up or profit of an asset. Simply known as cost plus profit. In Islamic finance Murabaha using as a type of loan.
- Istisna and Salam
Istisna is a type of manufacturing business. Manufactured or build according to pre agreed features will be delivered at a predetermined price on a fixed future date. Salam refers to a type of sale where the goods are pre-priced at the time of contract and delivered in the future (mainly agricultural products).
Ijarah is an alternative of conventional lease contract. Ijarah means provide service or goods temporarily for rent.