Islamic Banking

Abstract

This SIP undertakes an analysis of how Islamic banks earn a profit even though giving and receiving interest is prohibited in Islam. Interest free. banking itself is not a recent phenomenon. In fact the. fundamentals of conducting trade without charging interest were laid down in the Quran, the holy text of the Muslims, some 1400 years ago. The essay traces the history of Islamic banking principles as laid down in the Quran and the establishment of the first interest free bank in the world. It then seeks to draw a comparison between conventional and Islamic baking purely for the purpose of highlighting the differences between the two banking systems. Not to show one banking system to be superior to the other. The various modes of finance help to establish how Islamic banks earn profits without involving any activity requiring interest transactions. There is a wide array of financing modes employed by Islamic banks, however, this SIP seeks to analyze the most commonly used ones. Each mode is briefly explained, followed by its process of transaction and in turn how this helps to earn a profit in a sharia (Islamic) compliant way. In spite of the many criticisms launched at these modes of finances, it is established that they do generate profit for Islamic banks and doing so in a way which is comparatively less risky and more secure. Even though Islamic banking has much in favor, it has still been slow in gaining popularity. However, the recent subprime mortgage and economic crisis which resulted in huge economic losses and profitability for various institutions, while Islamic banks' profits and performance remained relatively less affected, has shed new positive light on Islamic banking. This has attracted a significant amount of attention from various institutions to turn to certain elements of Islamic banking in their banking operations, thus demonstrating that financial institutes are turning· their attention to this form of banking. Therefore· this also indicates that interest free banking can earn profits in a stable and secure manner or else there would not be newly garnered keenness to tum to Islamic banking by other financial institutes.