Islamic finance: a practical perspective.

Abstract

Islamic banking is now a widely used term. Islamic banking has emerged in recent decades as one of the most important trends in the financial world. There has always been a demand for financial products and services that conform to the Syariah (Islamic law). With the development of viable Islamic alternatives to conventional banking, there are now Syariah-compliant banking products to meet the short-term and long-term banking needs of the customers. Islamic banking is based on the principles of Syariah law. The Islamic banking system offers similar functions and services as the conventional banking system while abiding by Syariah principles. There are two basic principles underlying Islamic banking: 1. The prohibition of riba (interest); and 2. The sharing of profit and loss between a bank and its customers. The operations of Islamic financial institutions are based on a profitand loss-sharing principle. An Islamic bank does not charge any interest for the financing offered to customers but rather participates in yield, resulting from the use of funds. On the other hand, depositors get their share from the bank’s profit based on a predetermined ratio. With the growth of Islamic finance, banks are now introducing various riba-free products and services to expand the banking scope and customer base.