Finance Banking

Rules Of Islamic Banking And Finance

Published at 07/14/2011 14:04:12

Islamic finance and banking, is a system of banking which is based on Islamic law or Sharia in Islamic language.  The main difference between Islamic banks and traditional banking institutions is the prohibition of interest charges on loans lent to borrowers. Instead, they offer a myriad of financial products designed to safeguard the interests of both the lender and the borrower. They are also prohibited from financing any “immoral” business activities according to Islamic law, such as alcohol, pornography, etc.

Islamic finance and banking institutions are not are recent phenomenon, but rather started as far back as the 8th century. They have recently gained popularity, due increased demand from strict Muslims who felt it unethical, according to the Sharia rules on banking, to use traditional banking products that charge interest on loans, and allow account holders to collect interest on deposits. In order to sustain themselves as a going concern, Islamic banks will instead incorporate a profit margin into the loans lent to borrowers. This then ensures stable costs for borrowers, regardless of the time taken to pay the money back. Although, there are some products which have variable costs, depending on the time taken to pay back the loan.

Islamic banks are required to establish a Sharia supervisory board, which confers with them on the operations and transactions offered by the bank to ensure that they comply with the rules stipulated by Sharia law. Islamic banks do not restrict their services to Muslims only, but are open to all types of individuals/institutions, regardless of their religious affiliations.

Tips and comments:

Islamic banking products do tend to be quite similar to those provided by non Muslim banks, except for the fact that they do not charge interest on transactions. That said, they do tend to be quite intricate, and will often involve very complicated documentation. Therefore, if you do not understand financial jargon, you should use the service of a lawyer or a financial advisor to simply the requirements set, for whichever facility you intend to use.