Though Islamic banks are a relatively recent experience when compared to their traditional counterpart, Islamic banking and finance is becoming one of the most significant aspects of the modern global financial system. Why? Because it is a fast-growing industry that has developed rapidly within a few years from a niche industry to a global force to be reckoned with in the international arena.

What is Islamic Banking ?

Many researchers have found it very difficult to reach a specific definition of the Islamic bank, but despite the multiplicity of these definitions, the content remains the same. Here are a set of these definitions :

• Islamic Bank is a banking institution to collect funds and employ them within the scope of Islamic sharia in order to serve the building of the Islamic solidarity society and achieve the fairness of distribution and placing money in Islam.
• It is an investment financial institution with a developmental, humanitarian and social mission, which aims to accumulate funds and achieve optimum use of its resources under the rules and provisions of Islamic Sharia to build the Islamic solidarity society.
• A monetary financial institution that works to attract monetary resources from members of the community and employ them in accordance with the provisions of Islamic sharia in a way that ensures their growth and achieves the goal of economic development and social progress of Islamic peoples and societies.
• A banking institution that adheres to all its transactions, investment activities and management of all its activities in the Islamic Sharia and its purposes as well as the objectives of the Islamic society internally and externally.
• An Islamic financial institution with an economic and social message that operates under Islamic teachings, it is a bank with a message and not just a merchant, a bank looking for the most beneficial projects and not just the most profitable. The Islamic bank not only aims to implement an Islamic banking system but also to contribute to building an Islamic society full of ideological, ethical and economic foundations.
• Islamic banks as a financial institution to collect funds and employ them in accordance with the provisions of Islamic sharia in order to serve the Islamic solidarity society, and to achieve the fairness of distribution with the obligation not to deal with RIBA based interest, and to avoid any act contrary to the provisions of Islam.

Islamic banks are usually divided according to a number of areas which are considered the most functional domain, dividing them into:

• International development banks : These banks are owned by several countries, and their primary mission is to achieve development in these countries by participating in development projects and financing productive programs in the public and private sectors through the provision of “Qardh Al Hasan” or benevolent loans , as well as creating and managing funds such as fund Support for Muslim communities.
• Social banks: This type of bank focuses its activities on the social side, such as Nasser Social Bank, whose main objective is to strengthen the bonds of cooperation and social solidarity among individuals through the granting of benevolent loans “Qardh Al Hasan” and the provision of aid and subsidies, as well as the collection and distribution of zakat.
• Multi-purpose banks: Islamic banks that, as indicated, address various banking, commercial, financial and investment activities, such as Dubai Islamic Bank in the UAE or Faisal Islamic Bank in Saudi Arabia.

The philosophy of Islamic banking takes the lead from Islamic Shariah. According to Islamic Shariah, Transactions involving interest/riba, Gharar and Maiser are prohibited. Moreover, they cannot deal in any transaction, the subject matter of which is invalid (haram in the eyes of Islam). Islamic banks focus on generating returns through investment tools which are also Shariah compliant. Islamic Shariah links the gain on capital with its performance. Operating within the ambit of Shariah, the operations of Islamic banking are based on sharing the risk which may arise through trading and investment activities using contracts of various Islamic modes of finance.

Riba, Gharar & Maiser

1.Riba:

An increase stipulated or sought over the principal of a loan or debt and implies any excess compensation without due consideration (consideration does not include time value of
money).

2.Gharar:

Excessive level of uncertainty or ambiguity created due to the lack of information or control in a contract

3.Maiser:

Game of Chance or speculation

What is meant by Shariah/Islamic Law?

Shariah lexically means a way or path. In Islam Shariah refers to the divine guidance and laws
given by the Holy Quran, the Hadith (sayings) of the Prophet Muhammad (Sallalahu Alaihi
Wassalam) and supplemented by the juristic interpretations by Islamic scholars. Shariah
embodies all aspects of the Islamic faith, including beliefs and practices. Islamic Shariah or the
divine law of Islam is derived from the following four sources:

• The Holy Quran
• The Sunnah of the Holy Prophet (Peace Be Upon Him)
• Ijma’ (consensus of the Ummah)
• Qiyas (Anology)

How do Islamic banks make money?

Instead of lending money to their clients at a profit, Islamic banks buy the underlying product (House, Car, Air-conditioner…) and then lease it or re-sell it on installment to the client for a fixed price typically higher than the initial market value. The key notion here is risk sharing—the banks make a profit on the transaction as a reward for the risk they took with the customer. Instead of thriving off of interest rates, Islamic banks use their customers’ money to acquire assets such as property or businesses and profit when the loan is successfully repaid.

All Islamic finance investments, acquisitions, and transactions must reflect Islamic values. Dealing with anything illicit (Haram) like alcohol production, pork breeding, arms manufacturing, or gambling is strictly forbidden.

The fundamental principle of Islamic banking is based on the Bank’s direct involvement in transactions financed by it. The remuneration it receives is justified either by its status as co-owner, to the results of the project financed (losses or profits) in the case of a Mudaraba or a Musharaka, or by the provision of marketing or leasing of property previously Acquired by it in the case of a Murabaha, Ijara (Leasing / Leasing) or Salam, or, finally, by the manufacture / construction of movable or immovable property by it or by third parties, In the case of an Istisna’a.

The general rule is that money is, from the Islamic point of view, merely a mediator and an instrument of measurement in trade in commodities. Even if, in parallel, it ensures a function of store of value, it can produce a surplus only insofar as it is transformed beforehand into real property.

Therefore, the banking margin is considered legal by the Islamic Shari’s only to the extent that it is generated by one of the following activities: Sale – Participation – Rental – Manufacture. Islamic financial institutions have a dual commercial and financial vocation. Far from confining themselves to the traditional mission of financial intermediation, they play a role in the creation, transformation and commercialization of wealth as full stakeholders.

This dual vocation is illustrated legally by the existence of two types of clauses in the financing contracts governing the relationship between the Islamic Bank and its partners: financial clauses fixing the amount, duration and general conditions of use And the renewal of the financing line, the commercial clauses, laying down the terms of the transaction and / or operation carried out under the aforementioned financing line.

Islamic finance does not therefore have the sole objective of profitability as opposed to conventional finance far from it. Islamic finance must play a real role in the economy of a country. It must be directly involved in the projects and thus create real added value. Islamic finance must play an active role and take risks and not a role of spectator as in the framework of conventional finance.