All of us have heard many types of banking systems prevailing in the banking sector and many of us are involved in many of those systems. But, very few of us are aware of this banking system – the Islamic Banking system. Islamic banking is also known as non-interest banking.
Islamic banking is based on the principles of Islam or Sharia law. According to this law, money does not have any intrinsic value. Thus, in accordance with that, no profit can be earned or interest should not be taken or simply, money can’t be sold. This is the principle on the basis of which Islamic banking was founded!
What does this law say?
Islamic law or Sharia prohibits the collection of payments of interest – known as RIBA in Islam, by lenders and investors i.e. neither banks can charge interest, nor they have to pay the interest to investors who invest their money in the bank.
Also, investors cannot invest in any business which is considered to be haram in the preaching of Islam i.e. they can invest only in those things which are sharia compliant. Thus, it is largely believed that these principles have been derived from the holy Quran.
Factoids about Modern Islamic Banking:
The very first successful implementation of such a bank was done in Malaysia. In the year 1963, Tabung Haji this bank came into existence with a total of 1281 depositors. Over the years this number has increased to 8,67,220 depositors accounting for almost 1 billion Malaysian dollars.
Why did this bank gain such enormous popularity?
As this bank gave interest-free money, many pilgrims used this interest-free money to complete their pilgrimage to Hajj – A must in this religion. Also, there was a lot of demand for interest-free money, back then. Thus, the success of this bank led to the formation of another such bank – Naseer Social Bank, in Cairo, in the year 1972, and from this year onwards various such banks were opened in various countries.
Now, one might ask how can a bank function without taking an interest? Well, an investor should not make an undue profit from the hard work of some other person, but they can follow a system of reasonable profit and return from investment where investors take risks i.e. they see profit and loss on any investment and not the interest rate. This is the reason that these banks do not keep a record of interest rates rather they have the record stating profit or loss.
Seeing the rise of Islamic Banking, the Dow Jones Islamic Market Index was formed, in the year 1999, in the United States. This was mainly used by investors willing to invest in sharia-compliant projects.
Thus, this banking system has immensely contributed in increasing the investments in healthcare, education, and humanitarian sectors which are the basic needs of any human being.