Islamic Banking : Principles, Practices & Performance

Commercial banks and other financial institutions are an integral part of present economies. Individuals as well as public and private institutions can hardly operate without the institution of banking. Modern banking operations are primarily interest-centric. Banks receive money and lend it on interest. This is prohibited in Islam. Since interest permeates all the operations of the banking system, the whole banking system is repugnant to Muslims. Islamic banking -- as an alternative to the Western capitalist banking system -- prohibits any kind of speculation, interest, and immoral investments (eg: casinos). Islamic banks have to make a profit. They do this by buying assets on behalf of the customer, who has to repay the loan and a fee for using the asset. When the loan is paid off, the asset''s ownership is transferred to the borrower. The advantage of this arrangement is that the bank shares not only the profit but the risk as well. For this reason, it gets the opportunity to have a close look at the potential borrowers.