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The Islamic Banking Model




The origin of Islamic banking dates to the very beginning of Islam within the seventh century. The prophet Muhammad's first wife, Khadija, was a merchant, and he acted as an agent for her business, using many of an equivalent principles utilized in contemporary Islamic banking. In the Middle Ages, trade and commercial activity within the Muslim world relied on Islamic banking principles, and these ideas spread throughout Spain, the Mediterranean and therefore the Baltic States, arguably providing a number of the idea for western banking principles. In the 1960s to the 1970s, Islamic banking resurfaced within the times .

This banking system is based on the principles of Islamic law, also referred to as Sharia law, and guided by Islamic economics. The two basic principles are the sharing of profit and loss and therefore the prohibition of the gathering and payment of interest by lenders and investors. Islamic banks neither charge nor pay interest during a conventional way where the payment of interest is about beforehand and viewed because the predetermined price of credit or the reward for money deposited. Islamic law accepts the capital reward for loan providers only on a profit- and loss-sharing basis, performing on the principle of variable return connected to the particular productivity and performances of the financed project and the real economy. Another important aspect is its entrepreneurial feature. The system is concentrated not only on financial expansion but also on physical expansion of economic production and services. In practice, there is a higher concentrated on investment activities such as equity financing, trade financing and real estate investments. Since this technique of banking is grounded in Islamic principles, all the undertakings of the banks follow Islamic morals. Therefore, it might be said that financial transactions within Islamic banking are a culturally distinct sort of ethical investing. For example, investments involving alcohol, gambling, pork, etc. are prohibited.

For the last four decades, the Islamic banking industry has experienced an incredible evolution from alittle niche visible only in Islamic countries to a profitable, dynamic and resilient competitor at an international level. Their size around the world was estimated to be close to $850 billion at the end of 2008 and is expected to grow by around 15 percent annually. While system of banking remains the main component of the Islamic financial system, the other elements, such as Takaful (Islamic insurance companies), mutual funds and Sukuk (Islamic bonds and financial certificates), have witnessed strong global growth, too. Per a reliable estimate, the Islamic financial industry now amounts to over $1 trillion. Moreover, the opportunity for growth in this sector is considerable. It is estimated that the system could double in size within a decade if the past performances are continued within the future.


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