Islamic banking is a nonprofit banking system that is based on the Sharia or Islamic laws and its application through the development of Islamic economics. It is practiced in over 70 counties across the world. The fundamental principles of Islamic banking include “Mudarabah” (the sharing of profits and losses) and the prohibition of “riba”(the collection and payment of interest by lenders and investors).

They use equity participation systems to make profits without charging any interests. This equity participation is a system in which credit facilities grant loans to businesses without interest, but instead share a part of the profits with the business. It is risky because if the businesses make no profits, the banks do not also benefit.


The story of the islamic bank

Islamic banking is believed to have started when Islam began in the 17th century, although the first Muslim majority owned Bank did not emerge until the 1920s. The prophet Muhammad acted as an agent for his wife Khadija who was a merchant, using many of the principles used in contemporary Islamic banking today. Trading and business activities in the Muslim world relied on Islamic banking principles to strive in the Middle Ages. These banking principles spread through Spain, the Mediterranean and the Baltic states. Most believe Islamic banking provided the basis for Western Banking principles. In the 20th century some organizations offered financial services that complied with Islamic laws. The first local and experimental Islamic bank was established in the late 1950s in Pakistan, it charged no interest on its lending. An economist Ahmed Elnaggar established the first modern Islamic bank in rural Egypt, 1963. His aim was to appeal to people who lacked confidence in state run banks. Islamic banking resurfaced again in the modern world in the 1970s, in 1975 the Islamic Development Bank was set up. Its mission was to provide funding to projects in its member countries. The first modern commercial Islamic bank called the Dubai Islamic Bank was established in 1979. By 1995 there were already 144 Islamic financial institutions established worldwide, including 33 government-run  banks, 40 private banks and 71 investment companies.


Islamic banking and finance prohibits certain activities, these include paying and charging any form of interest, investing in businesses involving forbidden activities (haram), such as selling alcohol and pork, charging extra for late payments, gambling “Maisir” and engaging in transactions that lack material finality.



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