There is thus a partnership between the Islamic bank and its account holders, on the one side, and between the bank and its investment clients, on the other. This is in contrast with a conventional bank, which mainly borrows funds paying interest on one side of the balance sheet, and lends funds charging interest, on the other.
To avoid using the interest rate instrument Islamic financial institutions have devised a variety of different types of financial contracts which have, as their common characteristic, the concept that risks and rewards are shared between the institution and its customers. In the past decade an important innovation has been the development of an Islamic “bond” market.