What is Islamic Banking? Definition of Islamic Banking, Islamic Banking Meaning and Concept

Islamic banking is an alternative to traditional banking, characterized by participating in the banking and financial markets strictly following Muslim doctrine or law.

Through the principles of Islamic banking, the Muslim population of various countries establishes a way of banking consistent with their way of life and their faith.

Although its business model goes through the traditional system of delivery of credit and receipt of deposits by its clients, it presents peculiarities determined by the observance of Islamic law.

This responds to its commitment to integrate socio-cultural values and religious beliefs in its way of doing economics.

At present there are more than a hundred banks and financial entities that follow this doctrine, which operate in dozens of countries in both Asia and Africa especially.

Origin of Islamic Banking

The appearance of important oil or gas resources in geographical areas near the Persian Gulf led to the creation of the current States in the area.

In this way, the main families of these territories managed to acquire relevant mineral and oil exploitations. This, during the first decades of the 20th century and after phenomena such as decolonization by the main economic and political powers of the world.

As a consequence, the royal families and multiple Muslim oligarchs acquired great fortunes. Fortunes that were destined to the creation of banking and financial entities through which to operate.

Basic principles of Islamic Banking

The practice of banking in Muslim populations consists of strictly following two main lines:

  • Prohibition of loans or credits with interest rates.
  • Prohibition of accepting money.

Both points suppose the removal of possible usury behaviors, which from their point of view and their beliefs is something sinful.

In this sense, they follow the idea that money is only an object of exchange for other goods and should not generate value by itself.

Main features of Islamic Banking

Faced with more orthodox economic and banking positions and close to current capitalism, Islamic banking assumes some characteristics of its own that define it:

  • Follow-up of Islamic postulates : Sharia is the central axis of the postulates of Islamic banking. In other words, it would be a doctrinally guided bank.
  • Moral importance : By combining faith and economics, the economists belonging to this phenomenon pursue a certain ethical balance.
  • Interest rate prohibition: According to its doctrine, the application of interest rates that increase a borrowed principal is not valid.
  • Non-speculative motivation: Islamic banking moves away from speculative financial markets, as well as stock exchanges and many other practices that practice credit.
  • Recent growth : Although for centuries, the precepts of Islam have influenced commerce or finance, it is in the middle of the last century when the phenomenon of Islamic banking begins to acquire greater relevance.
  • Adaptation and approval: Islamic banks act in line with the rest of the financial operators at an international level.
  • Energy focus. Due to geographical reasons, most of the institutions that practice this modality base their business on mineral resources such as oil, as well as the profits derived from their exploitation.

All these points are included in the entity-client relationship that this trend exemplifies. In contrast to the traditional model of debtors and creditors, Islamic banking advocates bilateral relations as project partners.

According to their faith, the risk must be jointly shared by both parties when facing a certain business or investment.

Relevance of Islamic Banking

The development of a more globalized world has facilitated the fitting of new economic and financial visions on the world spectrum.

Within them, Islamic banking has acquired an outstanding relevance compared to traditional or more canonical banking concepts.

Especially in the countries of the Middle East this financial trend prevails. This is due to the fact that the main banks or economic bodies follow their basic guidelines and approaches.

In this way, important nations such as Iran or Saudi Arabia operate globally under the umbrella of this economic trend.