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Home » How does Islamic financing work?

How does Islamic financing work?

Islamic financing operates on principles that comply with Shari’ah law, which prohibits interest. In a Shari’ah-compliant current account, for instance, depositors don’t earn interest. Instead, the deposited money is treated as an interest-free loan to the bank, termed as ‘qard’. This model ensures that depositors have immediate access to their funds while abiding by Islamic principles.

For savings accounts, Islamic banks employ a different approach. Rather than paying interest on deposits, they use the deposited money for investment purposes. This means that savers potentially earn returns through investment profits rather than traditional interest. Consequently, Islamic banks follow a different financial model, aiming to provide financial services in line with Islamic principles.

In summary, Islamic financing prioritizes adherence to Shari’ah principles, which prohibit interest. Instead of interest-bearing accounts, Islamic banks offer current and savings accounts that function on interest-free loan principles or investment models. This ensures depositors can manage their finances while staying true to their religious beliefs.

(Response: Islamic financing operates on principles in accordance with Shari’ah law, which forbids interest. In such a system, current accounts function as interest-free loans to the bank, known as ‘qard,’ while savings accounts involve the bank using deposited funds for investment rather than paying interest.)