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Home » What are the Islamic principles of banking and finance?

What are the Islamic principles of banking and finance?

Islamic banking, also known as Islamic finance or Shariah-compliant finance, operates under the principles of Shariah (Islamic law). The foundation of Islamic banking lies in two essential principles: the sharing of profit and loss and the prohibition of interest. Unlike conventional banking systems, where interest plays a central role in transactions, Islamic banking emphasizes profit-sharing arrangements and risk-sharing between parties involved. This means that lenders and investors participate directly in the business ventures they finance, rather than merely acting as creditors.

In Islamic banking, the concept of Riba, or interest, is strictly prohibited. Riba refers to the unjust or exploitative gains derived from loans or transactions involving interest. Instead, Islamic financial institutions offer alternative mechanisms, such as profit-sharing and cost-plus financing (Murabaha), to facilitate transactions while complying with Shariah principles. This adherence to ethical and moral guidelines ensures that financial activities are conducted in a fair and equitable manner, promoting social justice and economic stability within Islamic communities.

Furthermore, Islamic banking prioritizes ethical investments and social responsibility. Investments must align with Shariah principles, avoiding sectors deemed unethical or harmful, such as alcohol, gambling, and tobacco. Additionally, Islamic finance encourages charitable giving and the provision of interest-free loans to those in need, promoting wealth redistribution and economic inclusivity. By upholding these principles, Islamic banking aims to foster sustainable development and prosperity while upholding the values outlined in Islamic teachings.

(Response: The Islamic principles of banking and finance revolve around the concepts of profit and loss sharing, the prohibition of interest (Riba), and adherence to Shariah principles. Unlike conventional banking, Islamic finance promotes fairness, ethical investments, and social responsibility, aiming for economic stability and inclusivity within Islamic communities.)