Islamic banking pertains to a banking system or activity that is consistent with Islamic law or Shariah principles and guided by Islamic economics. This type of banking system revolves around several well-established concepts, all based on Islamic canons.
Below are some of the commonly used terms and principles in Islamic banking:
Sharia. This principle literally means “a clear path to be followed and observed”. This is an abstract form of law capable of development, adaptation and interpretation. It does not prescribe general principles of law but instead, deals with specific cases or transactions and sets out rules that govern them. The Sharia is derived from two primary sources: the Quran – the transcription of God’s message to the prophet Mohammed; and Sunna – the living tradition of the prophet Mohammed.
Riba. Riba, when literally translated, means an increase, growth or accretion. In Islamic banking, Riba is strictly forbidden. As such, all Islamic banking activities avoid interest.
Musharaka. This pertains to finance by way of partnership. Under this principle, profits are shared between partners on a pre-agreed ratio. However, losses are shared in exact proportion to the capital invested by each party.
Murabaha. This term literally means cost-plus financing. With a murabaha contract, a bank agrees to buy some assets or goods from a third party, at the behest of its client and then re-sells this to the client with a mark-up profit.
Mudaraba. This is a form of partnership wherein one partner (rab-ul-amal) provides the capital needed for a project and the other party (mudarib) manages the investment utilising its capabilities and expertise. Profits from the investment are then distributed according to a fixed, pre-determined ratio.
Info source: www.hsbc.ae
Below are some of the commonly used terms and principles in Islamic banking:
Sharia. This principle literally means “a clear path to be followed and observed”. This is an abstract form of law capable of development, adaptation and interpretation. It does not prescribe general principles of law but instead, deals with specific cases or transactions and sets out rules that govern them. The Sharia is derived from two primary sources: the Quran – the transcription of God’s message to the prophet Mohammed; and Sunna – the living tradition of the prophet Mohammed.
Riba. Riba, when literally translated, means an increase, growth or accretion. In Islamic banking, Riba is strictly forbidden. As such, all Islamic banking activities avoid interest.
Musharaka. This pertains to finance by way of partnership. Under this principle, profits are shared between partners on a pre-agreed ratio. However, losses are shared in exact proportion to the capital invested by each party.
Murabaha. This term literally means cost-plus financing. With a murabaha contract, a bank agrees to buy some assets or goods from a third party, at the behest of its client and then re-sells this to the client with a mark-up profit.
Mudaraba. This is a form of partnership wherein one partner (rab-ul-amal) provides the capital needed for a project and the other party (mudarib) manages the investment utilising its capabilities and expertise. Profits from the investment are then distributed according to a fixed, pre-determined ratio.
Info source: www.hsbc.ae
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