What Is The Concept Of Islamic Banking?

There is a complete way Islam tells about doing business. The Quran strictly condemns the interest in the business. It is called the riba'a in the Arabic language. In recent years many banks in the Pakistan ignored this and they business were based on the interest. But later on the government reformed the interest free banking in the whole country. Now many banks started to carry operations in Pakistan and implemented the interest free banking. Now there are nearly 170 Islamic financial institutions are managing 150 billion dollars assets. Now the world two leading and big banks like Citibank and HSBC are now offering Islamic banking through out the worldwide operations.

In 2001, the Pakistan is listed on the number three among the countries who have adopted Islamic banking methodology. Conventional bank generate their profits by offering loans to the people who requires them and charging the high interest rates on them. So Islamic banking do not make buy in previous ways. Pakistani banks are introducing new methods of earning profits one is called Mudarabah and Murabaha. Under Mudarabah the banks offers profit sharing to its customers. So when banks investment money with some customers it takes sharing in profits. The second one is Murabaha. In which the banks purchase anything that is high in cost for its customer and then resell it to its customers at some profit on it.

Islamic banking all over the world is becoming famous. The history of Islamic banking is very old the first Islamic bank was established in Dubai. But some conventional bank has also introduced some Islamic instrument to attract muslins. The Islamic banking term is very vast. The reason behind its popularity is riba.

The riba means interest. As a Muslim it is prohibited to take or pay interest. In Islam money is not considered as a commodity. Therefore, we can not sell this commodity to earn interest. The definition of Islamic bank is that bank which follows the laws of Shariha. In west also the Islamic banking is flourishing. To avoid interest or riba, Islamic banks has introduced instrument such as "Mudaharba" and "Musharka". Mudaharba means that bank as a rab-ul-mal will provide the funds to entrepreneur to do business.

But bank has no right to interfere in the business. The entrepreneur has responsibility to run business and provide whole information to bank. In this kind of contract the bank will share the profit of business according to percentage fixed in contract. In case of loss the bank will bear all lost. In Musharka, the both will share loss and profit. This type of contract is called partnership.