what is Islamic banking

Islamic bank offers all banking services in Halal way

what is Islamic bankingIslamic bank means a bank that provides all services related to money according to the Islamic teachings. In Islam interest or usury is illegitimate (haram) and strictly forbidden in all types of circumstances. Even if you live in a non-Muslim country you are not allowed to deal with your money matters in an entity that deals with interest. Therefore, being a Muslim one must avail the services of an Islamic bank with regard to all money matters.

History of Islamic bank

Islamic banking was formally started nearly four decades ago in Egypt. By and by it becomes so popular because of its being a Sharia-compliant banking service. Now this service is available almost in all Islamic countries of the world. Interestingly, most of the non-Islamic countries are also using this service because there is less uncertainty in Islamic banking system as compare to its counterpart.

How Islamic bank is different

An Islamic bank offers same banking services which its counterpart – a conventional bank – provides to its customers. It includes:

  • Cash deposit service
  • Lending money to bank
  • Borrowing money from bank

An Islamic bank receives cash from customers and keeps it safely and gives back the required amount to customers when they need it. For this work Islamic bank charge a small amount as service fee. A conventional bank also provides same service to its customers but it may use the deposited money in various interest-based business activities.

A conventional bank lends money to customers and borrows from them on interest that is a fixed rate on loan to be paid on regular interval of month, quarter or year. An Islamic bank also provides the same service but not on a fixed rate but purely on profit and loss basis. Islamic bank issues loan to borrower with an agreement that shows the objective of borrowing. When borrowers earn over the borrowed money they pay the share of profit to bank. Borrowers also make guarantee to pay back the principle amount in regular installments in a specified time period.

An Islamic bank also receives money from customers who want to invest their money in any Halal source of business. It issues the same money to its others customers who want various types of Islamic loans to fulfill their business and personal needs. The difference between profit received and profit issued is called the net earnings of the Islamic bank. It also charges a small amount for the services it offers to its customers.


An Islamic bank cannot be compared with a conventional bank because the latter has been providing banking services since centuries. It is based on interest system of finance that has strong roots in the world. Therefore, it takes a long time for Islamic banking to replace with the centuries-old conventional banking system.

There are various challenges to an Islamic bank in present times. First of all it has to fully develop its all services as competitive as that of its counterpart. Secondly it has to make innovation in its financial services to make them attractive for customers. Its main objective should be not only to make new customers but to make the customers of conventional banking to shift to it. For this purpose it has to provide far better services than the competitors but while strictly remaining Shariah-compliant in all its services.

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