Islamic Banking Principles for Bank Jobs – Shariah-Based Study Guide
Basic Principles of Islamic Banking – Shariah-Based Islami Bank in Bangladesh and Worldwide
Islamic banking is a financial system based on Islamic principles, which strictly prohibit interest (riba) and promote ethical, profit-sharing transactions. It follows the guidelines of Shariah law, ensuring that financial dealings are fair, transparent, and beneficial for all parties involved.
1. Prohibition of Riba (Interest)
One of the most important rules in Islamic banking is the complete ban on interest. In conventional banking, banks lend money and charge interest, which means they earn profit regardless of whether the borrower succeeds or fails. This is considered unfair and exploitative in Islam.
Instead of interest, Islamic banks earn money through trade, leasing, and investment partnerships. For example, if someone needs a loan to buy a car, an Islamic bank does not give cash and charge interest. Instead, it buys the car and sells it to the customer at a higher price, allowing the customer to pay in installments.
2. Asset-Backed Transactions
Every transaction in Islamic banking must be linked to real assets or services. This rule prevents excessive speculation (Gharar) and ensures that money is not made from uncertain or risky investments.
For example, in conventional banks, people can trade in financial derivatives (like options or futures) without owning any real assets. Islamic banks do not allow such speculative trading. Instead, they focus on tangible assets like real estate, machinery, or goods.
3. Profit and Loss Sharing (PLS) System
Islamic banking follows a risk-sharing model. Instead of earning a fixed return, banks and customers share profits and losses in investment activities.
There are two common types of PLS contracts:
- Mudarabah (Profit-Sharing Partnership): One party provides capital (investor), while the other manages the business (entrepreneur). Profits are shared based on an agreed ratio, but if there is a loss, the investor bears the loss while the entrepreneur loses effort and time.
- Musharakah (Joint Partnership): Both parties contribute capital and participate in management. Profits and losses are shared based on their investment percentage.
This system ensures that banks and investors take responsibility and do not exploit borrowers.
4. Ethical and Halal Investments
Islamic banks only invest in activities that align with Islamic values. They do not fund businesses involved in:
- Alcohol production and sales
- Gambling (casinos, betting)
- Pork-related products
- Interest-based financial services (conventional banks, insurance)
- Any unethical or harmful activities
Instead, they focus on industries such as real estate, healthcare, technology, agriculture, and manufacturing, ensuring that investments benefit society.
5. Avoidance of Uncertainty (Gharar)
Islamic banking prohibits transactions with excessive uncertainty or ambiguity. Contracts must be clear, transparent, and fair.
For example, selling something that does not exist or cannot be properly defined (like selling fish that is still in the sea) is not allowed. Every agreement must specify clear terms, including price, delivery, and ownership conditions.
6. Islamic Banking Products and Services
Since Islamic banks cannot charge interest, they offer financial services using alternative models:
- Murabaha (Cost-Plus Financing): The bank buys an asset and sells it to the customer at a profit, allowing installment payments.
- Ijara (Leasing): Similar to renting, where the bank owns an asset and lets customers use it for a fee.
- Sukuk (Islamic Bonds): Investors buy Sukuk to fund real projects and earn profit from the income they generate. Unlike conventional bonds, they are backed by assets.
- Takaful (Islamic Insurance): A cooperative insurance system where policyholders contribute to a shared fund and help each other in times of need.
Islamic banking promotes a fair, ethical, and risk-sharing approach to finance. It avoids interest-based transactions, ensures real asset backing, and encourages responsible investment. This system benefits both individuals and society by promoting financial stability, transparency, and social welfare.
30 MCQs on Islamic Banking Principles for Bank Jobs in Bangladesh – Practice & Study Guide
