Introduction to Islamic Banking

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The most characteristic feature of the Islamic economic system is the prohibition of interest. The principles of Islamic economics have been applied most prominently in the financial industry, especially in the field of banking. Islamic finance is growing in multiple dimensions and is now spreading to other financial sectors like insurance, structured finance, project finance, mutual funds, syndicated finance, investment banking, etc. Geographically also, Islamic banking has grown from the Middle East to Europe and is now well positioned in the South Asian markets as well.

Sharia compliance also ensures corporate social responsibility (CSR) and ethical compliance. Islamic banks do not deal with companies that produce tobacco or alcohol or engage in gambling, casinos, nightclubs, prostitution, etc. This mechanism gave Islamic banking the name “ethical banking” in Europe.

The balance sheet of Islamic banks is able to withstand financial shocks. Islamic banks are not obligated to give a fixed return to their general depositors and creditors. Creditors, shareholders and depositors participate in and participate in the business of the Bank. Therefore, if there is a shock on the asset side (increase in non-performing loans), Islamic banks will be able to share this loss with their depositors and shareholders.

Islamic banks cannot refinance loans. Therefore, repackaging and repackaging loans and then issuing more and more debt securities against the background of these non-performing loans cannot legally take place in Islamic banks. Islamic banks are required to have asset support on all their investments. Therefore, the losses of Islamic banks, even in theory, cannot exceed the value of the real asset.

Islamic bank financing operations

To provide financing, the following methods are used in Islamic banking.

Undo post

In refusing to participate, the customer goes to the bank to purchase a joint asset/property. It is called Diminishing Musharaka because the lessee’s share of the ownership increases and decreases or the bank decreases over time. Rent decreases as the interest of the tenant’s ownership increases. The Bank’s share of assets/property is divided into units. These units are purchased by the customer periodically until all units are purchased. After the customer purchases all units from the bank, he becomes the sole owner of the asset/property.

Murabaha magazine

Murabaha is a deferred payment sale. Murabaha is used for working capital financing, SME financing and trade financing. The Murabaha process is as follows:

The Institute of Islamic banking and finance and the customer sign the Master Murabaha Financing Agreement and the Wakala Agreement. Under the agency contract, the customer purchases goods from the supplier on behalf of the bank. The customer agrees to buy the asset from the bank. It is a promise and a one-sided commitment. The bank pays the seller and obtains title and physical/implied possession of the asset. The customer signs an acknowledgment that he has purchased the property on behalf of the bank and is now ready to purchase the asset. After the offer and acceptance, the sale is carried out and the customer pays the agreed price to the bank.


Ijarah means paying rent. In Ijarah, the right to use the property is transferred to another person in return for a consideration. The process flow is as follows:

The customer goes to the bank to obtain an asset for lease. The customer agrees to make periodic rental payments during the rental period. Signing the lease and agency contract. The customer, as the agent of the bank, buys the asset. The bank receives the title deed of the asset and pays it to the seller. The bank leases the asset and the customer starts using the asset and pays the rent for each period. In the end, the customer can purchase the asset from the bank through a separate purchase agreement.


It is used to finance goods and services that are not ready for cash sale and must be delivered later. In peace payment is in cash but delivery is delayed. It is used in special cases to facilitate transactions. It is used in forex trading as an alternative to discounting bills of exchange and in financing agriculture.

ordering to make

It is used to finance goods that are not yet ready for sale and will have to be manufactured. Example includes tailoring services, architectural services,