Islamic banking is based on strong foundations, since it relies on the Shari’a rulings and principles derived from Quran and Sunnah.
Islamic financial institutions only carry activities in compliance with Shari’a and fully avoid activities which are prohibited by Shari’a, such as gambling, transacting in liquor, hoarding, borrowing and lending money on riba (interest).
Members of the Internal Shari’a Supervisory Committee (“ISSC”) in the Islamic bank provide Shari’a supervision through looking into Shari’a compliance of transactions and services offered by the Islamic bank on going basis. Also, the ISSC provides guidelines for products offered by the Islamic bank, and by end of the financial year, Shari’a Annual Report is issued that confirms the level of compliance with Shari’a in the Islamic bank.
Since all forms of banking interest constitute riba, that is prohibited in Shari’a, so Islamic banks avoid all banking activities where interest is received or paid. Instead of that, the Islamic bank generates returns on its financial facilities, extended to its customers, in the form of profits in the financing based on sale or partnership or in the form of rent in the financing based on Ijarah (leasing).
On the side of deposits and
investment accounts, the depositors (as investors) are entitled for a share of profits realized on their deposits based on
Mudaraba and profit sharing concept. Funds deposited in the saving and investment accounts (based on Mudaraba or Investment Wakala) are deployed in transactions in compliance with Shari’a. Profits on deposits and investment account are not guaranteed and will be subject to investment risk, but the Islamic bank manages the deposited funds in a professional way that achieves the expected returns. On the other hand, current accountholders are not entitled for any returns because the funds in these accounts represent interest free loan provided by the current accountholders to the Islamic bank, and such funds will be guaranteed for the accountholders.