Sharia banking, also known as Islamic banking, refers to the type of banking activities which is based on the principles of Islamic law (Sharia of Shariah in Arabic). It also involves the application of the Sharia principles through the development of Islamic economics. How is it different from conventional banking? Basically, the Sharia forbids the imposition of loan interest rates (usury or Riba in Arabic). In addition to that, investing in businesses that do not operate according to the principles of Islamic law is considered Haraam (Arabic for ‘forbidden’). The Sharia principles of economics have been practiced for centuries, and their history can be traced back as far as the 8th century AD. The concept of Sharia banking itself was introduced only near the end of the 20th century.

Sharia banking is mainly practiced in countries in which Islam is the majority religion, such as Indonesia, Bangladesh, Malaysia, Iran, Saudi Arabia, and other countries in the Middle East. These days, the concept of Islamic banking is also gaining more popularity in Western nations. The UK, for instance, is considered the leader of Islamic banking in the Western hemisphere. On the other hand, The Netherlands comes in a close second and is ready to take the lead anytime soon. In North America, New York City’s Wall Street has also opened its doors to Sharia banking.

The primary purpose of Sharia banking is similar to conventional banking, which is to make profit by lending out money. However, since theSharia prohibits the charging interest on loans, Islamic banking uses the Fiqh al-Muamalat (or Islamic transactions rules) to overcome this setback. The Fiqh al-Muamalat includes techniques such as the sharing of profit and loss through banking activities like Mudharabah (profitsharing), Musharakah (joint venture), Murabahah (cost plus), Wadiah (safekeeping), and Ijar (leasing).

Besides avoiding riba with Islamic transaction rules, the Sharia also forbids investments in businesses that are considered haraam or forbidden according to Islamic teachings such as lottery or gambling businesses and stores or restaurants that sell alcohol and pork. Additionally, money borrowed from an Islamic bank can’t be used to invest in corporations that produce media such as pornographic magazines or gossip tabloids. Hence, it can be concluded that Islamic banks only participate in moral purchasing and ethical investment.

Even though Sharia banking does not allow usury, products offered by Islamic banks include a profit (mark-up). And since the Sharia does not allow trading with debts, it is no wonder that Islamic banks do not issue conventional bonds like the ones issued by conventional banks. In fact, Islamic bonds or Sukuk are not based on interest rates. The profits are based on a mathematical formula that correlates the cash flow to the cost of the asset.

Sharia banking is also shrouded in controversy. Sharia principles also require that a few portions of all fees (about 20% or more) must be donated to Islamic charity organization. Hence, many people worry that the profits fall into the wrong Islamic organization. Some Islamic banks also charge for the time value of money, which is the same as interest. So it is no wonder that people question whether some banks are really ‘Islamic’ or not.

Sharia banking is an alternative for conventional banking. If you are interested to borrow money from an Islamic bank to start your business, make sure you choose a trustworthy bank. For a list of recent banking licences Geneva, please visit our website.

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