Principles of Islamic Banking

Abu Dhabi Islamic Bank: Principles of Islamic Banking

Islamic banking revolves around several well-established concepts – based on Islamic canons, these cover the following:

1) First and foremost, Islamic banking must operate within the framework of the religion, based on Qura’n and Sunna. Hence only Halal activities are allowed. This holds ethics paramount and, consequently those activities forbidden to Muslims, i.e. gambling, liquor, hoarding and usury based lending are strictly avoided. The Bank does not, for example finance liquor manufacturing, transportation, storage or distribution companies. Scholars trained in Islamic law (Islamic Jurisprudence) screen the suitability of investments on an ongoing basis and provide guidance on products to the Bank’s management.

2) Interest, known as Reba in Islam is forbidden. Hence, all banking activities must avoid interest. Instead of interest, the Bank earns profit (mark-up) and fees on financing facilities it extends to customers. Also, depositors earn a share of the Bank’s profit as opposed to interest.

3) Partnership and the Sharing of Risks. Another principle of Islamic finance is based on profit sharing partnership between the parties involved in a transaction.

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