Islam is not only a religion but also a way of life.

Islam guides and leads man in his relation with

God. Islam is concerned with the spiritual, political, social economic, moral and all other material aspects
of the human being. It gives meaning and direction all throughout the journey of a man’s life.

Islamic banking is banking or banking activity that is consistent with the principles of Islamic law
which involves the sharing of profit and loss, and the prohibition of riba (usury or interest). It is only in
the late 20th century that a number if Islamic banks were formed to apply Islamic principles to private or
semi-private commercial institutions of the community. The basic attributes of the merchandise should
consist of pure materials which should be objects of intrinsic/legal value having some use. Islamic law
has provided certain boundaries in order to avoid inequitable gains and injustice.

In 1963, the first modern experiment with Islamic banking was undertaken in Egypt that lasted
until 1967, which, by that time, there were nine such banks in country existed.

In 1972, The Mit Ghamr Savings project became part of Nasr Social Bank and still operating up to
this day in Egypt.

In 1975, the Islamic Development Bank has started its mission to provide funding to projects in
the member countries. Also, in this year, Dubai Islamic Bank, the first Islamic bank, has started to
operate. Islamic banking was growing each year and has started to spread to other countries that
comply with Islamic principles. Islamic finance became the fastest-growing segment of the global
financial system.

The two main prohibitions in Islamic law are Riba and Gharar. Riba is also called as interest. Riba,
which is generally translated into usury, decreases national wealth. There is no permission for earning
livelihood or acquiring wealth through interest. Charging of Riba in the sight of the Qur’an tantamounts
to declaring of war against Allah. It is equivalent to the prohibition of investing in business that is
unlawful (Haram). Gharar covers ambiguity, uncertainty hazard and risk relating to the main aspects of a
transaction. It includes the ambiguity/ uncertainty about the ultimate of a contract and the nature
and/or quality and specifications of the subject matter of the contract or the rights and obligations of
the parties. Gharar can be avoided if some standards of certainty are met. Shariah also prohibits Maysir
which defines as a game of chance or gambling trying to earn easy money without having to provide
equivalent consideration. Both Gharar and Maysir involve excessive risk and are supposed to foster
uncertainty and fraudulent behaviour.

The explosive growth of Islamic finance was due to strong growth of OIC economies, innovative
product development, resurgence of muslim cultural values, international financial crises, liberalisation
of capital markets, and institutional capital.

The Islamic boundaries for financial transactions is set forth by the Islamic principles. Principles
such as the concept of Halal (lawful) and unlawful (Haram). The lawful transactions include avoiding
fraud, free consent and honesty of the involved parties in a contract, and others. There are also
principles that provides prohibitions such as riba, gharar, maysir, jahl, and qimar (gambling). Jahl, or
ignorance, is a part of Gharar and means lack of clear understanding of the specifications about the very
nature of the contract or the subject matter. All financial transactions must be real-time transactions or
sale of goods, services or benefits (except a loan extended on a goodwill basis), otherwise, it would
mean exchange of money for money that is subject to all rules relating to riba.
 Debt instrument is a type of Islamic financial instrument wherein a purchase indicating the
resale price in the resale contract of a tangible asset is purchased by a bank at the request of its
customer from a supplier. Quasi-debt instrument is a leasing contract where by a party leases an asset
for a specified rent and term. The owner of the asset (the bank) bears all risks associated with
ownership. Profit and loss sharing instrument is an equity participation contract under which a bank and
its client contribute jointly to finance a project.

Islamic products for microfinancing sector includes: (1) partnership based which consists of
musharka, a relationship established under a contract by the mutual consent of the parties for sharing of
profits and losses in the joint business, and mudaraba, a trustee-type finance contract under which one
party provides the capital for a project and the other party provides the labor/skill; (2) trade based
which consists of murabaha, a type of sale contract under which payment of all or part of the purchase
price is deferred for an agreed period, musawamah, the negotiation of selling price between two parties
without reference by the seller to either costs or asking price, salam, a contract in which advance
payment is made for goods to be delivered later on., and istisn’a, a pre-delivery financing instrument
used to finance projects where commodity is transacted before it comes into existence; (3) rantel based,
which consists of ijarah that means letting on lease or sale of a definite usufruct of any asset in exchange
of definite reward, and diminishing musharkah is a form of Musharakah where the financier and his
client participate in a joint commercial enterprise or property; and (4) other modules, such as Qard-e-
Hasana Model is a loan extended on a goodwill basis, and the other debtor is only required to repay the
amount borrowed, Waqf Model, and Zakat Model.

Credit Sale is a contract in which the bank earns a profit margin on the purchase price and
allows the buyer to pay the price of the commodity at a future date in a lump sum or in instalment.
Power of attorney occurs when a person appoints a representative to undertake transactions on his/her
behalf. Safekeeping is where a bank is deemed as a keeper and trustee of funds.

Islamic Insurance is an alternative form of cover that a Muslim can avail himself against the risk
of loss due to misfortunes. Islamic bonds are form of financial certificates that are the Islamic equivalent
of bonds.

The difference between Islamic and conventional banking are: first, Islamic banking focuses on
Investment while Conventional banking focuses on lending; second, Islamic banking offers no interest-
bearing products or services, while conventional banking has interest-bearing products or services; third,
Islamic banking considered certain business transactions as unlawful and cannot be carried out, while
conventional banking has a freedom to enter into any business transactions as long as it is in conformity
with the law of the country it resided; fourth, Islamic banking gives an extension on humanitarian
ground without penalty if the principal cannot pay back on time, while conventional banking, the delay
causes payment of penalty; and fifth, Islamic banking forbids receiving a monetary advantage without
giving a counter value, while conventional banking accepts.

Islamic banking facilitates the uplifting of economic standards of its clients by providing various
types of lending contracts that complies with Islamic principles.