By Admin 
Islamic Banking: Taking or giving interest is strictly prohibited in Islam. But this raises a question that if giving loan on interest is prohibited then how do people take loan in Muslim countries. The answer lies in Islamic banking. Islamic banking is a parallel financial system designed to comply with Sharia. Let us know how it works.
Principles of Islamic Banking
In fact, in Islamic banking, money itself does not create money. Wealth should only be created through genuine economic activity such as trade, services or investment. For this reason, banks are not allowed to give cash loans and charge interest on them. Instead they are directly involved in the transaction and share both the profits and risks with the customer.
How are home, car and business finance done in Islamic banks?
Whenever someone in a Muslim country needs financing, the bank does not just give cash. A common method is Murabaha. In this, the bank buys the asset on behalf of the customer and then sells it in installments at a pre-decided higher price. This extra amount is not interest but is considered profit from business.
Another widely used system is Ijara. It is like leasing. In this model the bank buys an asset and leases it to the customer. The customer pays rent instead of interest and ownership can be transferred to him at the end of the lease period. It is commonly used for homes and industrial equipment.
Profit and loss sharing instead of fixed returns
Islamic banks often use Musharaka for business financing. In a way, this is a model based on partnership. In this, both the bank and the customer invest capital in a business or project. Profit is shared in a fixed ratio while loss is shared based on the amount invested by each party.
How does an Islamic bank earn money without interest?
Now, since interest is not allowed, Islamic banks earn income from profit from sale of assets, rental income and shared business profits. They also charge service fees for account maintenance, fund transfer and advisory services.
Along with this, the concept of Karz-e-Hasna i.e. charitable loan is also included in Islamic banks. In this concept, the borrower has to repay only the principal amount without any profit or extra charges. These loans are usually given to help people in education, medical needs or financial problems.
Also read: Does India also give loan to Pakistan, know how much is the loan on this?