Islamic Banking: An Alternative Way Of Understanding Finance

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Along with the traditional banking that everyone knows, there are other models of banking in the world, such as Islamic banking. This type of banking, although it has special characteristics that differentiate it from the rest, at the same time is part of the global financial system. In some countries such as Malaysia, Iran or Saudi Arabia, Islamic banks are the main financial institutions in the country.

In the global economy, and especially in the financial world, capitalism as a form of economic functioning is absolutely dominant. However, the religious and cultural peculiarities that certain societies present have caused the emergence and growth of an alternative way of understanding finance, such as Islamic banking. 

Islamic banking that has its roots in sharia or Islamic law can be considered a mix between ethical commitment and faith in Islam. Its impact on the global financial system is still very limited and barely reaches 2% of it, although its growth levels and future prospects are not negligible.

Goals of Islamic banking

Like any traditional financial institution, Islamic banking seeks, through intermediation, to generate wealth and activate the economy through an offer of banking products and services developed according to the rules of Islam.

Investing in a business, buying a home, even placing savings, are also financial needs that must be satisfied for the Muslim population and the response to these needs was fostered with the creation of Islamic banks.

The first principle that characterizes this type of entity is the prohibition of the payment or acceptance of interest rates for loans or the placement of money, respectively. But it is not only about usury, but as per the office management course professionals the Islamic term Riba refers to any type of interest. That is, any default payment above the principal is prohibited.

Money is nothing more than an object of exchange, it has no value in itself and therefore should not be allowed to give rise to more money simply by being placed in a bank through a deposit or, loaned to another individual. Thus, in accordance with this principle, the issuance of credit cards that charge an interest for having money during the time that goes from the use of the credit card to make a purchase to its charge would not be allowed by these entities in the checking account. 

A second principle is that both the lender and the borrower should be participants in both the losses and the gains derived from the business or project that is the object of the borrowed money. Islamic law promotes that both the provider and the user of the capital must participate in the profits, as well as the losses of the businesses in which they concur. From this point emerges the principle that the Sharia promotes investments so that the entire community can benefit.

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