Introduction to Islamic Banking

The pioneering effort of Islamic Banking, led by Ahmad El Najjar took the form of a savings banks based
on profit sharing in the Egyptian town of MitGhamir in 1963. This experiment lasted until 1967 by which
time there were 9 such banks in the country. These banks which neither charged nor paid interest
invested mostly by engaging in trade and industry directly or in partnership with others and shared their
profits with the depositors. Thus they functioned essentially as savings investment institutions rather
than as commercial banks.

According to the common economic laws there are two people involved in a business transaction
regarding loans, and the first individual who is being paid the loan is the borrower whereas the second
person paying it is the lender. Normally interest is charged by the lender on the amount that he is
lending. This concept is rejected by Islam which terms capital as a means of value rather than as an
asset, and asserts the negation of receiving interest over money. Further under the Islamic rules this
practice called "riba" and regulations it is termed as illegal and "haram". The existence of Islamic
banking works towards the supplementation and fulfillment of both the economic and the social
objectives of Islam. Some of the investment arrangements that are permitted under Islamic banking
have been briefly explained in the following paragraphs.

To recap, one of the basic principles of Islamic banking is the prohibition of riba as mentioned above
(usury or interest). Up until the 1980s riba was generally interpreted to only apply to usury but it is now
accepted practice to refer to all interest. Other principles are based on simple morality and common
sense, which are by no means unique to Islam. For example, usury was also prohibited by the Old as well
as the New Testament. Even literary heavyweights such as Shakespeare weighed in against the practice.

The basic principles of Islamic Banking originate in the axioms of justice and harmony with reality and
the human nature. The concept of Islamic Banking is evolved on the basis of Shariah principles. One
might wonder whether Islamic Banking & Finance is an alternative approach to modern banking.

The most important development in modern banking is the art of mobilizing funds for investment. It
happened to be that the method of both collecting and using of funds was based in the West on the
interest paid and charged. In contrast Islamic Banking is a system that provides financing and attracts
savings on the basis of profit and Loss sharing. The Central feature of Islamic Banking is that no interest
would be charged or paid and the returns would be in the form of profits from trade in which the money
lent or borrowed is invested. For Muslims this system of Profit or Loss sharing coincides with their
prohibition of interest, and helps in mobilizing unused funds for investment and creating new job
opportunities. As for non-Muslims, the Islamic Banking system doesn't contradict their faith, while it
provides the society with alternative ideas for venture capital and other tools of investment.

Source: http://www.articlesfactory.com/articles/finance/introduction-to-islamic-banking-and-
finance.html

Question:

What differs Islamic banking from conventional banking?