Islamic banking refers to a financial system based on the principles of Islamic law.

In other
words, its primary objective is to provide an alternative financial system that promotes
fairness, transparency, and social responsibility while adhering to Islamic principles.
However, it's trite to note that the implementation of these principles may vary among
countries and Islamic financial institutions, as interpretations of Islamic law can differ. Be
that as it may, here are the common principles of Islamic Banking and finance:
1. Prohibition of Interest (Riba): The main difference between Islamic Banking and
Conventional Banks is that Islamic Banks prohibit the charging or paying of interest
which is considered exploitative and unjust since it involves making money without
any productive activity.
2. Asset-Backed Financing (Murabaha and Ijarah): In a Murabaha transaction, the
bank purchases the asset requested by the customer and sells it to the customer at a
higher price, allowing the customer to pay in installments. However, the price is
determined at the onset and not subject to amendments whereas, in an ijarah
transaction, the bank leases an asset to the customer for a specified period, with
ownership remaining with the bank. The arrangement allows individuals and
businesses to access the use of assets without resorting to interest-based financing,
making it a popular alternative in Islamic banking.
3. Prohibition of Uncertainty or Speculation (Gharar): Islamic banking encourages
transparency and thus prohibits transactions that involve excessive uncertainty,
ambiguity, or speculation.

4. Profit and Loss Sharing (Mudarabah): In Mudarabah, the bank provides the funds,
and the customer provides the expertise & labor. The resultant effect of this is profit
and loss sharing from the business which is also done under agreed ratios although
the bank bears the losses unless they are a result of negligence /misconduct of the
customer.
5. Social and Economic Development (Zakat and Sadaqah): Islamic banking
encourages the redistribution of wealth and the promotion of social and economic
development and this Islamic bank often collects and distributes Zakat (obligatory
alms) and Sadaqah (voluntary charity) to support the less fortunate and fund social
welfare projects.
6. Prohibition of Financing Prohibited Activities (Haram): Islamic banking doesn’t
finance activities that are considered haram (forbidden) in Islam. This includes
businesses involved in activities such as gambling, pork, weapons, and other activities
that are contrary to Islamic principles.
In a nutshell, Islamic Banking is more intertwined with societal development and
principles of wealth distribution than profit maximization and this explains why many
countries that have embraced it have drastically developed.
Mr. Gukiina Patrick M. is a multi-jurisdictional lawyer, author and researcher.
gukiimeni@gmail.com : +256-784-216-459