Islamic Banking


What Is Islamic Banking?

Islamic banking, also known as non-interest banking, is a banking system that is based on the principles of Islamic or Sharia law and guided by Islamic economics. Two fundamental principles of Islamic banking are the sharing of profit and loss, and the prohibition of the collection and payment of interest by lenders and investors. Islamic law prohibits collecting interest or "riba."

Key Takeaways

  • Islamic banking, also known as non-interest banking, is a system based on the principles of Islamic or Sharia law and guided by Islamic economics.
  • Islamic banks make a profit through equity participation which requires a borrower to give the bank a share in their profits rather than paying interest.
  • Some commercial banks have windows or sections that provide Islamic banking services to customers.

Understanding Islamic Banking

Islamic banking is grounded in Sharia, or Islamic, principles and all bank undertakings follow those Islamic morals. Islamic rules on transactions are called Fiqh al-Muamalat. Typically, financial transactions within Islamic banking are a culturally distinct form of ethical investing.

For example, investments involving alcohol, gambling, pork, and other forbidden items is prohibited. There are over 300 Islamic banks in over 51 countries, including the United States.

Principles of Islamic Banking

The principles of Islamic banking follow Sharia law, which is based on the Quran and the Hadith, the recorded sayings, and actions of the Prophet Muhammad. When more information or guidance is necessary, Islamic bankers turn to learned scholars or use independent reasoning based on scholarship and customs. The bankers also ensure their ideas do not deviate from the fundamental principles of the Quran.

Two fundamental principles of Islamic banking are the sharing of profit and loss, and the prohibition of the collection and payment of interest by lenders and investors.

History of Islamic Banking

The origin of Islamic banking dates back to the beginning of Islam in the seventh century. The Prophet Muhammad's first wife, Khadija, was a merchant. He acted as an agent for her business, using many of the same principles used in contemporary Islamic banking.

In the Middle Ages, trade and business activity in the Muslim world relied on Islamic banking principles. These banking principles spread throughout Spain, the Mediterranean, and the Baltic states, arguably providing some of the basis for western banking principles. From the 1960s to the 1970s, Islamic banking resurfaced in the modern world.


The number of Islamic banks in 2017, according to a report on global Islamic finance.

How Islamic Banks Make a Profit

To earn money without the use of charging interest, Islamic banks use equity participation systems. Equity participation means if a bank loans money to a business, the business will pay back the loan without interest, but instead gives the bank a share in its profits. If the business defaults or does not earn a profit, then the bank also does not benefit.

For example, in 1963, Egyptians formed an Islamic bank in Mit Ghmar. When the bank loaned money to businesses, it did so on a profit-sharing model. To reduce its risk, the bank only approved about 40% of its business loan applications, but the default ratio was zero.

Islamic Banks Versus Islamic Windows

While an Islamic bank is one based on and managed with Islamic principles, an Islamic window refers to the services provided by a conventional bank but based on Islamic principles. For example, in Oman, there are two Islamic banks, Bank Nizwa and Al Izz Islamic Bank. Six of the seven commercial banks in the country also offer Islamic banking services through dedicated windows or sections.




What is Riba ?

What is Riba ?

Riba is a concept in Islam that refers broadly to the concept of, growth, increasing or exceeding. It has also been roughly translated as illegal, exploitative gains made in business or trade, under Islamic law.

Breaking Down Riba

Riba is a concept in Islamic banking that refers to charged interest. It has also been referred to as usury, or the charging of unreasonably high-interest rates. There is also another form of riba, according to most Islamic jurists, which refers to the simultaneous exchange of goods of unequal quantities or qualities. Though, here, we will be referring to the practice of charged interest.

Rationale for Riba 

It is forbidden under Sharia Law (Islamic religious law) because it is thought to be exploitative. Though Muslims agree that riba is prohibited, there is much debate over what constitutes riba, whether it is against Sharia law, or only discouraged, and whether or not it should be punished by people or by Allah. Depending on the interpretation, riba may only refer to excessive interest; however, to others, the whole concept of interest is riba and thus is unlawful. For example, even though there is a wide spectrum of interpretation on the point at which interest becomes exploitative, many modern scholars believe that interest should be allowed up to the value of inflation, to compensate lenders for the time value of their money, without creating excessive profit. Nevertheless, riba was largely taken as law and formed the basis of the Islamic banking industry.

The Muslim world has struggled with riba for quite some time, religiously, morally and legally, and eventually, economic pressures did allow for a loosening of religious and legal regulation, at least for a period. In his book, Jihad: The Trail of Political Islam, Giles Kepel wrote that "since modern economies function on the basis of interest rates and insurance as preconditions for productive investment, many Islamic jurists racked their brains to find ways of resorting to them without appearing to bend the rules laid down by the Koran," and "the problem loomed ever larger as more and more Muslim states entered the world economy in the 1960s." This loosening of economic policy lasted until the 1970s, when a "total ban on lending with interest was reactivated."

Riba is prohibited under Sharia law for a couple of reasons. It is meant to ensure equity in exchange. It is meant to ensure that people can protect their wealth by making unjust and unequal exchanges illegal. Islam aims to promote charity and helping others through kindness. To remove sentiments of selfishness and self-centeredness, which can create social antipathy, distrust, and resentment. By making riba illegal, Sharia law creates opportunities and contexts in which people are encouraged to act charitably—loaning money without interest.





Islamic Banking & Takaful

Islamic Banking & Takaful

Islamic Banking

Islamic banking refers to a system of banking that complies with Islamic law also known as Shariah law. The underlying principles that govern Islamic banking are mutual risk and profit sharing between parties, the assurance of fairness for all and that transactions are based on an underlying business activity or asset.

These principles are supported by Islamic banking's core values whereby activities that cultivate entrepreneurship, trade and commerce and bring societal development or benefit is encouraged. Activities that involve interest (riba), gambling (maisir) and speculative trading (gharar) are prohibited.

Through the use of various Islamic finance concepts such as ijarah (leasing), mudharabah (profit sharing), musyarakah (partnership), financial institutions have a great deal of flexibility, creativity and choice in the creation of Islamic finance products. Furthermore, by emphasising the need for transactions to be supported by genuine trade or business related activities, Islamic banking sets a higher standard for investments and promotes greater accountability and risk mitigation.

Islamic finance has grown tremendously since it first emerged in the 1970's. Current global Islamic banking assets and assets under management have reached USD750 billion and is expected to hit USD1 trillion by 2010.

There are over 300 Islamic financial institutions worldwide across 75 countries According to the Asian Banker Research Group, The World's 100 largest Islamic banks have set an annual asset growth rate of 26.7%2 and the global Islamic Finance industry is experiencing average growth of 15-20% annually.

Malaysia's Islamic finance industry has been in existence for over 30 years.  The enactment of the Islamic Banking Act 1983 enabled the country's first Islamic Bank to be established and thereafter, with the liberalisation of the Islamic financial system, more Islamic financial institutions have been established.

Malaysia's long track record of building a successful domestic Islamic financial industry of over 30 years gives the country a solid foundation - financial bedrock of stability that adds to the richness, diversity and maturity of the financial system. Presently, Malaysia's Islamic banking assets reached USD65.6 billion with an average growth rate of 18-20% annually.

Today, Malaysia's Islamic finance continues to grow rapidly, supported by a conducive environment that is renowned for continuous product innovation, a diversity of financial institutions from across the world, a broad range of innovative Islamic investment instruments, a comprehensive financial infrastructure and adopting global regulatory and legal best practices.

Malaysia has also placed a strong emphasis on human capital development alongside the development of the Islamic financial industry to ensure the availability of Islamic finance talent. All of these value propositions have transformed Malaysia into one of the most developed Islamic banking markets in the world.

Rapid liberalisation in the Islamic finance industry, coupled with facilitative business environment has encouraged foreign financial institutions to make Malaysia their destination of choice to conduct Islamic banking business. This has created a diverse and growing community of local and international financial institutions.

Currently, Malaysia has a significant number of full-fledged Islamic banks including several foreign owned entities; conventional institutions who have established Islamic subsidiaries and also entities who are conducting foreign currency business. All financial institutions are given permission to conduct both ringgit and non-ringgit businesses.

Malaysia continues to progress and to build on the industry by inviting foreign financial institutions to establish international Islamic banking business in Malaysia to conduct foreign currency business.   

The domestic Islamic financial institutions may also apply for ICBU, a dedicated division to conduct foreign currency business. ICBU will also be accorded various tax incentives and privileges that lead to reduction in the cost of doing business and expedient market entry in foreign currency Islamic finance business.

1 Mckinsey, The World Islamic Banking Competitiveness Report 2007-08, "Capturing The Trillion Dollar Opportunity"
2 Ibid
3 Ibid
4 Bank Negara Malaysia: Annual Banking Statistics 2007

Takaful Industry

Takaful (Islamic insurance) is a concept whereby a group of participants mutually guarantee each other against loss or damage. Each participant fulfils his / her obligation by contributing a certain amount of donation (or tabarru) into a fund, which is managed by a third party - the takaful operator.

In the event of loss or damage suffered, the takaful operator will disburse the funds accordingly to its participants.  Any surplus is paid out only after the obligation of assisting the participants has been fulfilled. Through this principle, takaful operates as a protection and profit sharing venture between the takaful operator and the participants.

Globally, the takaful industry has been growing rapidly, appealing to both Muslims and non-Muslims. The industry is expected to grow by 15-20% annually, with contributions expected to reach USD7.4 billion by 2015.1 Currently, there are more than 110 takaful operators worldwide.

Malaysia has achieved significant milestones in the development of its takaful industry. With the enactment of the Takaful Act 1984, the first takaful company was established in 1985. Since then, Malaysia's takaful industry has been gaining momentum and increasingly recognised as a significant contributor to Malaysia's overall Islamic financial system.

As at 2007, total assets of Malaysia's takaful industry amounted to USD2.8 billion, with market penetration of 7.2%.2 Takaful assets and net contributions experienced strong growth with an average annual growth rate of 27% and 19% respectively from 2003 to 2007.3

The rapid liberalisation of Malaysia's Islamic financial industry has encouraged foreign institutions' participation in Malaysia, thus creating a diverse and growing community of domestic and international takaful operators. There are currently eight takaful operators and two retakaful operators, with five foreign participations from the UK, Bahrain, Germany and Japan. These takaful operators conduct both domestic and foreign currency business.

Malaysia continues to progress and build on the industry's rapid development by inviting financial institutions across the world to establish takaful and retakaful operations in Malaysia to conduct foreign currency business.

The domestic Islamic financial institutions may also apply for ICBU, a dedicated division to conduct foreign currency business. ICBU will also be accorded various tax incentives and privileges that lead to reduction in the cost of doing business and expedient market entry in foreign currency Islamic finance business. For more information on the establishment and application procedure for ICBU, please contact MIFC Secretariat.


1 Based on projection by Institute of Islamic Finance and Insurance & Investor Offshore Review, February 2006
2 Bank Negara Malaysia: Annual Takaful Statistics 2007
3 MIF Monthly 2008 Supplement Series - Takaful Industry in Malaysia: Performance and Key Development

Shariah resolutions in Islamic finance


Bank Negara Malaysia has published the second edition of the Shariah Resolutions in Islamic Finance Book in October 2010.

This second edition of the SAC resolutions, which is a compilation of all Shariah resolutions made between 1997 and 2009, is a continuation of the earlier efforts of Bank Negara Malaysia to deepen the understanding on the Shariah interpretations and the juristic reasoning for the rulings. It aims to increase the level of transparency on juristic reasoning in Islamic finance and thus, an increased appreciation and acceptance of Shariah decisions. It would also allow for more efficient Shariah governance at institutional level, whilst catalysing greater cross-border harmonisation in the interpretation and application of Shariah.

This edition supersedes the Shariah Resolutions in Islamic Finance (First Edition) published in 2007 and the Summary of National Shariah Advisory Council Decisions for Islamic Banking and Takaful (Summary of NSAC Decisions) issued in 2002. Accordingly, all new Islamic financial products that are going to be offered by Islamic financial institutions or any existing products to be offered to new customers must comply with the rulings of this Shariah Resolutions in Islamic Finance (Second Edition). However, for Islamic financial products which have been contracted between the customers and Islamic financial institutions based on the Shariah rulings published in the First Edition and the Summary of NSAC Decisions, the contracts remain in force until maturity.





Best Islamic Financial Institutions In The World 2019: Coming Into Their Own

Growth continues for Islamic financial institutions, helped by technology and product innovations.


Growth in assets and net profits across most markets in which they have significant client base made 2018 a pretty good year for Islamic financial institutions (IFIs). Realizing the importance of innovation in the face of competition from conventional banks as well as earch other, IFIs are increasingly investing in technology. The winners of Global Finance’s Islamic Finance Awards 2019 are institutions that have focused on product innovation supported by technology and service—and applied it successfully to generate good financial performance.

The past year provided a strong environment for innovation, as IFIs’ fundamentals remained solid. Award winners saw healthy increases in earnings, and returns were good and maintained sound margins. Impairment costs were generally lower, fee income was higher and a number of institutions strengthened their balance sheets through Basel III-compliant debt issues.

Kuwait Finance House (KFH), Global Finance’s Best Islamic Financial Institution award winner, continued to release new products and services and is today is one of the biggest Islamic financial institutions in the world, with a network across the Gulf Cooperation Council (GCC) states, Turkey, and other Asian and European countries. KFH’s net profit grew strongly in 2018, rising by 24% year-on-year, while return on average equity jumped to 13.14% from 10.48%.

KFH is currently undertaking due diligence in connection with its planned takeover of Bahrain’s Ahli United Bank, a potential game-changer for the Islamic finance industry. If consummated, this would be the GCC’s first major cross-border deal, creating the region’s sixth-largest bank, with assets in excess of $92 billion. More mergers are considered likely going forward as IFIs look to build scale and remain competitive.

Institutions across the sector are positioning themselves for further growth. Bank Rakyat Indonesia Syariah, a subsidiary of Bank Rakyat Indonesia, the largest state-owned bank In Indonesia, went public last May. Malaysia’s CIMB Islamic Bank initiated an enhanced trade network, linking businesses across China and the ASEAN region through trade infrastructure to take advantage of the growth in global demand for halal products. Many conventional banks are also building their Shariah-compliant business in key markets. Standard Chartered, through Saadiq, its global Islamic banking business, is increasing its asset base and delivery of new services and products. 

The key sukuk (bond) market saw a slight tapering off in 2018. Sukuk sales totaled $46 billion, down from a record in the previous year. To date, however, 2019 looks to be a solid year, boasting some important issues from Indonesia and Turkey. In March, for example, Indonesia raised more than 21 trillion rupiah ($1.5 billion) via a retail sukuk bond sale, more than twice the government’s target.





Best Islamic Financial Institution Kuwait Finance House
Best Sukuk Bank CIMB Islamic Bank Berhad
Best Islamic Retail Bank Standard Chartered Saadiq
Best Islamic Investment Bank Samba Financial Group
Best Islamic Custodian BNY Mellon Asset Servicing
Best Islamic Fund Manager Jadwa Investment
Best Islamic SME Bank Maybank Islamic
Best Islamic Corporate Bank Samba Financial Group
Best Islamic Asset Manager Al Rajhi Capital
Best Islamic Bank for CSR CIMB Islamic Bank Berhad
Best Islamic Trade Finance Provider Kuwait Finance House
Best Islamic Takaful Etiqa Takaful Berhad
Best Islamic Project Finance Provider Qatar Islamic Bank