Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Shariah) and its practical application through the development of Islamic economics. Shariah prohibits the payment of fees for the renting of money (Riba, usury) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haraam, forbidden). While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community.
The World Islamic Banking Conference held annually in Bahrain since 1994 is the unique platform internationally recognized as the largest and most significant gathering of Islamic banking and finance leaders in the world.
According to Islamic Banking Act of Malaysia, an Islamic bank is a “company, which carries on Islamic banking business, Islamic banking business means banking business whose aims and operations don’t involve any element which is not approved by the religion Islam.”
Dr. Ziauddin Ahmed says, “Islamic banking is essentially a normative concept and could be defined as conduct off banking in consonance with the ethos of the value system of Islam.”
It appears from the above definitions that Islamic banking is systems of financial intermediation that avoids receipts and payments of interest in its transactions and conduct its operations in a way that it helps achieve the objectives of an Islamic economy. Alternatively, this is a banking system whose operation is based on Islamic principles of transactions of which profit and loss sharing is major feature, ensuring justice and equity in the economy. That is why Islamic banks are often known as profit and loss sharing banks.