Islamic banking and finance operate under Shariah (Islamic law), emphasizing ethical and interest-free financial transactions. Unlike conventional banking, it prohibits riba (interest), gharar (excessive uncertainty), and haram (prohibited) investments, ensuring fairness and risk-sharing.

Key Principles:

Interest-Free Transactions (Riba-Free) – Loans and savings accounts do not accrue interest. Instead, banks earn through profit-sharing models. Risk Sharing – Investments follow Mudarabah (profit-sharing) or Musharakah (joint venture) models, where profits and risks are shared. Asset-Backed Financing – Transactions must be tied to tangible assets, avoiding speculation. Ethical Investments – Funds cannot be invested in businesses involving alcohol, gambling, or other prohibited industries.

Islamic Finance and Ethical Banking by Mufti M.Naveed

Common Islamic Finance Instruments:

Murabaha – Cost-plus financing where banks buy goods and sell them at a profit instead of charging interest. Ijarah – Lease-based financing similar to rent-to-own agreements. Sukuk – Islamic bonds structured to generate returns without interest.