Model of Islamic Banking

Model of Islamic Banking Islamic banking dates back to the seventh century, when Islam was first introduced. The prophet Muhammad's first wife, Khadija, was a merchant, and he acted as her agent, employing many of the same principles as modern Islamic banking. Trade and business activity in the Muslim world relied on Islamic banking principles during the Middle Ages, and these ideas spread throughout Spain, the Mediterranean, and the Baltic States, arguably providing some of the foundation for western banking principles. Islamic banking resurfaced in the modern world from the 1960s to the 1970s. This banking system is based on Islamic law principles, also known as Sharia law, and is guided by Islamic economics. The two fundamental principles are profit and loss sharing and the prohibition on lenders and investors collecting and paying interest. Islamic banks do not charge or pay interest in the traditional sense, where interest is set in advance and viewed as the predetermined cost of credit or the reward for money deposited. Islamic law accepts capital rewards only on a profit-and-loss-sharing basis, based on the principle of variable return linked to the actual productivity and performance of the financed project and the real economy. Another significant feature is its entrepreneurial nature. The system is concerned with not only financial but also physical expansion of economic production and services. In practice, investment activities such as equity financing, trade financing, and real estate investments are more concentrated. Because this banking system is founded on Islamic principles, all bank endeavors adhere to Islamic morals. As a result, financial transactions in Islamic banking could be considered a culturally distinct form of ethical investing. Alcohol, gambling, and pork investments, for example, are prohibited. Over the last four decades, the Islamic banking system has grown from a small niche visible only in Islamic countries to a profitable, dynamic, and resilient international competitor. Their global size was estimated to be close to $850 billion at the end of 2008, with annual growth of around 15% expected. While banking remains the most important component of the Islamic financial system, other components such as Takaful (Islamic insurance companies), mutual funds, and Sukuk (Islamic bonds and financial certificates) have also seen significant global growth. According to reliable estimates, the Islamic financial industry is now worth more than $1 trillion. Furthermore, there is a lot of room for growth in this industry. If the system's current performance is maintained, it is expected to double in size within a decade.