Islamic financial institutions are those that are based, in their objectives and operations, on Qur’anic principles. They are thus set apart from conventional institutions, which have no such religious preoccupations. Islamic banks provide commercial services which comply with the religious injunctions of Islam. Islamic banks provide services to their customers free from interest, (the Arabic term for which is riba), and the giving and taking of interest is prohibited in all transactions. This prohibition makes an Islamic banking system differ fundamentally from a conventional banking system.
This rejection of interest poses the central question of what replaces the interest rate mechanism in an Islamic framework. Financial intermediation is at the heart of modern financial systems. If the paying and receiving of interest is prohibited, how do Islamic banks operate? Here Profit and Loss Sharing (PLS) comes in, substituting profit-and-loss-sharing for interest as a method of resource allocation and financial intermediation.
In his new book Introduction to Islamic Banking & Finance author Brian Kettell, who worked for many years as an economic advisor for the Central Bank of Bahrain where he had numerous Islamic Banking responsibilities, explains the fundamental points of convergence and divergence between Shari'ah compliant finance and mainstream interest-based finance.
Comprehensive and detailed, the book is an excellent first read for banking professionals and others in order to understand where Islamic Banking comes from, what philosophies underlie it and the major componants of Sharia'ah compliant banking and finance.
