Moneyzine
Contents
/Personal Finance/Islamic Bank

Islamic Bank

Moneyzine Editor
Author: 
Moneyzine Editor
1 mins
September 25th, 2023
Advertiser Disclosure

Definition

The term Islamic bank refers to financial institutions that abide by the statutes of Islamic law, or Sharia. Islamic banks do not pay interest on checking or savings accounts and they are also prohibited from collecting interest.

Explanation

Islamic banks follow the principals of Islamic law, or Sharia, which is a framework that guides people in both the public and private aspects of their lives. Sharia prohibits the paying of interest or the charging of fees when lending money, which is referred to as riba.

Islamic banks can provide capital to its customers, and remain profitable at the same time, through the use of an equity-participation process. For example, the bank may loan money to a business but is prohibited from collecting interest on the loan. Instead, the business will offer the bank a share of its profits. This arrangement allows the bank to share in the risk of trade, rather than a transfer of risk.

Islamic banks can also provide potential homeowners with a mortgage-like transaction and still follow the principals of Sharia. One approach is for the bank to purchase the property and resell it to the buyer at a profit through an installment plan; much like the payments a homeowner would make on a more conventional mortgage.

Some commercial banks may offer their customers what is referred to as an Islamic window. In doing so, these banks can provide the same services and follow the same principals as an Islamic bank.

Related Terms

Related Content

  • What Can Help You Meet Your Budget While Shopping for Important Items?
    Budgeting while ensuring you don't compromise on quality can seem daunting. Whether filling your pantry, updating your wardrobe, or keeping up with the latest tech, smart shopping strategies are crucial for keeping your finances in check.
    April 2nd, 2024
  • How to Make a Million Dollars in 10 Years
    Truthfully, this title should actually be “How to Make a Million Dollars in 10 Years Without Going Into Debt", but that is just getting a little too winded for my liking. It’s true though!
    November 5th, 2024
  • How to Apply Maslow’s Hierarchy to Your Money This Year
    You might vaguely remember your psychology teacher talking about Maslow. He pointed at a picture of a triangle as you nodded off in the back of the school room.
    November 5th, 2024
  • How to Tackle Multiple Savings Goals
    When there’s only so much money to go around, there are often multiple savings goals competing for your money. Think of the young professional who’d like to get a more reliable car, buy a house, and save for retirement. Or consider the young family that’s saving for college, retirement, and a bigger house.
    March 22nd, 2024
  • The Countdown to Early Retirement: 10 Expenses to Eliminate
    Dreaming of waving goodbye to the daily grind five years ahead of schedule? The road to early retirement is paved with more than good intentions; it requires a meticulously crafted strategy with surprising twists. It's not solely about what you should be doing—like diligently saving a portion of your income or investing wisely—but also about what you need to stop doing.
    March 22nd, 2024

Contributors

Moneyzine Editor
The Moneyzine editorial team consists of writers and content specialists with diverse backgrounds.
Moneyzine 2024. All Rights Reserved.