Islamic banking is followed in many countries around the world, and a number of Islamic banking services are offered around the world. Islamic banking is not just for Muslims but anyone who wants fair and transparent banking services. Just like any other bank, Islamic banks also have savings bank accounts and current accounts.
What is Islamic Banking and How Does it Function?
Islamic banking is based on Sharia laws (Islamic law). It is based on principle of risk sharing, where the risk is shared by the bank and the customer. This model helps to build a more equitable society. Islamic banking is free of the interest based system on which the rest of the financial world thrives around the world. Under the Islamic system, no interest is accrued to your bank accounts or charged on any type of loans. Apart from these services, Islamic banks also offer mortgages and investment facilities.
Now the very first question arises is how an Islamic bank convert’s money into profits without applying any interest based policies? Islamic financial institutions earn profit from the trade of goods and or by charging for various services. These institutions invest under various ventures but only in lawful areas. The investment is on a partnership basis, between the bank and the entrepreneur.
For a current account, the bank maintains funds and pays on demand. It is similar to a guarantee in loan. As part of this account, the customer does not bear any profits or losses. For the savings bank account, the customer can deposit his money under the safe environment of a bank and withdraw as and when he wishes. Profits and losses are accrued to the minimum monthly balance of the customer. A customer is enrolled for the profit and loss sharing as soon as he signs up for the account. Islamic banks also provide financing services, one of which is ijaara. This is very similar to real-estate financing. Under ijaara, the financial institution purchases the property for the buyer and holds 100% ownership. The buyer makes the payments to the institution in instalments and when the entire payment is complete, the property is transferred to the buyer.
Transparency is the USP of the Islamic banking system. It is a good option if you need a loan, since you pay back exactly what you borrowed. Islamic banks maintain huge liquidity and therefore they are less likely to face sudden problems in deposits. Both current and savings bank accounts are good options to start with Islamic banking solutions.