Islamic Banking

Islamic banking has unique financial instruments and investment policies. Islamic banks do not finance projects that could harm individuals, society, environment, and the well-being of future generations. Consequently, Islamic banking is highly aligned with the spirit of the United Nations’ Sustainable Development Goals, making it attractive not only to Muslims but to all who use an ethical approach in their investment decision-making process.

There is solid evidence that various cultures, religions, and schools of thought criticize usury and lending with interest. The reasons for such negative opinions could be of divine, ethical and economic nature. In Islam, any type of exploitation including interest-based lending is condemned and should be avoided. Interest can be defined as a predetermined fee to be paid by the borrower to the lender as compensation for the borrowed funds. The amount of the fee is directly correlated to the amount of borrowed funds and the length of the repayment period. So, any lending transaction that earns interest from an Islamic perspective is problematic.

Due to this sentiment during the last century, scholars and finance practitioners in predominantly Muslim countries strove to design banking models that would serve the contemporary financial needs of individuals and businesses while upholding religious values. They needed to construct a model where capital would be mobilized and allocated in society while earning profits but not an interest. The financial instruments that are incorporated in the Islamic banking model were derived from prophetic practices that date back to 14 centuries ago. These financial instruments are mostly based on partnership principles but also include deferred sales, leasing, agency, and project financing.

Even though the Islamic banking industry is relatively new, there are more than 1400 Islamic financial institutions globally. Islamic banking represents one of the fastest-growing banking branches with an average of 17.6% annual growth. However, it is still a marginal phenomenon since it makes up only 0.7% of total world assets with a total value of assets equivalent to $3 trillion.

To find more about Islamic Banking, United Bank of Albania has sponsored translation of famous book titled Introduction to Islamic Finance by Muhamed T. Usmani which can be downloaded below.