Islamic banking is an ethical banking system based on Islamic or Shariah law. It follows the principles of the Quran and Sunnah, or the Islamic way of life, and is meant to transcend the traditional financial systems of the Western world. At its core, Islamic banking eliminates the idea of interest, or Ribaa, which is seen as exploitation and considered un-Islamic.

Rather than charging and receiving interest for loanable funds, Islamic banks structure their transactions as ‘Participatory Financing’, and emphasize a collaborative approach to banking and business dealings. The profits and losses are to be shared in a predetermined ratio, and it is the relationship between the bank and its customers that is the cornerstone of Islamic banking.

The key principles of Islamic Banking are based on the concept of a socially responsible economy, where money manages and creates wealth as opposed to using a concept of debt-based credit as practiced in conventional banking. This means that any activity that is considered harmful to the welfare of society and isn’t in line with Islamic principles is prohibited. These include activities such as investing in alcohol and gambling, or the financing of weapons.

Islamic Banking products and services are both comprehensive and comprehensive; from current accounts and savings accounts to business finance and mortgages, there are a wide range of products available to religious and secular individuals alike. In addition to traditional banking products, Islamic banks also often provide other shariah-compliant services such as Zakat (charity) management and Islamic wealth management.

In practice, Islamic banking follows the principles of profit and loss sharing, with the bank and its depositors sharing the risk and returns of the investments being made. An Islamic bank can take deposits from individual customers, who will receive a share in the profits the bank earns rather than interest. The bank can also enter into Mudaraba (joint venture capital financing), in which it contributes its own capital in addition to capital provided by the depositors, and profits are shared on a pre-defined basis.

Overall, Islamic Banking is a form of ethical banking that seeks to create wealth and value in accordance with the principles of the Quran and Sunnah. With the increasing demand for Shariah-compliant financial products, it is likely that Islamic banking will continue to grow and find application even in conventional banking.