Principles of Islamic Banking

From Mudharabah to Ijarah, Get to Know the Principles of Islamic Banking

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Islamic banks are banks that carry out their activities based on Islamic law (Islamic principles). This bank is also called an interest-free bank. Why not, in raising funds this bank does not provide interest in return and in loans are not subject to interest.

In carrying out its activities, this bank is based on Islamic religious principles which prohibit levies and loans with interest or what is called usury. This system also prohibits investing in businesses that are categorized as haram. For example, businesses related to the production of haram food or drinks, non-Islamic media businesses and so on.

So, what are the principles of the Islamic banking? In the following we will describe them one by one, from the so-called principles of mudaraba, murabahah, to ijarah.

1. Mudaraba

The first principle of Islamic banking is mudaraba. This is an agreement between the provider of capital and the customer. Each profit earned will be shared according to a certain ratio agreed upon. The risk of loss is fully borne by the bank, as long as there is no evidence of customer fraud or actions that are not in accordance with the trust of the bank.

2. The Murabaha Principle

Murabahah is the distribution of funds in the form of buying and selling. Banks buy goods needed by service users, then sell them back to service users at prices that are increased according to the profit determined by the bank. Service users can pay the goods in installments.

3. The principle of Musharakah

Musharakah is financing based on the principle of equity participation. Banks and customers become business partners. Each of them contributes capital and agrees on the ratio of profit in advance for a certain time.

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4. The Wadiah Principle

Wadiah is a fund deposit service (savings) where the depositor can take the funds at any time.

5. Ijarah Principles

Ijarah principle, namely the financing of capital goods based on the principle of pure lease without choice, or with the option of transferring ownership of the goods leased from the bank by another party (ijarah wa iqtina).

As for some examples of Islamic banks that we can currently find are BRI syariah, Mandiri syariah, BNI syariah and others.

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Economics Student of Universitas Gadjah Mada, Indonesia.