Islamic Banking

What is Islamic Banking?

It consists of all banking activities in compliance of the principles of Shariah law, which rely on Shariah laws that are from the understanding of the specialists from Shariah law scholars. Shariah financial transactions are based on solid foundations, and well-established rules, where all transactions are considered legit, unless compound interest, Riba or injustice is present then they are considered Shariah unlawful transactions.

What is the History of Islamic Banking?

For centuries, Muslim communities have practiced a number of credit methods and financial techniques. These methods and techniques created an informal credit system for those communities and started the international trade movement covering the area from the Middle East to Southern Europe over three or four centuries before the emergence of any comparable system in Europe. Credit methods of Islamic communities facilitated trade and provided a framework for credit as a means of investment. The development of banking and semi-banking activities were recorded in Iraq in the 10th century.

Islamic countries used a fairly complex banking system which involved instruments of credit and loans such as Hawala (payment of debt through the transfer of a claim) and Suftaja (equivalent to a letter of credit or bill of exchange). The system also included some forms of trade credit to create associations such the capital trust financing (Mudaraba), partnership (Musharkaka), delivery and reclamation. This system flourished in the Muslim world for several centuries before some of these financial instruments appeared in Europe.

By the 18th century, a number of credit institutions evolved and the role and position of the creditor appeared in trade transactions while there were recordings of credit in several economy aspects.

What is the Difference between Islamic Banking and Conventional Banking?

Islamic banking is governed by the teachings of the Islamic religion. Islam is theology, legislation and way of life. Islamic Banking considers the following aspects:

The First Aspect: the statement of the ruling on the products and services, both in terms of legitimate and unlawful, and to find suitable alternatives in the event the products or services are prohibited, based on Qur’an versus, Prophet Hadiths or from the interpretations of scholars over time, and the contractual relationship is described scholarly and accurately.

The Second Aspect: concerns with values and moralities. For example: fraud, injustice and ambiguity, are considered immoral actions and thus unlawful.

The Third Aspect: achieving balance, as the bank relies on achieving the rights of God and the people together and the rights of the individual and the community, and the world and the afterlife together.

Like other banking institutions, Al Rajhi Bank aims to achieve rewarding revenues through providing banking products and services that do not contradict with the Bank’s commitment to the principles of Shariah law as a basic framework for all its business dealings.

Fundamentals of Al Rajhi Bank practices:

  • 1. Dependence on Sharia

    The practices of the bank are governed by Shariah laws as seen by the Shariah Board. As a result all products and services are delivered in the context of Islamic teachings with a focus on work ethics.
  • 2. Prohibition of Ribah

    The prohibition of Riba is the fundamental basis of all Islamic money transactions whether taking, giving, assisting or the witnessing of it. Therefore Riba transactions are to be prohibited and refused, directly or under any name.
  • 3. Source of Money Growth is Effort and Work

    This means that money is not the only source of money growth nor shall money generate money. Rather, Work and effort should, for example, intellectual effort must play a role in the productive process, and in other words the development process must be achieved through a relationship between capital and labor. However, this should not exclude wealth gained without effort, such as gifts, inheritance or charity. These gains, in fact are not guaranteed and effort still has to be made in order to manage these gains and guarantee a regular income. Otherwise this wealth will be depleted through zakat. Omar Ibn Al Khattab once said: “Be bold with the money of orphans to avoid its depletion through charity.” Therefore, those who put efforts forward deserve and are entitled to a reward. On the other hand, people who do not put any effort should not expect or be entitled to any return. Exceptions are made to those who cannot work due of illness or disability.
  • 4. Risk Sharing when the Bank enters into a partnership with its client

    The risk in any partnership contract is shared between the client and the bank. The objective is to ensure the absence of a determined rate such as that in conventional banking whereby the entrepreneur takes all the risk, regardless of the result of the project. In Islamic banking there is no guaranteed gain or loss, for one without the other.