Islamic banking A form of banking that is Shariah-compliant, that is, it does not break any of the rules of Islam. One of the key prohibitions is the earning of interest, and it is in the avoidance of this mechanism, which is considered perfectly normal in secular banking, that most of the efforts have been made in the development of Islamic banking. Supporters of Islamic banking, say that without a means of providing credit for entrepreneurial purposes, Muslims will forever be held back developmentally and socially as compared to the rest of the world. But without some form of remuneration for lending money to cover the reduced amount of liquidity a lender has and to counteract the risk of non-repayment, there is no real incentive for a commercial banking sector to emerge. One of the main mechanisms for allowing investment has been the principle that something can be bought by the financier and sold back to the lender at a profit. This profit covers the work done to arrange the deal, among other things. The money can be paid back in instalments, just like a western loan, and ownership does not change hands until the property is fully paid for. Critics of the system say this is interest in all but name, but the Islamic transactions are among the most studied, scrutinised and contested pieces of economic policy making in human history, and many Muslims and Islamic scholars are happy that such mechanisms comply with the Shariah.
As well as the financial rulings that govern Islamic banking, other aspects of a bank’s dealings must be in line with Shariah law. So, for example, a bank must not deal with: companies who farm pigs for pork or the pork industry; the pornography industry; weapons manufacturers; betting or gambling companies; or alcohol manufacturers.
After World War II, it started to come up with some key mechanisms that would allow lenders to earn an income without it being interest per se, but it was only in the 1970s that the sector started to become institutionalised and trusted. At the time of writing the sector is growing steadily, and is notable for its lack of serious damage during the global financial difficulties in the years before 2010.