Islamic banking is established on the principles of Islamic beliefs as they link with business transactions. The basics of Islamic banking are stemmed from the Quran, the main holy text of Islam. In Islamic banking, all transactions must comply with shariah guidelines, the lawful code of Islam which is in view of the preachings of the Quran and traditions of the Holy Prophet (SAWW). The standards governing business transactions in Islamic banking are called Fiqh al-muamalat.

Bankers or professional personnel who are employed by financial institutions that maintain Islamic banking are instructed to not go astray from the basic standards of the Quran while they are directing business. At the point when more data or direction is required, Islamic bankers go to highly qualified scholars or use their own reasoning based on their knowledge and experiences.

One of the essential contrasts between traditional banking frameworks and Islamic banking is that Islamic banking forbids usury, uncertainty, and speculation or gambling. Shariah firmly restricts any kind of speculation or gambling, which is known as maysir. Shariah additionally bans taking interest on loans that favor moneylenders at the expense of borrowers.

To generate profit without the ordinary act of charging interest, Islamic banks use equity participation funds. This implies if a bank provides a loan to a business, the business will have to pay back without interest. However, business rather gives the bank an offer in its profits earned. If the business fails to honour the bank or doesn’t earn any profit, at that point the bank likewise doesn’t profit.

What’s more, any ventures including things or substances that are restricted in the Quran which includes liquor, speculation, pork, and all haram activities are disallowed. Along these lines, Islamic banking can be viewed as socially responsible investment.

The acts of Islamic banking are generally followed back to businessmen in the Middle East who began participating in commercial exchanges with businessmen in Europe during the Medieval time. Originally, businessmen in the Middle East employed similar financial standards as the Europeans. Nonetheless, after some time, as financial institutions and banks established and European nations began building up nearby offices of their banks in the Middle East, a portion of these banks embraced the neighborhood customs of the district where they were recently settled, fundamentally no-interest financial frameworks that operated at a PnL i.e. profit and loss, sharing strategy. By embracing these practices, these European banks could likewise serve the requirements of nearby businessmen who were Muslim.

Starting during the 1960s, Islamic banking reemerged in the cutting edge world, and since 1975, numerous new Interest-free banks have developed. While most of these institutions were established in Muslim nations, Islamic banks likewise opened in Western Europe during the mid-1980s and that’s what we know as of today, Islamic banking evolved.

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There are many modes of Islamic banking and finance. However, in this blog, we’ve discussed the most-used modes of Islamic banking and financing. These are:


It is a type of partnership where one party has the right to invest in the business i.e; Rabbul-maal and the other has the right to manage it i.e; Modarib. Any profits earned are shared between the two parties as per the profit ratio agreed during the agreement, while the financial loss is only suffered by the investor.


In its literary context, it means profit. In fact, it is an agreement of offer wherein the seller reveals his cost and profit. It is an Islamic method of financing used by Islamic banks. In this financing mode, the customer requests the bank to buy certain products for him. The bank does that for a distinct profit over the cost, which is specified at the time of the agreement.

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Its literary context, it means sharing or partnership. Musharakah implies a relationship set up under a mutual agreement of the parties for the sharing of profit and loss in the joint business. It is an arrangement under which the Islamic bank gives funds, which are blended in with the assets of the business undertaking and others. Profit is shared amongst the partners on a pre-agreed basis. However, the loss is borne by the partners equivalent to their respective capital investment ratios.


In its literary context, it means “to provide something on rent”. Ijarah is an agreement of a known and suggested usufruct against a predetermined and legal return or thought for the administration or return for the advantage proposed to be taken, or for the exertion or work proposed to be consumed. In layman words, Ijarah or renting is the exchange of usufruct against some lawful consideration. If a fixed asset is provided then consideration is rent and if it’s hiring of a person then consideration is a wage.


In Islamic financing, Istisna is generally a long-term contractual agreement for constructing, building, or manufacturing an asset, permitting advance money payment and delivery of commodities at a predetermined future time at an agreed price. It is generally used for giving an opportunity of financing the production or development of houses, buildings, plants, heavy machinery, and infrastructures like roads, bridges, railways, and more.


It is one of the most famous modes of Islamic financing. Salam implies an agreement where advance payment is made for products to be conveyed later on. The seller or dealer delivers some particular merchandise to the purchaser at a future date in return for a development cost completely paid at the time of the agreement. It is important that the nature of the product proposed to be bought is completely known and determined leaving no space for uncertainty which can further lead to conflict. The objects of this deal are various goods but can’t be gold, silver, or any currency. Even so, Bai Salam covers nearly everything, which can be measured in terms of quality, quantity and craftsmanship, and more.

Understanding How Takaful Works

In this blog, we have discussed Takaful operations and the kinds of funds required for it. Give it a read.

Process of Takaful

All policyholders consent to promise one another and, rather than paying premiums, they make contributions to a common pool or a mutual fund to alleviate the financial liabilities of the accused. The pool of sum of collections makes the Takaful reserve.

The measure of the contribution that every member makes depends on the sort of coverage they require, and on their personal resources and condition. Just like conventional insurance, the policy i.e. Takaful Contract, determines the nature of the uncertain situation and time for coverage.

The Takaful fund is overseen and controlled for the benefit of the members by a Takaful Operator who charges a certain fee to take care of expenses. These expenses incorporate the expenses of deals and marketing and sales, indemnity, and the management of claims.

Any cases made by members of the policy are paid out of the Takaful pool and any remaining surpluses, in the wake of causing arrangements for likely expense of future cases and different funds, belong to the policyholders, and not the Takaful Operator. The remaining Takaful fund is then distributed among the participants or policyholders in the form of cash dividends or any other suitable form.

Takaful Operating Principles

An Islamic insurance organization follows the following operational standards:

The Policyholders’ Fund

The constituents of the policyholder’s funds are:

All of the claims payable to the policyholders, reinsurance costs, technical funds, managerial costs, and so on., barring the costs of the investment branch, will be met out of the policyholder’s reserve.

The remaining balance to the credit of the policyholder’s reserve by the year’s end speaks to their excess. The General Assembly may designate the entire or some portion of the excess to the policyholders’ specific reserves. This will be equally distributed among the policyholders.

At the point when the policyholder’s funds are inadequate to meet their expenses, the shortfall is supported by the shareholder’s funds.

The shareholders volunteer themselves to release all the contractual liabilities of the policyholder’s reserves, however this risk doesn’t surpass their equity in the organization.

The Shareholders’ Fund

The constituents of the shareholder’s funds are:

All the managerial costs of the investment branch or department are deducted from the Shareholder’s reserves.

The standings balance of the shareholders’ excess, assuming any, is allocated among them.

Investment of Fund

The organization may contribute its funds just on the basis of profit and loss sharing as instructed by the Shari’ah.

Products and services that are offered by Islamic insurance companies i.e. firms dealing in Takaful

Islamic insurance organizations may offer products that are competitively priced, without diminishing the scope and advantage of insurance coverage made customarily accessible to people in general by local insurance companies.

As far as life insurance facilities are concerned, Islamic insurance companies have created Islamic Trust Funds for social solidarity, mortgage safety, student security and employer’s security.

Learn About Takaful With CIE

To learn the laws of Shariah business policies, enroll yourself for a certificate course in Islamic banking Takaful.