Uncovering How Islamic Banking Makes Profit

Islamic finance, sometimes known as Shariah-compliant finance continues gaining immense popularity among Muslims and Non-Muslims alike. And this is easily understandable going with the numerous benefits it offers. Actually, Islamic finance is principally based on trading. For this reason, banks can profit from the buying and selling of Shariah-compliant goods and services.

When customers deposit money, the banks select the Shariah-compliant investment, then profits are shared with the bank equally. The practices of Islamic finance have some clear ethical advantages over conventional banks, which can be seen as unscrupulous.

You might wonder how Islamic banks go about making profits despite being prohibited from giving or taking interest. Well, this profit is realized through a number of Shariah-compliant means.

One such option is Ijara. This is when banks choose to buy an asset, such as a car, and lease it to the customer. Ownership remains with the bank until the lease is paid off by the customer. During the time, the bank is responsible for maintenance of the assets.

There’s also another popular Shariah-compliant means known as Murabaha that Islamic banks use to make profits. This simply means the bank acts as an intermediary to buy the asset, which is then sold to the customer, plus profit. The customer buys the assets with deferred payments.

Aside from these two, there is also Wakala which refers to a contract of agency or delegated authority in which the bank is appointed much like an individual to undertake a specific task on the customer’s behalf. The Islamic bank lends its expertise for a set duration for an agreed upon profit.

Last but not least is Salam, which can be regarded as forward-financing. With this option, the institution pays for specified assets in finance, which the seller will then supply to a quality, quantity, and time the parties have pre-agreed.

Even though Islamic banks represent a significant percentage of the banking population, in the last couple of years, other ethical banks also report growing customer numbers and far greater profit per employee. Either way, you should never ignore what Islamic finance offers the masses.