Introduction to Islamic Banking

Written by Wellington Ayugi

A silent revolution is taking place in the Kenya’s banking system. When the concept of Islamic banking was introduced about a decade ago, it initially was targeting the uniqueness of their Muslim customers. Today, that has expanded to cater for the non-Muslim customers as well. 

Recently, the CEO of the Standard Chartered bank, Mr.  Lamin Manjang stated that Islamic finance is the fastest growing area in global finance. He added that it should be viewed as a value proposition open to all customers irrespective of if the customer is Muslim.

What is Islamic Banking?

Islamic banking is a form of banking based on the tenets of Islamic law, also known as Shari’ah law. It is guided by the principles of Islamic economics. The principles of Islamic economics place a huge emphasis on upholding moral and ethical values in all dealings have wide universal appeal.

Some of the governing principles of Islamic banking are: 

  • The absence of interest-based (riba) transactions. Shari’ah prohibits the payment or acceptance of interest charges (riba) for the lending and accepting of money. The logic behind this is that money is not a commodity but a medium of exchange and hence should not earn interest, unlike goods and services..
  • The avoidance of economic activities involving oppression. (zulm)
  • The avoidance of economic activities involving speculation. (gharar)
  • The introduction of an Islamic tax. (zakat)
  • The discouragement of the production of goods and services which contradict the Islamic value. (haram)

Islamic banking follows a strict code of ethics where people are allowed to pursue business activities and make profits, within the framework of safeguarding public interest.

The Difference Between Islamic Banking and Conventional Banking

With Islamic banking, money is not a commodity even though it is used as a medium of exchange and store of value. Therefore, it cannot be sold at a price higher than its face value or rented out.

On the other hand, with conventional banking, money is a commodity that serves as a medium of exchange and store of value. Therefore, it can be sold at a price higher than its face value and it can also be rented out.

The Difference Between Islamic Mortgage Financing and Conventional Mortgage Financing

Under conventional mortgage, in order to purchase a property the customer borrows money and repays it with an additional amount over a period of time. The additional amount in a conventional mortgage is the amount of interest which is against the Shari’ah rulings of Islam.

Under an Islamic mortgage finance facility, the Islamic bank shares the risk with the customer in purchasing the desired property. Accordingly, the customer and the bank become joint owners of the property in proportion to their share in purchasing the property.

In conclusion, Islamic banking is an area that has grown to become an increasingly substantial financial sector in Kenya. This is because it is giving everyone access to a unique service offering with a wide range of financial products and services.

Learn more:

  1. What Is Islamic Banking?
  2. The Difference Between Islamic Banking and Conventional Banking
  3. Islamic Banking Is More Than Just Avoiding Interest
  4. Wooing the Non-Muslim Customer

 

About the author

Wellington Ayugi

Wellington Ayugi handles Business Development at Covered and has a passion for personal finance, microfinance, and developments in financial technology