What is Islamic Banking? Basic Terms and Concepts, Functions and Rules

By | November 26, 2019

What is Islamic Banking?

Islamic Banking is based on the Islamic principles of trade and finance. It endorses on interest-free debt and denies effortless profit as it is regarded as Premium or interest and curse in Islam.Islamic banking in USA. Following are some basic concepts of Islamic Banking system;

  • Murabaha:    

The Murabaha is the buying and selling process in which the seller tells both the COST and the PROFIT to the customer of the goods and items.

  • Musawmah:

The Musawmah is the buying and selling process in which the seller tells only the Total Cost of that goods and an item. He didn’t negotiate the cost and profit on it.


There are two types and parties of Mudarbah;

i) Mudarib     ii)  Rab-ul-Maal

Mudarib is the person who has the expertise and skills to run the business

Rab-ul-Maal the party or person who has money, who invests in the business by buy buying Mudaraba certificates.

Islamic Banking concept

Rab-ul-Maal may be of two types

1.Mudarba Al-Muqaida

In this Rab-ul-Maal restrict the Mudarib to do specific business, not to do any other business than this. If Mudarib wants to invest himself more, He will get permission from Rab-ul-Maal. It is also called Specific Mudaraba.

2. Mudaraba Al-Mutaliqa

In this Mudaraba the Rab-ul-Maal give free hand to Mudarib to do any business of his choice. He didn’t impose any restrictions on Mudarib. It is also called Multi-Purpose Mudaraba.


Musharka is the partnership of two or more partners in the business. In Islamic Banking partnership ( Musharaka) The Profit distribution is always done on an agreed ratio. While the Loss is according to investment ratio.

There two types of Musharka in Islamic Banking;

i) Shirkat-ul-Milk    ii)  Shirkat-ul-Aqad


It is regarding the property. It can be a Compulsory and Optional partnership.

For example in property come as heirs ( Varasat ), it is compulsory as heirs become a partner of that property. But in optional two or more partners buy and sell something and distribute the profit.

2. Shirkat-ul-Aqad

It can be an enterprise or business of two or more partners. It further has three types;

A) Shirkat-ul-Amwaal

Two or more partners invest in a business and distribute the profit and loss.

B)  Shirkat-ul-Amaal

Two or more Partners provide services and distribute the profit and loss

C) Shirkat-ul-Wajood

Someone give goods to a person as goodwill and trust. He sells those goods and then gives the amount to the owner and keeps his profit.


Ijara is basically leasing. It can be short term and long term leasing.

Operating Leasing; is short term leasing. For example, you get a car at the rent you use it for some time and then return to the owner and pay the rent.

Capital or Finance Leasing/ Ijara-wal-Iqtana

This is known as Long-term leasing for example, you buy a car on installments and after that installments, the car is permanently yours. You become the owner of the car.


In Islamic Banking the interest is unacceptable, So, the bank gives loans without interest to help the needy persons and didn’t charge interest on it. The Islamic Banks Just follow Diminishing Musharaka as for Long-Term Financing like Housing Finance.

Read More: About Islamic banking in USA

Financial Statements of Commercial Banks briefly described

Important Functions of Banks briefly described