Islamic banking is based on the principles of Islamic (Sharia) law that depends on Quran and Hadith rules. In view of CIMB Group Holdings, "Islamic finance is considered as the rapidly growing part of overall global financial system - sale of Islamic bonds increases about 24 percent worth of $25 billion in 2010."
Islamic finance is not a new concept; it is a centuries-old practice that is by no means making its significance in Eastern but also in Western states. It is the process by which the financial institutes in the Muslim world inclusive of banks and other loaning bodies raise their capital in accordance with Islamic rules and regulations that are termed as the "Shari'ah".
Islamic scholars has presented out following 3 basic principles of Islamic financing.
1. Mudaraba 2. Musharka 3. Murabaha
1. What is Mudaraba? This mode of financing is based on trust of both parties. It is form of partnership under which one party called rub-ul-amal provides finance for the business while other party utilizes his core expertise to run the business. Unless profit is determined separately, there is no need to create a company. Profit is determined according to an agreed ratio. Loss under Mudaraba is beard by finance provider, unless it is caused by other partner due to his misconduct.
2. What is Musharka? It is based on partnership agreement about financing. It is considered as old fashioned because it is fruitful only for small scale business.The only difference between Mudaraba and Musharka is that in Musharka both parties are involved in contributing finance. Profits are shared in accordance with agreed ratio among partners but losses are beard in strict proportion to their investment ratio.
3. What is Murabaha? It is the most populated form of Islamic Finance. Under this category bank make purchases of any asset for its client from a third party then it sells to its customer with a little bit amount of profit at once or against deferred payments. Some people considered it mark up finance technique but in reality it is quite different from that.
It is understood fact that prohibition of markup is becoming essential day by day, regulators of finance from all over the world especially in the United States of America; people have been doing their best to get rid of markup and other bad practices like fraud, coercion etc. It can be said that many elements of Shari'ah are common now and highly adopted.
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