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Understanding Islamic Banking: Interest-Free Banking and Profit-and-Loss Sharing

Islamic banking represents a paradigm shift from conventional banking by adhering to Sharia principles. Central to Islamic banking is the prohibition of Riba (interest), as explicitly forbidden in the Quranic verse 2:275. This prohibition stems from the belief that Riba leads to exploitation and economic injustice.

The Quran further emphasizes ethical finance and fair dealings in various verses, such as 2:276: “Allah will deprive usury of all blessing, but will give increase for deeds of charity: for He loveth not creatures ungrateful and wicked.”

Islamic banks operate on a foundation of interest-free banking. Instead of charging interest, they engage in profit-and-loss sharing arrangements, such as Mudarabah and Musharakah. These arrangements ensure that the bank and the customer share in both the profits and losses of the business ventures.

The Hadith reinforces the importance of ethical and transparent financial transactions. The Prophet Muhammad (peace be upon him) said, “The seller and the buyer have the option of canceling or confirming the bargain unless they separate, and if they spoke the truth and made clear the defects of the goods, then they would be blessed in their bargain” (Sahih al-Bukhari).

Islamic banking’s primary goal is to provide financial services while adhering to Islamic principles, promoting fairness, ethical conduct, and risk-sharing among participants.

These principles and practices distinguish Islamic banking from conventional banking, making it a unique and ethical alternative for those who seek financial services that align with their faith and values.

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