Shariah compliant banking offers Riba free banking in line with Shariah rules. It neither gives nor takes loans on interest. It operates as a trading company which buys, sells and enters into different modes and contracts of investment such as Mudharaba, Musharaka and other forms of trading and equity instruments to make profits.
The absence of interest in Shariah compliant financing is one of the key factors that differentiate Shariah compliant financial institutions from conventional banks.
Shariah compliant banking is asset-backed which means that Shariah compliant financial institutions do not carry out business unless an asset is purchased to allow the transaction to be conducted according to Shariah.
The source of the Shariah compliant financial institution’s funding, profits and business investments cannot be in/from businesses that are considered unlawful under Shariah, i.e. companies that deal in interest, gambling, pornography, speculation, tobacco and other commodities contrary to Islamic values.
The whole premise of Shariah compliant banking is to provide a way for society to conduct its finances in a way that is ethical and socially responsible. Trade, entrepreneurship and risk-sharing are encouraged and these are the financial principles that underpin financing and the products offered in a Shariah compliant financial institution.