The Core Principle
Islamic banking operates on a simple principle: money should not make money simply by existing. Interest (riba) is prohibited. Instead, banks and customers must share in the risk and reward of actual economic activity.
Key Islamic Banking Products
Murabaha (Cost-Plus Financing)
Instead of giving you a loan to buy a car, an Islamic bank buys the car, then sells it to you at a markup with payment in installments. The bank's profit is the markup, not interest. Used for home financing, car financing, and business asset purchases.
Ijara (Leasing)
The bank buys an asset and leases it to you. You pay rent. At the end of the lease, you may buy the asset at a predetermined price. Common for mortgages (Islamic home finance) and equipment finance.
Musharakah (Partnership)
You and the bank jointly own an asset. You buy out the bank's share over time while paying rent on the bank's portion. Often used for home purchase (diminishing musharakah mortgage).
Mudarabah (Profit-Sharing Investment)
You provide capital, the bank provides management. Profits are shared according to a pre-agreed ratio. If the investment loses money, you bear the financial loss (the bank bears the loss of their labor). Used for Islamic savings accounts and investment products.
Takaful (Islamic Insurance)
Insurance based on mutual contribution to a shared pool. Instead of paying premiums to a company that profits from your risk, you contribute to a pool that pays claims. The operator manages the pool for a fee.
Where to Find Islamic Banks
Major Islamic banks globally include Al Rajhi Bank (Saudi Arabia), Dubai Islamic Bank (UAE), Maybank Islamic (Malaysia), Islamic Bank of Britain, and Gatehouse Bank (UK). In the US, LARIBA and University Islamic Financial offer Islamic mortgage products.
Bottom Line
Islamic banking provides full banking services through structures that respect the prohibition on riba. It's a complete financial system, not a compromise.