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Home » Islamic Banking Definition | Basic Concepts of Islamic Banking

Islamic Banking Definition | Basic Concepts of Islamic Banking

By Richard Daniels Reading Time: 3 mins
Updated August 2, 2017

Islamic Banking Definition

The fundamental principle of Islamic banking is based on the Bank’s direct involvement in transactions financed by it. The remuneration it receives is justified either by its status as co-owner, to the results of the project financed (losses or profits) in the case of a Moudharaba or a Musharaka, or by the provision of marketing or leasing of property previously Acquired by it in the case of a Moudharaba, an Idjar (Leasing / Leasing) or a Salam, or, finally, by the manufacture / construction of movable or immovable property by it or by third parties, In the case of an Istsina’a.

The general rule is that money is, from the Islamic point of view, merely a mediator and an instrument of measurement in trade in commodities. Even if, in parallel, it ensures a function of store of value, it can produce a surplus only insofar as it is transformed beforehand into real property.

Therefore, the banking margin is considered legal by the Islamic Shari’s only to the extent that it is generated by one of the following activities: Sale – Participation – Rental – Manufacture. Islamic financial institutions have a dual commercial and financial vocation. Far from confining themselves to the traditional mission of financial intermediation, they play a role in the creation, transformation and commercialization of wealth as full stakeholders.

This dual vocation is illustrated legally by the existence of two types of clauses in the financing contracts governing the relationship between the Islamic Bank and its partners: financial clauses fixing the amount, duration and general conditions of use And the renewal of the financing line, the commercial clauses, laying down the terms of the transaction and / or operation carried out under the aforementioned financing line.

Islamic finance does not therefore have the sole objective of profitability as opposed to conventional finance far from it. Islamic finance must play a real role in the economy of a country. It must be directly involved in the projects and thus create real added value. Islamic finance must play a role of Actor and take risks and not a role of Spectator as in the framework of conventional finance.

Basic Concepts of Islamic Banking

  1. A Mortgage is most Often

Established in the form of a Loan of a specific amount (although in some cases there are also options for the opening of mortgage loans that can be used by withdrawals within a total ceiling) granted by a bank or Specialized financial institution. Established over a long period of time (several years or decades) except in the case of a bridge loan covering a waiting period between the purchase of a property and the resale of another property or other expected financial receipt) at Fixed rate Over the life of the real estate loan (at least the most common in France), or a revisable rate linked to a personal contribution. However, financing of the entire acquisition (cost of acquisition of the property + notary fees + warranty cost) is always possible.

  1. The Overall Effective Rate (TEG)

Is the total cost of the loan to the borrower expressed as an annual percentage of the amount of the loan? The GET is calculated from the nominal rate. This is the indicator of the overall cost of your loan.

  1. Different Types of Home Loan

From a technical point of view, there are several types of loan: The amortizable loan the loan in fine the progressive or decreasing loan Tiered loan the flexible loan Real estate brokerage

Author at Business Study Notes
Richard DanielsAuthor at Business Study Notes

Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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Filed Under: Islamic Banking & Finance Tagged With: Islamic Banking Definition

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