View source for Islamic banking and finance

{{Short description|Financial activities compliant with Islamic law}}
{{Use dmy dates|date=November 2021}}
{{Banking|expanded=terms}}
{{Islam}}
[[File:Dubai_Islamic_Bank_-_panoramio.jpg|thumb|alt=image of Dubai Islamic Bank|[[Dubai Islamic Bank]]]]

'''Islamic banking''', '''Islamic finance''' ({{langx|ar|مصرفية إسلامية}} ''masrifiyya 'islamia''), or '''Sharia-compliant finance'''<ref>[https://web.archive.org/web/20180111233958/http://www.halalmonk.com/ajaz-ahmed-khan-sharia-compliant-finance. Khan, Ajaz A., Sharia Compliant finance]| halalmonk.com</ref> is [[banking]] or [[Finance|financing]] activity that complies with [[Sharia]] (Islamic law) and its practical application through the development of [[Islamic economics]]. Some of the modes of Islamic finance include ''[[Profit and loss sharing#Mudarabah|mudarabah]]'' (profit-sharing and loss-bearing), ''[[wadiah]]'' (safekeeping), ''[[musharaka]]'' (joint venture), ''[[murabaha]]h'' (cost-plus), and ''[[ijarah]]'' ([[leasing]]).

[[Sharia]] prohibits ''[[riba]]'', or [[usury]], generally defined as interest paid on all loans of money<ref>{{cite web|url=http://englishtafsir.com/ | title=Tafhim al-Qur'an - The Meaning of the Qur'an |last1=Maududi |first1=Sayyid Abul Ala |access-date=8 October 2023 }}</ref><ref>{{cite web|title=Islamic Banking Principles|url=http://www.islamic-banking.com/islamic_banking_principle.aspx|publisher=Institute of Islamic Banking and Insurance|access-date=8 October 2023|archive-date=28 September 2017|archive-url=https://web.archive.org/web/20170928102932/http://www.islamic-banking.com/islamic_banking_principle.aspx|url-status=dead}}</ref> (although some Muslims dispute whether there is a consensus that interest is equivalent to ''riba'').{{sfn|Farooq|2005|pp=3–6}}{{sfn|Khan|2013|pp=216-226}} Investment in businesses that provide goods or services considered contrary to Islamic [[Value (personal and cultural)|principles]] (e.g. pork or alcohol) is also ''[[haram]]'' ("sinful and prohibited").<ref>{{Cite book |last1=Khan |first1=Ibrahim |url=https://books.google.com/books?id=dc2_EAAAQBAJ&dq=Investment+businesses+pork+alcohol+haram&pg=PA113 |title=Halal Investing for Beginners: How to Start, Grow and Scale Your Halal Investment Portfolio |last2=Patel |first2=Mohsin |date=2023-05-19 |publisher=John Wiley & Sons |isbn=978-1-394-17806-3 |language=en}}</ref>

These prohibitions have been applied historically in varying degrees in Muslim countries/communities to prevent un-Islamic practices. In the late 20th century, as part of the [[Islamic revival|revival]] of Islamic identity,<ref name="IIFTU1998:6">[[#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.&nbsp;6</ref>{{#tag:ref|"... Modern Islamic banking/finance movement has been deeply influenced by the contemporary Islamic movements."{{sfn|Farooq|2005|p=7}}|group=Note}} a number of Islamic banks formed to apply these principles to [[Private bank|private]] or semi-private [[Commercial bank|commercial]] institutions within the Muslim community.<ref>{{cite journal |last1=Rammal |first1=Hussain Gulzar |last2=Zurbruegg |first2=Ralf |title=Awareness of Islamic banking products among Muslims: The case of Australia|journal=Journal of Financial Services Marketing |date=23 August 2007 |volume=12 |issue=1 |pages=65–74 |doi=10.1057/palgrave.fsm.4760060 |ssrn=1854427|doi-access=free |hdl=10453/71109 |hdl-access=free }}</ref><ref>Saeed, A. (1996). "Islamic Banking and Interest: A Study of the Prohibition of Riba and its Contemporary Interpretation". Leiden, Netherlands: E. J. Brill.</ref> Their number and size has grown, so that by 2009, there were over 300 [[bank]]s and 250 [[mutual fund]]s around the world complying with Islamic principles,<ref name="economist-2009">{{cite news |url=http://www.economist.com/world/europe/displaystory.cfm?story_id=14859353 |newspaper=The Economist |title=Sharia calling | date=12 November 2009}}</ref> and around $2 trillion was Sharia-compliant by 2014.<ref name="The Economist">{{cite news |title=Islamic finance: Big interest, no interest |url=https://www.economist.com/news/finance-and-economics/21617014-market-islamic-financial-products-growing-fast-big-interest-no-interest |access-date=15 September 2014 |newspaper=The Economist |agency=The Economist Newspaper Limited |date=13 September 2014}}</ref> Sharia-compliant financial institutions represented approximately 1% of total world assets,<ref name="islamic-finance-2014">{{cite news |url=http://www.islamicfinance.com/2014/12/size-islamic-finance-market-vs-conventional-finance/ |work=Islamic Finance |title=The Size of the Islamic Finance Market |date=27 December 2014 |first=Naveed |last=Mohammed}}</ref> concentrated in the [[Gulf Cooperation Council]] (GCC) countries, [[Bangladesh]], [[Pakistan]], [[Iran]], and [[Malaysia]].<ref name="IMF-2015-11">{{cite book |last1=Towe |first1=Christopher |last2=Kammer |first2=Alfred |last3=Norat |first3=Mohamed |last4=Piñón |first4=Marco |last5=Prasad |first5=Ananthakrishnan |last6=Zeidane |first6=Zeine |title=Islamic Finance: Opportunities, Challenges, and Policy Options |date=April 2015 |publisher=IMF |page=11 |url=https://www.imf.org/external/pubs/cat/longres.aspx?sk=42816.0 |access-date=13 July 2016}}</ref> Although Islamic banking still makes up only a fraction of the banking assets of Muslims,<ref name="BBC-2014">{{cite news |last1=Yueh |first1=Linda |title=Islamic banking: Growing fast but can it be more than a niche market? |url=https://www.bbc.com/news/business-28365639 |access-date=14 April 2015 |agency=BBC News |date=18 July 2014 |quote=Even in countries where Islamic banking has a strong foothold, such as the Gulf states and in South East Asia, its share rarely accounts for more than one third of the market. In Indonesia, the world's most populous Muslim country, Islamic banking currently has less than 5% market share.}}</ref> since its inception it has been growing faster than banking assets as a whole, and is projected to continue to do so.<ref name="The Economist"/><ref name="IFGE2010:21">[https://books.google.com/books?id=diSlBgAAQBAJ&q=Warde%2C+Ibrahim.+2000%2C+2010.+Islamic+finance+in+the+global+economy%2C&pg=PR4|Warde, ''Islamic finance in the global economy'', 2000]: p.&nbsp;21</ref>{{sfn|Khan|2015|p=87}}

The Islamic banking industry has been lauded by devout Muslims  for returning to the path of "divine guidance" in rejecting the "political and economic dominance" of the West,<ref name="IIFTU1998:6" /> and noted as the "most visible mark" of Islamic revivalism;{{sfn|Farooq|2005|p=33}} its advocates foresee "no inflation, no unemployment, no exploitation and no poverty" once it is fully implemented.<ref name="IFGE2010:21" />{{sfn|Khan|2015|p=87}} However, it has also been criticized for failing to develop [[profit and loss sharing]] or more ethical modes of investment promised by early promoters,{{sfn|Khan|2013|p=303}} and instead merely selling banking products<ref name="Qureshi_(2005)">Qureshi, D.M. 2005. Vision table: Questions and answers session. In ''Proceedings of the First Pakistan Islamic Banking and Money Market Conference'', 14–15 September, Karachi</ref> that "comply with the formal requirements of Islamic law",<ref name="Fadel_(2008:656)">Fadel, Mohammad. 2008. [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1115875 ''Riba'', efficiency, and prudential regulation: Preliminary thought.] ''Wisconsin International Law Journal'' 25 (4) (April) 656</ref> but use "ruses and subterfuges to conceal interest",{{sfn|Khan|2013|pp=xv-xvi}} and entail "higher costs, bigger risks"{{sfn|Khan|2013|p=400}} than conventional (''ribawi'') banks.

==History==

===Usury in Islam===
{{further|Riba}}
Islamic finance is based upon the belief that "all forms of interest are ''[[riba]]'' and hence prohibited".{{sfn|Khan|2013|pp=xv-xvi}} The word "''riba''" literally means "excess or addition", and has been translated as "interest", "usury", "excess", "increase" or "addition".<ref>{{Cite web|url=http://www.masrif.net/index.php?option=com_content&view=article&id=68:riba-in-the-contemporary-context-by-az&catid=35:religion|title=RIBA IN THE CONTEMPORARY CONTEXT (by Asif Zaidi)|last=Zaidi|first=Asif|website=masrif.net|language=en-gb|access-date=29 April 2017}}</ref><ref>{{Cite book|url=http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1359&context=commpapers|title=A Primer on Islamic Finance: Definitions, Sources, Principles and Methods|last1=Gait|first1=Alsadek H.|last2=Worthington|first2=Andrew C.|publisher=University of Wollongong. Research Online|year=2007|pages=7}}</ref>

According to Islamic economists Choudhury and Malik, the elimination of interest followed a "gradual process" in early Islam, "culminating" with a "fully fledged Islamic economic system" under Caliph [[Umar]] (634–644 CE).<ref>Choudhury, M.A. and Malike, U.A. (1992) ''The Foundations of Islamic Political Economy'', London: Macmillan; New York: St. Martin's Press. p.&nbsp;104</ref>

Other sources (''Encyclopedia of Islam and the Muslim World'', Timur Kuran), do not agree, and state that the giving and taking of interest continued in Muslim society "at times through the use of legal ruses (''[[ḥiyal]]''), often more or less openly,"<ref name="EoIMW-596">''Encyclopedia of Islam and the Muslim World'', p.&nbsp;596</ref> including during the Ottoman Empire.<ref name="TKLD2011:148">Kuran, ''The Long Divergence'', 2011: p.&nbsp;148</ref><ref name="TKLD2011:152">Kuran, ''The Long Divergence'', 2011: p.&nbsp;152</ref>
Still another source (International Business Publications) states that during the "Islamic Golden Age" the "common view of ''riba'' among classical jurists" of Islamic law and economics was that it was unlawful to apply interest to gold and silver currencies, "but that it is not ''riba'' and is therefore acceptable to apply interest to fiat money—currencies made up of other materials such as paper or base metals—to an extent."<ref name=ILMC-23/>{{#tag:ref|Thus, when "currencies of base metal were first introduced in the Islamic world, no jurist ever thought that paying a debt in a higher number of units of this fiat money was ''riba''" as they were concerned with "the [[real versus nominal value|real value]] of money."<ref name=ILMC-23>{{cite book|last1=IBP, Inc.|title=Investment Laws in Muslim Countries Handbook Volume 1 Investment Laws ..|publisher=Lulu.com. ("updated annually")|page=23 |url=https://books.google.com/books?id=1MKrCQAAQBAJ&q=%22surplus+value+without+counterpart%22+%22to+ensure+equivalency+in+real+value%22&pg=PA23 |access-date=9 August 2015|isbn=9781433023972|date=25 March 2015}}{{self-published source|date=February 2020}}</ref>{{self-published inline|date=February 2020}}|group=Note}}

In the late 19th century [[Islamic modernist]]s reacted to the rise of [[History of Islam#Modern period|European power and influence]] and the European colonization of Muslim countries by reconsidering the prohibition on interest and whether interest rates and insurance were not among the "preconditions for productive investment" in a functioning modern economy.<ref name="Kepel-77">{{cite book|last1=Kepel|first1=Gilles|title=Jihad: on the Trail of Political Islam|date=2003|publisher=Harvard University Press|page=77|url=https://books.google.com/books?id=OLvTNk75hUoC&q=this+loose+approach+prevailed&pg=PA77|access-date=13 May 2015|isbn=9781845112578}}</ref> [[Syed Ahmad Khan]], argued for a differentiation between sinful ''riba'' "usury", which they saw as restricted to charges on lending for consumption, and legitimate non-''riba'' "interest", for lending for commercial investment.{{sfn|Aḥmad|1958}}

However, in the 20th century, Islamic revivalists, Islamists, and other Islamic activists worked to define all interest as ''riba'', to enjoin Muslims to lend and borrow at "Islamic banks" that avoided fixed rates. By the 21st century this Islamic banking movement had created "institutions of [[interest-free]] financial enterprises across the world".<ref>Choudhury, M.A. and Malike, U.A. (1992) ''The Foundations of Islamic Political Economy'', London: Macmillan; New York: St. Martin's Press., p.&nbsp;104</ref> Loans are permitted in Islam if the interest that is paid is linked to the profit or loss obtained by the investment. The concept of profit acts as a symbol in Islam of equal sharing of profits, losses, and risks.

The movement started with activists and scholars such as Anwar Qureshi,<ref>Qureshi, Anwar Iqbal. ''Islam and the Theory of Interest'', with an Introduction by Syed Sullaiman Nadvi, Lahore, Muhammad Ashraf, xxiw, 223p. Arabic translation ''al-Islam wa'l riba'' by Faruq Hilmi, al-Qahirah Maktabah, Misr, 158p.</ref> [[Naeem Siddiqui]],<ref>Siddiqui, Naeem. "Islami usul par banking" (Banking according to Islamic principles) ''Chiragh-e-Rah'' (Karachi) 1(11), November 1948: 60–64; 1(12), December 1948; 24–28</ref> [[Abul A'la Maududi]], [[Muhammad Hamidullah]], in the late 1940 and early 1950s.<ref name="MNSMET1981">{{cite book|last1=Siddiqi|first1=Muhammad Nejatullah|title=Muslim Economic Thinking|date=1981|publisher=The Islamic Foundation|location=UK|pages=29–30}}</ref> 
They believed commercial banks were a "necessary evil," and proposed a banking system based on the concept of ''[[Profit and loss sharing#Mudarabah|mudarabah]]'', where shared profit on investment would replace interest.  Further works specifically devoted to the subject of interest-free banking were authored<ref name="coif">{{cite web|title=ISLAMIC BANKING|url=http://www.correctislamicfaith.com/islamicbanking.htm|website=LET US CORRECT OUR ISLAMIC FAITH|access-date=28 July 2016|archive-url=https://web.archive.org/web/20160822214717/http://www.correctislamicfaith.com/islamicbanking.htm|archive-date=22 August 2016|url-status=dead}}</ref><ref name="Alharbi">{{cite journal |last1=Alharbi |first1=Ahmad |title=Development of the Islamic Banking System |journal=Journal of Islamic Banking and Finance |date=2015 |volume=3 |issue=1 |page=14 |doi=10.15640/jibf.v3n1a2 |doi-broken-date=12 July 2025 |url=http://jibfnet.com/journals/jibf/Vol_3_No_1_June_2015/2.pdf |access-date=16 May 2017 |doi-access=free |archive-date=16 May 2017 |archive-url=https://web.archive.org/web/20170516192211/http://jibfnet.com/journals/jibf/Vol_3_No_1_June_2015/2.pdf |url-status=dead }}</ref> by Muhammad Uzair (1955), Abdullah al-Araby (1967), [[Mohammad Najatuallah Siddiqui]],<ref>(1961, 1969. The 1969 work is''G̲h̲air sūdī bank kārī''. 1969</ref> al-Najjar (1971) and [[Muhammad Baqir al-Sadr]].<ref>Muhammad Baqir al-Sadr, ''[[Iqtisaduna]]'' 1961; ''Al-Bank al-la Ribawi fi al-Islam'' (Usury-free Banking in Islam) 1974.</ref>

====Since 1970====
The involvement of institutions, governments, and various conferences and studies on Islamic banking (the Conference of the Finance Ministers of the Islamic Countries held in Karachi in 1970, the Egyptian study in 1972, the First International Conference on Islamic Economics in Mecca in 1976, and the International Economic Conference in London in 1977) were instrumental in applying the application of theory to practice for the first interest-free banks.<ref>ISLAMIC BANKING By A.L.M. Abdul Gafoor [http://users.bart.nl/~abdul/chap4.html 4.1 Historical development] {{Webarchive|url=https://web.archive.org/web/20170821185300/http://users.bart.nl/~abdul/chap4.html |date=21 August 2017 }}</ref><ref>
Sami Hassan Homoud, established the Jordanian Islamic Bank in 1978. (source: {{cite book|last1=Salihovic|first1=Elnur|title=Major Players in the Muslim Business World|date=2015|publisher=Universal-Publishers.com|page=368|url=https://books.google.com/books?id=aSa1DAAAQBAJ&q=Jordanian+Islamic+Bank+Sami+Hassan+Homoud&pg=PA368|access-date=31 August 2016|isbn=9781627340526}})</ref> At the First International Conference on Islamic Economics, "several hundred Muslim intellectuals, Sharia scholars and economists unequivocally declared ... that all forms of interest" were ''riba''.<ref name=Kepel-77/>{{sfn|Khan|2013|p=143}}

By 2004, the strength of this belief (which is the basis of Islamic finance){{sfn|Khan|2013|pp=xv-xvi}} was demonstrated in Pakistan—when a minority (non-Muslim) member of the Pakistani parliament{{#tag:ref|M.P. Bhindara, one of the non-Muslim MNAs (Member of the [[National Assembly of Pakistan]]) representing their minority religious group—in this case the Hindus—rather than an electoral district.|group=Note}} questioned it, pointing out that a scholar from [[Al-Azhar University]] (one of the oldest Islamic universities in the world), had issued a decree that bank interest was not un-[[Islamic]]. His statement resulted in "pandemonium" in the parliament, a demand by members of the leading [[Islamist]] political party{{#tag:ref|the [[Muttahida Majlis-e-Amal]] (MMA) party|group=Note}} to immediately respond to these allegedly derogatory remarks, followed by a walkout when they were denied it. When the upset members of parliament returned, their leader (Sahibzada Fazal Karim), stated that since the Pakistan [[Council of Islamic ideology]] had decreed that interest in all its forms was ''[[haram]]'' (forbidden) in an Islamic society, no member of parliament had the right to "negate this settled issue".<ref name="dawn.com">[http://www.dawn.com/2004/06/17/top2.htm Govt accused of fudging figures: Poverty reduction]| dawn.com | 17 June 2004</ref>

The council's decree notwithstanding, over the years a minority of Islamic scholars ([[Muhammad Abduh]], [[Rashid Rida]], [[Mahmud Shaltut]], [[Syed Ahmad Khan]], Fazl al-Rahman, [[Muhammad Sayyid Tantawy]] and [[Yusuf al-Qaradawi]]) have questioned whether ''riba'' includes all interest payments.<ref name="RBIRPMNS2004:55-56">Siddiqi, ''Riba, Bank Interest'', 2004: p.&nbsp;55–56</ref> Others (Muhammad Akran Khan) have questioned whether ''riba'' is a crime like murder and theft, forbidden by [[Sharia]] (Islamic law) and subject to punishment by human beings, or simply a sin to be inveighed against, with the reprimand left to God, since "neither the Prophet nor the [[Rashidun|first four caliphs]] nor any subsequent Islamic government ever enacted any law against ''riba''."{{sfn|Khan|2013|pp=55-56}}

With an increase in the Muslim population in Europe and the current lack of supply, opportunities will arise for the important role which Islamic finance plays in Europe's economy. In particular, Luxembourg is emerging as a leader and hub for Islamic funds.<ref>{{Cite web|url=https://www2.deloitte.com/lu/en/pages/islamic-finance/articles/islamic-finance-europe.html|title=Islamic Finance in Europe|website=Deloitte Luxembourg|language=en|access-date=2019-11-09|archive-date=9 November 2019|archive-url=https://web.archive.org/web/20191109000645/https://www2.deloitte.com/lu/en/pages/islamic-finance/articles/islamic-finance-europe.html|url-status=dead}}</ref>

===Banking===
[[File:Housing Bank and Islamic Bank Amman.jpg|thumb|right|upright|A Jordan Islamic Bank branch in [[Amman]]]]
While [[Islamic revival#Since 1970|revivalist]]s like Mohammed Naveed insist Islamic banking is "as old as the religion itself with its principles primarily derived from the Quran", secular historians and Islamic modernists see it as a modern phenomenon or "[[invented tradition]]".<ref name="islamic-finance-history">{{cite news| url=http://www.islamicfinance.com/2015/02/an-overview-of-the-history-of-islamic-finance/ | work=Islamic Finance | title=A History of Islamic Finance | date=8 February 2015 | first=Naveed | last=Mohammed}}</ref><ref>see also {{cite web|title=The Islamic Banker |url=http://www.theislamicbanker.com/history_islamic_banking/|access-date=12 February 2015|archive-url=https://web.archive.org/web/20150213022607/http://www.theislamicbanker.com/history_islamic_banking/ |archive-date=13 February 2015|url-status=dead}}</ref>

==== Early example: [[Zubayr ibn al-Awwam]] ====
It is argued that in practice the fundraising business of [[Zubayr ibn al-Awwam]] was [[bank]]ing with zero interest.{{sfn|Alharbi|2015|p=1}} Zubayr pioneered this practice by technically modifying the money-keeping service to be a loan which Zubayr was obligated to pay off, while he also got privilege to manage the money he kept to do his business.<ref name="The Growth of Islamic Finance and Banking Innovation, Governance and Risk Mitigation">{{cite book |last1=Mohi-ud-Din Qadri |first1=Hussain |last2=Ishaq Bhatti |first2=M. |title=The Growth of Islamic Finance and Banking Innovation, Governance and Risk Mitigation |date=2019 |publisher=Taylor & Francis |isbn=9780429557507 |url=https://books.google.com/books?id=isyqDwAAQBAJ&q=africa+zubayr+al+awam |access-date=23 December 2021 |format=Ebook}}</ref> Zubayr's practice of accepting deposits while not charging any interest meant Zubayr died with an inflated debt of 2,000,000 Dinar.{{#tag:ref|1 Dinar during the era of Muhammad was approximately 12 [[Dirham]]s.{{sfn|Alharbi|2015|p=1}} |group=Note}}{{sfn|Alharbi|2015|p=1}}{{#tag:ref|According to Ibn Sa'd, debt of al-Zubayr 1,200,000 Dinar.{{sfn|Ibn Sa'd|2013|p=81}}|group=Note}} However, Zubayr invested his clients' deposits in his own lucrative businesses, so his inheritors managed to settle his debts while still leaving an inheritance for his family.{{sfn|Ibn Sa'd|2013|p=81}} After his death, his son Abdullah ibn Zubayr sold the property for 1.600.000 [[dinar]].{{sfn|Tarmizi|2017|p=95}} This practice was allowed according to classical scholar consensus, such as Ibn Taymiyyah in his [[Majmu Fatawa]].{{sfn|al Bushi|2019|p=685, 686}}

====Early banking====
According to Timur Kuran, by "the tenth century, Islamic law supported credit and investment instruments" that were "as advanced" as anything in the non-Islamic world, but prior to the 19th century there were no "durable" financial institutions "recognizable as banks" in the Muslim world. The first Muslim majority-owned banks did not emerge until the 1920s.<ref name="Kuran_2004_x-xi">Kuran, Timur. 2004. ''Islam and Mammon: The economic predicaments of Islamism''. Princeton, NJ; Princeton University Press, pp.&nbsp;x–xi</ref>
 
An early [[market economy]] and an early form of [[mercantilism]], sometimes called ''Islamic capitalism'', was developed between the eighth and twelfth centuries.<ref>Subhi Y. Labib (1969), "Capitalism in Medieval Islam", ''The Journal of Economic History'' '''29''' (1), p. 79–96 [81, 83, 85, 90, 93, 96].</ref> The [[monetary economy]] of the period was based on the widely circulated [[currency]] the [[gold dinar]], and it tied together regions that were previously economically independent.

A number of economic concepts and techniques were applied in early Islamic banking, including [[bills of exchange]], [[partnership]] (''mufawada'', including [[limited partnership]]s, or ''mudaraba''), and forms of [[Capital (economics)|capital]] (''al-mal''), [[capital accumulation]] (''nama al-mal''),<ref name=Banaji/> [[cheque]]s, [[promissory note]]s,<ref>Robert Sabatino Lopez, Irving Woodworth Raymond, Olivia Remie Constable (2001), ''Medieval Trade in the Mediterranean World: Illustrative Documents'', [[Columbia University Press]], {{ISBN|0-231-12357-4}}.</ref> [[trusts]] (see ''[[Waqf]]''),<ref>Timur Kuran (2005), "The Absence of the Corporation in Islamic Law: Origins and Persistence", ''American Journal of Comparative Law'' '''53''', pp. 785–834 [798–9].</ref> [[transactional account]]s, [[loan]]ing, [[ledger]]s and [[Assignment (law)|assignments]].<ref name="Labib-69-92">Subhi Y. Labib (1969), "Capitalism in Medieval Islam", ''The Journal of Economic History'' '''29''' (1), pp. 79–96 [92–3].</ref> Muslim traders are known to have used the cheque or ''ṣakk'' system since the time of [[Harun al-Rashid]] (9th century) of the [[Abbasid Caliphate]].<ref name="glubb">{{citation
  | title = A Short History of the Arab Peoples
  | first = John Bagot
  | last = Glubb
  | publisher=Dorset Press
  | year = 1988
  | page = 105
  | isbn = 978-0-88029-226-9
  | oclc = 603697876}}</ref><ref name=Labib-69-92/> [[Organization]]al [[Business|enterprises]] independent from the [[Sovereign state|state]] also existed in the medieval Islamic world, while the [[Agency (law)|agency]] institution was also introduced during that time.<ref>Said Amir Arjomand (1999), "The Law, Agency, and Policy in Medieval Islamic Society: Development of the Institutions of Learning from the Tenth to the Fifteenth Century", ''Comparative Studies in Society and History'' '''41''', pp. 263–93. [[Cambridge University Press]].</ref><ref>Samir Amin (1978), "The Arab Nation: Some Conclusions and Problems", ''MERIP Reports'' '''68''', pp. 3–14 [8, 13].</ref> Many of these early capitalist concepts were adopted and further advanced in [[medieval Europe]] from the 13th century onwards.<ref name="Banaji">Jairus Banaji (2007), "Islam, the Mediterranean and the rise of capitalism", ''[[Historical Materialism (journal)|Historical Materialism]]'' '''15''' (1), pp. 47–74, [[Brill Publishers]].</ref>

====20th century====
{{further| Islamic economic jurisprudence}}

In the middle of the 20th century, some organizational entities were found to offer financial services complying with Islamic laws. The first, experimental, local Islamic bank was established in the late 1950s in a rural area of Pakistan. It charged no interest on its lending.<ref>Wilson, R. (1983), Banking and Finance in the Arab Middle East, St Martin's Press, New York.</ref><ref>Cengiz Erol, Radi El‐Bdour, (1989) "Attitudes, Behaviour, and Patronage Factors of Bank Customers towards Islamic Banks", International Journal of Bank Marketing, Vol. 7 Iss: 6, pp.&nbsp;31–37</ref>

In 1963, the first modern Islamic bank on record was established in rural [[Egypt]] by economist [[Ahmad Elnaggar]]<ref name="IFDCS">{{cite web |last1=Jamaldeen|first1=Faleel |title=Key Sharia Principles and Prohibitions in Islamic Finance |url=http://www.dummies.com/how-to/content/islamic-finance-for-dummies-cheat-sheet.html |access-date=24 July 2016}}</ref> to appeal to people who lacked confidence in state-run banks. The profit-sharing experiment, in the [[Nile Delta]] town of [[Mit Ghamr]], did not specifically advertise its Islamic nature for fear of being seen as a manifestation of Islamic fundamentalism, which was anathema to the [[History of Egypt under Gamal Abdel Nasser|Gamal Nasser regime]]. Also in that year the Pilgrims Saving Corporation was founded in Malaysia. Although not a bank, it incorporated basic Islamic banking concepts.<ref name=IFDCS/>

The Mit Ghamr experiment was shut down by the Egyptian government in 1968. Nonetheless, it was considered a success by many,<ref>{{cite book
|last=Kepel
|first=Gilles
|title=Jihad: The Trail of Political Islam
|year=2006
|publisher=I.B. Tauris
|pages=77
|url=https://books.google.com/books?id=OLvTNk75hUoC&pg=PA61
|isbn=9781845112578
}}
</ref> as by that time there were nine similar banks in the country.<ref name="nine banks">{{cite journal|last1=Ariff |first1=Mohamed |title=Islamic Banking |journal=Asian-Pacific Economic Literature |volume=2 |issue=2 |date=September 1988 |pages=48–64 |doi=10.1111/j.1467-8411.1988.tb00200.x |doi-access=free }}</ref> In 1972, the Mit Ghamr Savings project became part of Nasr Social Bank, which as of 2016 was still in business in Egypt.<ref>{{Cite web|url=http://nsbbank.weebly.com/|title=بنك كل المصريين|website=بنك ناصر الاجتماعي ( NSB )|access-date=13 April 2017}}</ref>

====Since 1970====
{| class="wikitable center floatright" style="text-align: center; max-width: 12em;"
|+ id="publications-table-caption" style="line-height:130%"| Publications available relating to Islamic finance
|-
! scope="col" | Year
! scope="col" | Number 
|-
|prior to 1979||238
|-
|1999||2722
|-
|2006||6484
|-
|style="font-size:88%;line-height:130%" colspan=2 |
Source: Islamic Finance Project Databank{{sfn|Khan|2013|p=5}}
|}
The influx of "petro-dollars" and a "general re-Islamisation" following the [[Yom Kippur War|1973 Arab Israeli War]] and [[1973 oil crisis]] encouraged the development of the Islamic banking sector,<ref name="Kepel-banking">{{cite book
|last=Kepel
|first=Gilles
|title=Jihad: The Trail of Political Islam
|year=2006
|publisher=I.B. Tauris
|pages=76–77
|url=https://books.google.com/books?id=OLvTNk75hUoC&pg=PA61
|quote=This loose approach prevailed throughout the Muslim world until the 1970s, at which time the total ban on lending with interest was reactivated, in tandem with a general re-Islamisation in the cultural and political domains. ...until 1973, when the tidal wave of petro-dollars changed the entire [economic] waterfront.
|isbn=9781845112578
}}</ref> and since 1975 it has spread globally.{{sfn|Khan|2013|p=289}}

In 1975, the [[Islamic Development Bank]] was set up with the mission of providing funding to projects in its member countries.<ref name="IFGE2010:?">[[#|Warde, ''Islamic finance in the global economy'', 2000]]: p.?</ref> The first modern commercial Islamic bank, [[Dubai Islamic Bank]], was established in 1979.{{sfn|Khan|2013|p=292}} The first Islamic insurance (or ''[[takaful]]'') company – the Islamic Insurance Company of Sudan – was established in 1979.<ref name=IFDCS/> The Amana Income Fund,<ref>{{Cite web|url=https://www.saturna.com/amana|title=Amana Mutual Funds Trust|date=2015-10-21|website=Saturna Capital|access-date=12 April 2017}}</ref> the world's first Islamic mutual fund (which invests only in Sharia-compliant equities), was created in 1986 in Indiana.<ref name=IFDCS/>
 
From 1980 to 1985, Islamic investments underwent a "spectacular expansion" throughout the Muslim world, attracting deposits with the promise of "great gains" and "religious guarantees" supplied by Islamic jurists who were "recruited to issue fatwas denouncing conventional banks and recommending their Islamic rivals."<ref name="GKJTPI2002:280">[[#GKJTPI2002|Kepel, ''Jihad'', (2002)]]: p.&nbsp;280</ref> This growth was temporarily reversed in 1988 in the largest Arab Muslim country, Egypt, when the Egyptian state – worried that Islamist movements were building up a "war chest" and being given financial independence – reversed its tacit support for the industry, and launched a media campaign against Islamic banks.<ref name=GKJTPI2002:280/> The ensuing financial panic led to the bankruptcy of some companies.<ref name="GKJTPI2002:280-1">[[#GKJTPI2002|Kepel, ''Jihad'', (2002)]]: p.280–1</ref>

In 1990 an accounting organization for Islamic financial institutions ([[Accounting and Auditing Organization for Islamic Financial Institutions]], AAOIFI), was established in Algiers by a group of Islamic financial institutions.<ref>Khan, ''What's Wrong with Islamic Banking?'', 2013, 6</ref>{{sfn|Khan|2013|p=6}} Also in that year the Islamic bond market emerged when the first tradable ''[[sukuk]]'' – the Islamic alternative to conventional bonds – were issued by Shell MDS in Malaysia.<ref name=IFDCS/> In 2002, the Malaysia-based Islamic Financial Services Board (IFSB) was established as an international standard-setting body for Islamic financial institutions.<ref name=IFDCS/>

By 1995, 144 Islamic financial institutions had been established worldwide, including 33 government-run banks, 40 private banks, and 71 investment companies.<ref name="Kepel-79">
{{cite book|last=Kepel|first=Gilles|title=Jihad: The Trail of Political Islam|year=2006|publisher=I.B. Tauris|pages=79
|url=https://books.google.com/books?id=OLvTNk75hUoC&pg=PA61|isbn=9781845112578}}</ref> The large US-based [[Citibank]] began to offer Islamic banking services in 1996 when it established the Citi Islamic Investment Bank in Bahrain.<ref name=IFDCS/> The first successful benchmark for the performance of Islamic investment funds was established in 1999, with the [[Dow Jones Islamic Market Index]] (DJIMI).<ref name=IFDCS/>

[[File:Kuala Lumpur Malaysia Wisma-Tun-Sambanthan-01.jpg|thumb|right|Building housing the Islamic Banking & Finance Institute Malaysia (IBFIM) in downtown [[Kuala Lumpur]]]]
Also in the 1990s, a false start was made in Islamic banking in the UK, where bankers declared returns "interest" for tax purposes, while insisting to depositors they were actually "profit" and so not ''riba''. Islamic scholars issued a fatwa stating they had "no objection to the use of the term 'interest'" in loan contracts for purposes of tax avoidance provided the transaction did not actually involve ''riba'', and the Islamic bankers used the term for fear that lack of tax deductions available for interest (but not profit) would put them at a competitive disadvantage to conventional banks.<ref>"Translation of Selected Fatwas of Al-Baraka Seminars" – Seminar 6b pp.&nbsp;81–2, Algeria, 2–6 October 1990</ref> Muslim customers were not persuaded, and a "bad taste" was left "in the mouth" of the market for Islamic financial products.<ref name="Irfan-2015-228">{{cite book|last1=Irfan |first1=Harris |title=Heaven's Bankers |date=2015|publisher=Overlook Press|page=228}}</ref> The [[Al Rayan Bank|Islamic Bank of Britain]], the first Islamic commercial bank established outside the Muslim world, was not established until 2004.<ref name=IFDCS/>

By 2008 Islamic banking was growing at a rate of 10–15% per year and continued growth was forecast.<ref>[http://www.imf.org/external/pubs/ft/wp/2008/wp0816.pdf Islamic Banks and Financial Stability: An Empirical Analysis] pg. 5</ref> There were over 300 Islamic financial institutions spread over 51 countries, as well as an additional 250 mutual funds complying with Islamic principles. Worldwide, approximately 0.5% of financial assets<ref name="wsj-2007">{{cite news| url=https://www.wsj.com/articles/SB116839213664272112 | work=The Wall Street Journal | title=World's Assets Hit Record Value Of $140 Trillion | date=10 January 2007 | first=Joanna | last=Slater}}</ref> were estimated to be under Sharia-compliant management according to ''[[The Economist]]'' magazine.<ref name="economist-2009"/> In Saudi Arabia, leaders in the Islamic finance sector include [[Saleh Malaikah]], chairman of Rusd Holding Group.

But, as the industry grew, it also drew criticism (from M.T. Usmani among others) for not progressing from "debt-based contracts", such as ''murabaha'', to the more "genuine" [[profit and loss sharing]] mode, but instead moving in the opposite direction, "competing to present themselves with all of the same characteristics of the conventional, interest-based marketplace".<ref>{{cite book |url=http://www.kantakji.com/media/7747/f148.pdf| last1=Usmani |first1=Muhammad Taqi |date=2008 |title=Sukuk and their contemporary application |page=13 |access-date=21 September 2016|archive-url=https://web.archive.org/web/20151123025633/http://www.kantakji.com/media/7747/f148.pdf|archive-date=2015-11-23}}</ref>

During the [[2008 financial crisis]], Islamic banks were not initially impacted by the 'toxic assets' built up on the balance sheets of US banks as these were not Sharia-compliant and not owned by Islamic banks. In 2009, the official newspaper of the [[Holy See|Vatican]] (''L'Osservatore Romano'') put forward the idea that "the ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service".<ref>{{cite news |  title = Vatican offers Islamic finance system to Western Banks  | website= world bulletin | date = 6 March 2009 | url = http://www.worldbulletin.net/index.php?aType=haber&ArticleID=37814 | archive-url = https://web.archive.org/web/20200809004308/https://www.worldbulletin.net/index.php?aType=haber&ArticleID=37814 | url-status = usurped | archive-date = 9 August 2020 | access-date=6 August 2016}}</ref> (The Catholic Church also forbids usury, but began to relax its ban on all interest in the 16th century.)<ref name="Seabourne">{{cite news|last1=Seabourne|first1=Gwen|title=When and why did the Christian Church stop viewing usury as a sin?|url=https://www.theguardian.com/notesandqueries/query/0,5753,-1030,00.html|access-date=28 July 2015|agency=The Guardian}}</ref><ref>Abdul-Rahman, Yahia. 2010: ''The art of Islamic Banking and Finance'', Hoboken, NJ, John Wiley and Sons, 26</ref> 
However, the drop in valuation of real estate and private equity – two segments heavily invested in by Islamic firms – following the collapse of Lehman Brothers Islamic did hurt Islamic financial institutions.<ref name="islamic-conventional-comparison">{{cite news | url=https://www.islamicfinance.com/islamic-finance/ | work=IslamicFinance.com | title=Islamic and Conventional Banking Comparison | date=3 July 2015 | first=Naveed | last=Mohammed | access-date=2 July 2015 | archive-date=3 July 2015 | archive-url=https://web.archive.org/web/20150703194338/https://www.islamicfinance.com/islamic-finance/ | url-status=dead }}</ref>

As of 2015, $2.004 trillion in assets were being managed in a Sharia-compliant manner according to the State of the Global Islamic Economy Report.  Of these $342 billion were ''[[sukuk]]''. The market for Islamic ''sukuk'' bonds in that year was made up of 2,354 sukuk issues,<ref name="reutersSGIER2015-16">{{cite book|url=http://www.startupbusiness.it/wp-content/uploads/2016/10/SALAAM03102016111130.pdf|title=State of the Global Islamic Economy Report 2015/16|publisher=Thomson Reuters & Dinar Standard|pages=54–55|access-date=19 March 2017|archive-date=14 March 2023|archive-url=https://web.archive.org/web/20230314155047/https://www.startupbusiness.it/wp-content/uploads/2016/10/SALAAM03102016111130.pdf|url-status=dead}}</ref> and had become strong enough that several non-Muslim majority states – UK, Hong Kong,<ref name="Economist-8-10-2014">{{cite news|url=https://www.economist.com/blogs/economist-explains/2014/10/economist-explains-0|title=Why Islamic financial products are catching on outside the Muslim world|date=8 October 2014|agency=The Economist|last1=F|first1=J|access-date=6 August 2016}}</ref> and Luxembourg<ref name="luxem">{{cite news|url=http://www.luxembourgforfinance.com/luxembourg-successfully-issues-landmark-sukuk-transaction|title=Luxembourg successfully issues landmark Sukuk transaction|date=10 January 2014|agency=luxembourgforfinance.com|access-date=5 May 2015|archive-date=12 October 2014|archive-url=https://web.archive.org/web/20141012203622/http://www.luxembourgforfinance.com/luxembourg-successfully-issues-landmark-sukuk-transaction|url-status=dead}}</ref> – issued ''sukuk.''

There are multiple Sharia-compliant indexes, created by Sharia screening of companies. Such indexes include DJIM, S&PSI, MSCI and country-based indexes like KMI-Pakistan and SCM-Malaysia.<ref>{{Cite journal |last=Hanif |first=Muhammad |date=January 2019 |title=Sharīʿah Screening Process of Capital Markets: An Evaluation of Methodologies |url=https://iei.kau.edu.sa/Files/121/Files/153868_32-01-02-MohammadHanif.pdf |journal=Journal of King Abdulaziz University: Islamic Economics |volume=32 |issue=1 |pages=23–42 |doi=10.4197/Islec.32-1.2}}</ref>

==Principles==
To be consistent with the principles of Islamic law ([[Sharia]])—or at least an orthodox interpretation of the law—and guided by Islamic economics, the contemporary movement of Islamic banking and finance prohibits a variety of activities, some of which are not illegal in secular states:

* Paying or charging [[interest]]. "All forms of interest are ''[[riba]]'' and hence prohibited".{{sfn|Khan|2013|pp=xv-xvi}} Islamic rules on transactions (known as ''Fiqh al-[[Muamalat]]'') have been created to prevent use of interest. 
* Investing in businesses involved in activities that are forbidden (''[[haram]]''). These include things such as selling [[Khamr|alcohol]] or [[Islamic dietary laws#Pork|pork]], or producing media such as gossip columns or pornography.<ref>The Islamic Banking and Finance Database provides more information on the subject. {{cite web |url=http://www.wdibf.com/ |title=World Database for Islamic Banking and Finance |access-date=12 February 2015}}</ref><ref name=RIFI2004-5/>
* Charging extra for late payment. This applies to ''[[murâbaḥah]]'' or other fixed payment financing transactions, although some authors believe late fees may be charged if they are donated to charity,<ref name="Edward Elgar">{{harvnb|Visser|2009|loc="4.4 Islamic Contract Law"|p=[https://books.google.com/books?id=KIXe3rY_OkgC&pg=PA77 77]}}: "The prevalent position, however, seems to be that creditors may impose penalties for late payments, which have to be donated, whether by the creditor or directly by the client, to a charity, but a flat fee to be paid to the creditor as a recompense for the cost of collection is also acceptable to many fuqaha."</ref><ref name="kettell-38">{{cite book |url=https://books.google.com/books?id=lLVVRAqvZZIC&q=murabaha+impose+penalties+for+late+payment&pg=PA38 |title=The Islamic Banking and Finance Workbook: Step-by-Step Exercises to help you ...|date=2011|page=38 |publisher=Wiley|quote=The bank can only impose penalties for late payment by agreeing to 'purify' them by donating them to charity.|last1=Kettell|first1=Brian|access-date=9 July 2016|isbn=9781119990628}}</ref><ref name="al-yusr">{{cite web|url=http://www.alyusr.om/faq.aspx?id=15|title=FAQs and Ask a Question. Is it permissible for an Islamic bank to impose penalty for late payment?|website=al-Yusr|access-date=9 July 2016|archive-date=6 August 2016|archive-url=https://web.archive.org/web/20160806175919/http://www.alyusr.om/faq.aspx?id=15|url-status=dead}}</ref> or if the buyer has "deliberately refused" to make a payment.<ref name="IMF-2015-8">{{cite book|url=https://www.imf.org/external/pubs/ft/wp/2015/wp15120.pdf|title=IMF Working paper, An Overview of Islamic Finance|last2=Shahmoradi|first2=Asghar|last3=Turk |first3=Rima|date=June 2015|page=8|last1=Hussain|first1=Mumtaz|access-date=9 July 2016}}</ref>
*''[[Maisir]].'' This is usually translated as "gambling" but used to mean "speculation" in Islamic finance.<ref name="Economist-8-10-2014" /> Involvement in contracts where the ownership of a good depends on the occurrence of a predetermined, uncertain event in the future is ''maisir'' and forbidden in Islamic finance.
*''[[Gharar]]''. Usually translated as "uncertainty" or "ambiguity". Bans on both ''maisir'' and ''gharar'' tend to rule out derivatives, options and futures.<ref name="Economist-8-10-2014" /> Islamic finance supporters (such as Mervyn K. Lewis and Latifa M. Algaoud) believe these involve excessive risk and may foster uncertainty and fraudulent behaviour such as are found in derivative instruments used by conventional banking.<ref name="Lewis_and_Algaoud_(2001)">{{cite book |author1=Mervyn K. Lewis |author2=Latifa M. Algaoud |title=Islamic Banking |location=Cheltenham, UK and Northampton, MA, USA |publisher=Edward Elgar |year=2001}}</ref>
*Engaging in transactions lacking "'material finality'. All transactions must be "directly linked to a real underlying economic transaction", which excludes "options and most other derivatives".<ref name="RIFI2004-5">{{cite book |last1=El-Hawary |first1=Dahlia |first2=Wafik |last2=Grais |first3=Zamir |last3=Iqbal. |year=2004 |title=Regulating Islamic financial institutions: The nature of the regulated |series=World Bank policy research working paper 3227 |location=Washington, DC |publisher= World Bank |ssrn=610268 |page=5}}</ref>{{sfn|Khan|2015|p=89}}

Money on the most common type of Islamic financing – debt-based contracts – "must be made from a tangible asset that one owns and thus has the right to sell – and in financial transactions it demands that risk be shared." Money cannot be made from money.<ref name="nyt-review">{{cite news|last1=FASMAN|first1=JON|date=20 March 2015|url=https://www.nytimes.com/2015/03/22/books/review/heavens-bankers-by-harris-irfan.html?_r=0 |title=[Book Review] Heaven's Bankers by Harris Irfan|work=The New York Times|access-date=20 August 2015}}</ref> Another statement of the Islamic banking theory of finance is: "Money has no intrinsic utility; it is only a medium of exchange."<ref name="IIFTU1998:12">[[#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.12</ref>{{sfn|Khan|2013|p=275}}
Other restrictions include:
*Islamic banks are to collect ''[[zakat]]'' (obligatory religious alms giving) from customers' accounts – at least according to some sources.<ref name="Lewis_and_Algaoud_(2001)"/><ref name="Nathan_and_Rebiere_(2007)">Nathan, S. and Ribiere, V. (2007). "From knowledge to wisdom: The case of corporate governance in Islamic banking". ''The Journal of Information and Knowledge Management Systems'', 37 (4), pp. 471–483.</ref>
* A board of [[Sharia]] experts is to supervise and advise each Islamic bank on the propriety of transactions to "ensure that all activities are in line with Islamic principles".<ref name="Lewis_and_Algaoud_(2001)"/><ref name="Nathan_and_Rebiere_(2007)" /> (Interpretations of Sharia may vary by country. According to [[Humayon Dar]],<ref name="Dar(2010)">Dar, Humayon A. 27 June 2010. "[https://web.archive.org/web/20210906115834/http://www.humayondar.com/businessasia4.pdf Islamic banking in Iran and Sudan]". ''Business Asia''.</ref> interpretation of the Sharia is more strict in Turkey or Arab countries than in Malaysia, whose interpretation is in turn more strict than the Islamic Republic of Iran. Mohammed Ariff also found less exacting Sharia compliance in Iran, where the Islamic government had decreed "that government borrowing on the basis of a fixed rate of return from the nationalized banking system would not amount to interest" and consequently would be permissible."<ref name="nine banks" /> Mahmud el-Gamal found interpretations to be most strict in Sudan and least in Malaysia.)<ref name="MeGIFLEP2006:21">[[#MeGIFLEP2006|El-Gamal, ''Islamic Finance'', 2006]]: p. 21</ref>
* Risk sharing. Symmetrical risk and return on distribution to participants must be structured such that no one benefits disproportionately from the transaction.<ref name=RIFI2004-5/>{{sfn|Khan|2015|p=89}}

In general, Islamic banking and finance has been described as having the "same purpose" as conventional banking but operating in accordance with the rules of Sharia law (Institute of Islamic Banking and Insurance),<ref name="what-is-IIBaI">{{cite web |url=http://www.islamic-banking.com/what_is_ibanking.aspx |title=What is Islamic Banking? |website=Institute of Islamic Banking and Insurance |access-date=24 July 2016 |archive-url=https://web.archive.org/web/20160722181927/http://www.islamic-banking.com/what_is_ibanking.aspx |archive-date=22 July 2016 |url-status=dead }}</ref> or having the same "basic objective" as other private entities, i.e. "maximization of shareholder wealth" (Mohamed Warsame).<ref name="PoIFFaIS-2009">{{cite book|last1=Warsame|first1=Mohamed Hersi|title=The role of Islamic finance in tackling financial exclusion in the UK|date=2009|publisher=Durham University|page=183|chapter-url=http://shodhganga.inflibnet.ac.in/bitstream/10603/51331/10/10.chapter%204.pdf|access-date=23 August 2016|chapter=4. PRACTICE OF INTEREST FREE FINANCE AND ITS SIGNIFICANCE}}</ref> In a similar vein, Mahmoud El-Gamal states that Islamic finance "is not constructively built from classical jurisprudence". It follows conventional banking and deviates from it "only insofar as some conventional practices are deemed forbidden under Sharia."{{#tag:ref|"At least according to banking law in Kuwait 'the starting point in this formula' of Islamic banking 'is conventional financial practice, from which Islamic finance deviates only insofar as some conventional practices are deemed forbidden under Sharia.' ... Islamic finance 'is not constructively built from classical jurisprudence'. Rather, Islamic alternatives or modifications of conventional practices are sought whenever the latter is deemed forbidden. ... [[Ibn Taymiyya]] famously stated that two prohibitions can explain all distinctions between contracts that are deemed valid or invalid: those of ''riba'' and ''[[gharar]]''."<ref name=MeGIFLEP2006:8>[[#MeGIFLEP2006|El-Gamal, ''Islamic Finance'', 2006]]: p. 8</ref>|group=Note}}

A broader description of its principles is given by the Islamic Research and Training Institute of the [[Islamic Development Bank|Islamic Development bank]]:

<blockquote>The most important feature of Islamic banking is that it promotes risk sharing between the provider of funds (investor) on the one hand and both the financial intermediary (the bank) and the user of funds (the entrepreneur) on the other hand ... In conventional banking, all this risk is borne in principle by the entrepreneur.{{sfn|Khan|2015|p=86}}<ref>{{Cite book |url=http://www.iefpedia.com/english/wp-content/uploads/2009/10/Challenges-Facing-Islamic-Banking-by-Ausaf-Ahmad-Tariqullah-Khan-Munawar-Iqbal.pdf |title=Challenges facing Islamic banking|last=Iqbal |first=Munawar|publisher=Islamic Development Bank|year=1998|pages=15–16}}</ref>{{#tag:ref|see also Hubar Hasan<ref name="MPRA-hassan">{{cite book|url=https://mpra.ub.uni-muenchen.de/58059/1/MPRA_paper_58059.pdf|title=Risk-sharing versus risk-transfer in Islamic finance: An evaluation|date=21 August 2014|publisher=The Global University of Islamic Finance (INCEIF) .MPRA Paper No. 58059, (Munich Personal RePEc Archive)|location=Kuala Lumpur|last1=Hasan |first1=Zubair|access-date=23 August 2016}}</ref>|group=Note}} </blockquote>

Some proponents (Nizam Yaquby) believe Islamic banking has more far reaching purposes than conventional banking, and declare that the "guiding principles" for Islamic finance include: "fairness, justice, equality, transparency, and the pursuit of social harmony",<ref name="HIHB2015:532">[[#HIHB2015|Irfan, ''Heaven's Bankers'', 2015]]: p.53</ref> although others describe these virtues as the natural benefits of following Sharia. (Taqi Usmani describes the virtues as guiding principles in one section of his book on Islamic Banking, and benefits in another.)<ref name="IIFTU1998:11,167-8">[[#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.11, 167–8</ref>

Nizam Yaquby, for example, declares that the "guiding principles" for Islamic finance include: "fairness, justice, equality, transparency, and the pursuit of social harmony".<ref name="HIHB2015:532"/> Some distinguish between Sharia-''compliant'' finance and a more holistic, pure and exacting Sharia-''based'' finance.<ref name="HIHB2015:236">[[#HIHB2015|Irfan, ''Heaven's Bankers'', 2015]]: p.236</ref><ref name="IMSBoSC">{{cite journal|date=13 March 2009|title=Islamic mortgages: Shari'ah-based or Shari'ah-compliant?|url=http://www.islam21c.com/finance/211-islamic-mortgages-shariah-based-or-shariah-compliant/|journal=New Horizon Magazine|access-date=28 October 2015}}</ref><ref name="ali">{{cite web|url=http://irep.iium.edu.my/35516/3/Session_1_-_Dr_Engku_Rabiah.pdf|title=SHARIAH-COMPLIANT TO SHARIAH-BASED FINANCIAL INNOVATION: A QUESTION OF SEMANTICS OR PROGRESSIVE MARKET DIFFERENTIATION|publisher=4th SC-OCIS Roundtable, 9–10 March 2013, Ditchley Park, Oxford, United Kingdom|last1=Ali|first1=Engku Rabiah Adawiah Engku|access-date=28 October 2015}}</ref> "[[Socially responsible investing|Ethical finance]]" has been called necessary, or at least desirable,<ref name="HIHB2015:198">[[#HIHB2015|Irfan, ''Heaven's Bankers'', 2015]]: p.198</ref> for Islamic finance, as has a "[[Hard money (policy)|gold-based currency]]".<ref name="HIHB2015:192">[[#HIHB2015|Irfan, ''Heaven's Bankers'', 2015]]: p.192</ref> Taqi Usmani declares that Islamic banking would mean less lending because it paid no interest on loans. This should not be thought of as presenting a problem for borrowers finding funds, because – according to Usmani – it is in part to discourage excessive finance that Islam forbids interest.<ref name="MTUHJI1999:159">[[#MTUHJI1999|Usmani, ''Historic Judgment on Interest'', 1999]]: para 159</ref> [[Zubair Hasan]] argues that the objectives of Islamic finance as envisaged by its pioneers were "promotion of growth with equity ... the alleviation of poverty ... [and] a long run vision to improve the condition of the Muslim communities across the world."<ref name="Hasan,_Zubair_2010">{{cite book|url=http://mpra.ub.uni-muenchen.de/21224/|title='Islamic finance: What does it change, what it does not? Structure-objective mismatch and its consequences|date=21 February 2010|publisher=International Centre for Education in Islamic Finance (INCEIF)}}</ref>
Some (such as Umar Ibrahim Vadillo) believe the Islamic banking movement has so far failed to follow the principles of Sharia law, or at least failed to follow them sufficiently strictly.{{#tag:ref|Umar Ibrahim Vadillo states: "For the last one hundred years the way of the Islamic reformers have led us to Islamic banks, Islamic Insurance, Islamic democracy, Islamic credit cards, Islamic secularism, etc. This path is dead. It has shown its face of hypocrisy and has led the Muslim world to a place of servile docility to the world of capitalism."<ref>{{cite web|last1=Vadillo|first1=Umar Ibrahim |title=Questionnaire for Jurisconsults, subject specialists and general public in connection with re-examination of Riba/Interest based laws by Federal Shariah Court |url=https://umarvadillo.wordpress.com/2013/10/19/answers-to-the-questions-of-the-federal-shariah-court-of-pakistan/|website=Gold Dinar and Muamalat.|date=19 October 2013|access-date=15 November 2016}}</ref>
According to critic Critic Feisal Khan "there have thus been two broad categories of critic of the current version of IBF [Islamic Banking and Finance]: the Islamic Modernist/Minimalist position, and the Islamic ultra Orthodox/Maximalist one. ... The ultra Orthodox [such as the Islamic courts in Pakistan] ... agree with the Modernist/Minimalist criticism that contemporary Islamic banking is indeed nothing but disguised conventional banking but ... agitate for a truly Islamic banking and finance system".{{sfn|Khan|2015|p=114}}|group=Note}}

On the other hand, Usmani preached that an Islamic economy free of the "imbalances" in society – such as concentration of "wealth in the hands of the few", or monopolies which paralyze or hinder market forces – would ''follow'' from obeying "divine injunctions" by banning interest (along with other Islamic efforts).<ref name="IIFTU1998:11">[[#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.11</ref> (Later in his book ''Introduction to Islamic Finance'', he argues that Islamic principles should include "the fulfillment of the needs of the society" giving "preference to the products which may help the common people to raise their standard of living", but that few Islamic banks have followed this path.)<ref name="IIFTU1998:167-8">[[#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.167-8</ref> Another source ([[Saleh Abdullah Kamel]]),{{#tag:ref|Winner of the 1997 IDB Prize in Islamic Banking|group=Note}} described the changes anticipated for the Muslim community by following Islamic approach to economics, banking, finance, etc., as a "move towards economic development, creation of the value added factor, increased exports, less imports, job creation, rehabilitation of the incapacitated and training of capable elements".<ref name="Kamel_(1998:11ff)">{{cite book|url=http://www.ieaoi.ir/files/site1/pages/ketab/english_book/71.pdf |title=Development of Islamic banking activity: Problems and prospects |publisher=Islamic Research and Training Institute, Islamic development Bank |year=1998 |location=Jeddah |last1=Kamel |first1=Saleh |access-date=22 August 2015}}</ref>

[[File:Sabaibdjib.jpg|thumb|right|A Saba Islamic Bank branch in [[Djibouti (city)|Djibouti City]]]]

===Scriptural basis===

{{further|Riba}}
The [[Sharia]] law that forms the basis of Islamic banking is itself based on the [[Quran]] (revealed to the Islamic prophet [[Muhammad]]) and ''[[hadith]]'' (the body of reports of the teachings, deeds and sayings of the Islamic prophet [[Muhammad]] that often explain verses in the Quran).<ref>{{Cite web |title=Sales and Trade - Sunnah.com - Sayings and Teachings of Prophet Muhammad (صلى الله عليه و سلم) |url=https://sunnah.com/bukhari/34 |access-date=2023-07-19 |website=sunnah.com}}</ref>
Prohibition of ''[[gharar]]'' is based on ''hadith'' declaring as forbidden ''gharar'', the sale of things like "the birds in the sky or the fish in the water".<ref name="el-gamal-2001-2">{{cite web |title=An Economic Explication of the Prohibition of Gharar in Classical Islamic Jurisprudence |first=Mahmoud A. |last=El-Gamal |date=2 May 2001 |page=2 |url=http://instituteofhalalinvesting.org/content/el-gamal/gharar.pdf |access-date=4 August 2017 |archive-url=https://web.archive.org/web/20160428043313/http://instituteofhalalinvesting.org/content/el-gamal/gharar.pdf |archive-date=28 April 2016 |url-status=dead}}</ref>{{sfn|Visser|2013|p=53}}{{#tag:ref|Several [[hadith]], in addition to prohibiting games of chance, prohibit ''bayu al-gharar'' (literally "trading in risk",<ref>{{cite web|url= http://www.muslimummah.org/articles/articles.php?itemno=208&&category=Islamic%20%20Finance |title=Basic Principles of Islamic Finance |website=muslimummah.org|access-date=12 February 2015 |url-status=dead |archive-url= https://web.archive.org/web/20141219130819/http://www.muslimummah.org/articles/articles.php?itemno=208&&category=Islamic%20%20Finance |archive-date=2014-12-19}}</ref>{{better source needed|date=February 2021}} defined as sales in which gharar is the major component).<ref name=el-gamal-2001-3/> Jurists have distinguished between this kind of gharar, and ghasar considered minor (''yasir'') and so permissible (''[[halal]]''),<ref name=el-gamal-2001-3>[http://www.ruf.rice.edu/~elgamal/files/gharar.pdf An Economic Explication of the Prohibition of Gharar in Classical Islamic Jurisprudence] | Mahmoud A. El-Gamal | First version: 2 May 2001</ref> but disagree over what constitutes ''gharar'' that is minor and ''gharar'' that is substantial, (at least according to one source, Abu Umar Faruq Ahmad),<ref name="TaPoMIF-98-9">{{cite book|url=https://books.google.com/books?id=wRlI0nJp5mEC&q=%22Gharar+is+where+the+buyer+does+not+know+what+he+bought%2C+or+the+seller+does+not+know+what+he+sold%22&pg=PA99 |title=Theory and Practice of Modern Islamic Finance: The Case Analysis from Australia|date=2010 |publisher=Universal-Publishers|pages=98–99 |last1=Abu Umar Faruq Ahmad|access-date=17 May 2017|isbn=9781599425177}}</ref> 
have not agreed on an exact definition of the meaning and concept of ''gharar''.<ref name="AL-SUWAILEM">{{cite journal|title=Towards an objective measure of ''gharar'' in exchange |journal=Islamic Economic Studies|volume=7|issue=1, (October 1999); 2, (April 2000)|pages=61–102|last1=Al-Suwailem |first1=Sami |url=http://www.irti.org/English/Research/Documents/IES/119.pdf |access-date=1 August 2016|archive-url=https://web.archive.org/web/20170816233704/http://www.irti.org/English/Research/Documents/IES/119.pdf |archive-date=16 August 2017|url-status=dead}}</ref>|group=Note}} ''[[Maisir]]'' is thought to be banned by verses 2:219, 5:90, and 91 in the Quran.{{sfn|Visser|2013|p=53}}

However, "the Islamic evaluation" of modern banking centers around the definition of interest on loans<ref>{{Cite book|url=https://books.google.com/books?id=OZqJAAAAMAAJ|title=Muslim Economic Thinking: A Survey of Contemporary Literature|last=Siddiqi|first=Muhammad Nejatullah|date=1981|publisher=International Centre for Research in Islamic Economics, King Abdul Aziz University|isbn=9780860370819|pages=29|language=en}}</ref> as ''riba.'' Twelve verses in the Qur'an deal with ''riba'', the word appearing eight times in total, three times in verses {{qref|2|275|pl=y}}, and once in {{qref|2|276|pl=y}}, {{qref|2|278|pl=y}}, {{qref|3|130|pl=y}}, {{qref|4|161|pl=y}} and {{qref|30|39|pl=y}}.<ref name="RBIRPMNS2004:35">Siddiqi, ''Riba, Bank Interest'', 2004: p.35</ref> ''Riba'' is mentioned numerous times in ''[[hadith]]'', including Muhammad's [[Farewell Sermon]].

A number of orthodox scholars point to Quranic verses (2:275–2:280) as declaring ''riba'' "categorically prohibited" and "unjust" (''zulm''), and defining it to mean any payment "over and above the principal" of a loan.<ref name="RBIRPMNS2004:36">Siddiqi, ''Riba, Bank Interest'', 2004: p.36</ref><ref name="mufti">{{cite web|last1=Seifeddine|title=Surah al-Baqarah, 275–281|url=http://www.muftisays.com/blog/Seifeddine-M/2093_11-10-2011/surah-albaqarah-275281.html|website=muftisays.comm|access-date=14 April 2015|archive-url=https://web.archive.org/web/20150401132438/http://www.muftisays.com/blog/Seifeddine-M/2093_11-10-2011/surah-albaqarah-275281.html|archive-date=1 April 2015|url-status=dead}}</ref> (Although at least one source states "it is commonly argued" that ''riba'' is "defined by hadith".)<ref name="MOFRI6H2009:105">Farooq, ''Riba, Interest and Six Hadiths'', 2009: p.105</ref>

{{Blockquote|text=Those who consume interest will stand ˹on Judgment Day˺ like those driven to madness by Satan’s touch. That is because they say, “Trade is no different than interest.” But Allah has permitted trading and forbidden interest. Whoever refrains—after having received warning from their Lord—may keep their previous gains, and their case is left to Allah. As for those who persist, it is they who will be the residents of the Fire. They will be there forever. <br />Allah has made interest fruitless and charity fruitful. And Allah does not like any ungrateful evildoer. <br />Indeed, those who believe, do good, establish prayer, and pay alms-tax will receive their reward from their Lord, and there will be no fear for them, nor will they grieve. <br />O believers! Fear Allah, and give up outstanding interest if you are ˹true˺ believers. <br />If you do not, then beware of a war with Allah and His Messenger! But if you repent, you may retain your principal—neither inflicting nor suffering harm.<br />If it is difficult for someone to repay a debt, postpone it until a time of ease. And if you waive it as an act of charity, it will be better for you, if only you knew.|author={{qref|2|275–280|c=y}}}}

According to the orthodox, an "increase over the principal sum" in ''loans of cash'' is riba. An increase over the principal sum in ''financing a purchase'' of some product or commodity is another matter. These are ''not'' riba according to the orthodox interpretation – at least in some circumstances.<ref name="IIBI-murabaha">{{cite web |url=http://www.islamic-banking.com/murabaha_sruling.aspx |title=Q. What is Murabaha? |website=Institute of Islamic Banking and Insurance |access-date=31 August 2016 |archive-url=https://web.archive.org/web/20160831194438/http://www.islamic-banking.com/murabaha_sruling.aspx |archive-date=31 August 2016 |url-status=dead }}</ref> (These are sometimes known as "credit sales".) According to noted Islamic scholar [[Taqi Usmani]], this is because in [[Quran]] aya 2:275 ("they say, 'Trafficking (trade) is like usury,' [but] God has permitted trafficking, and forbidden usury")<ref name="2:275">{{Cite web|url=https://quran.com/al-baqarah/275|title=Surah Al-Baqarah - 275 |publisher=Quran.com}}</ref> "trafficking (trade)" refers to credit sales such as ''[[murabaha]]'', the "forbidden usury" refers to charging extra for late payment ([[late fee]]s), and the "they" refers to non-Muslims who did not understand why if the first was allowed both were not.<ref name="MTUHJI1999:50,51,219">[[#MTUHJI1999|Usmani, ''Historic Judgment on Interest'', 1999]]: paras 50, 51, 219</ref>{{#tag:ref|Monzer Kahf argues that the Quranic verse (in 2:275) where non-Muslims complain – "... they say, 'Trade is [just] like interest.' But Allah has permitted trade and has forbidden interest" – refers to credit sales.<ref name=kahf-2007/>|group=Note}} For this reason (according to Usmani) it is ''not'' true that "whenever price is increased taking the time of payment into consideration, the transaction comes within the ambit of interest".<ref name="PCCS"/> Instead of "principal" and "interest rate", the credit taker is paying "cost" and "profit rate".<ref name="IIBI-murabaha"/> (Another difference with conventional finance is that there is no penalty for late payment.){{#tag:ref|Taqi Usmani explains that in such transactions "the whole price ... is against a commodity and not against money" and so "... once the price is fixed, it relates to the commodity, and not to the time". Consequently "the price will remain the same and can never be increased by the seller." If the price had "been against time", (which is forbidden) "it might have been increased, if the seller allows ... more time" for repayment when the bill is past due.<ref name="MTUHJI1999:224">[[#MTUHJI1999|Usmani, ''Historic Judgment on Interest'', 1999]]: para 224</ref>|group=Note}}

===Interest and credit sales===
While Usmani and other Islamic banking pioneers envisioned credit sales like ''murâbaḥah'' being a limited part of the Islamic banking industry and subordinate to [[profit and loss sharing]], it has become the "most common" mode of Islamic financing.<ref name="IIBI-murabaha"/><ref name="Irfan-2015-139">{{cite book|last1=Irfan|first1=Harris|title=Heaven's Bankers|date=2015|publisher=Overlook Press|page=139}}</ref><ref name="IFIM">{{cite book|title=Islamic Finance: Instruments and Markets|date=2010|publisher=Bloomsbury Publishing|page=131|url=https://books.google.com/books?id=YxPVBAAAQBAJ&q=Murabahah&pg=PA131|access-date=4 August 2015|isbn=9781849300391}}</ref><ref>{{cite web|url=http://www.mohammedamin.com/Islamic_finance/Simple-introduction-to-Islamic-mortgages.html|title=A Simple Introduction to Islamic Mortgages|date=14 May 2015}}</ref>

The distinction between credit sales and interest has also come under attack from critics such as Khalid Zaheer and Muhammad Akram Khan, criticizing it from opposite points of view. Zaheer considers profit from credit sales to be ''riba'', the same as interest, and notes the lack of enthusiasm of orthodox scholars (such as the [[Council of Islamic Ideology]]) for credit sales-based Islamic banking, which the Council calls "no more than a second best solution from the viewpoint of an ideal Islamic system".<ref name="KH-CS">{{cite web|title=Is charging more on credit sales (Murabaha) permissible?|url=http://www.khalidzaheer.com/qa/109|website=Khalid Zaheer|access-date=31 August 2016}}</ref>
Khan calls the distinction "frivolous and laboured", a way of charging interest using another name, necessary because businesses "cannot survive where cash and credit prices are equal".{{sfn|Khan|2013|pp=197. 199}}
Others note that in terms of [[standard accounting practice]] and [[Truth in Lending Act|truth-in-lending regulations]],{{#tag:ref|"Indeed, truth-in-lending regulations in the United States force Islamic and conventional financiers to report the implicit interest rates they charge their customers in such financing arrangements."<ref name=MeGIFLEP2006:52>[[#MeGIFLEP2006|El-Gamal, ''Islamic Finance'', 2006]]: p.52</ref><ref name="El-Gamal-2006-52">{{cite book|last1=El-Gamal|first1=Mahmoud A.|title=Islamic Finance: Law, Economics, and Practice|date=2006|publisher=Cambridge University Press.|page=52|url=https://books.google.com/books?id=2ElRUvoVRxYC&q=Ibn+Rushd+on+riba&pg=PA51|access-date=14 September 2016|isbn=9781139457163}}</ref>|group=Note}} getting 90 days credit on a Rs 10000 product and paying an extra Rs 500, cost very nearly the same and is considered very nearly the same as paying in cash, using a three-month loan at 20% per annum.

Taqi Usmani, however, explains that this is a "misconception". 
Paying more for credit when buying a product ("an exchange of commodities for money")<ref name="IMaBIMiCT-116"/>{{sfn|Khan|2013|p=197}} does not violate Sharia law, but exchange of "one unit of money for another of the same denomination" ("an exchange of money for money")<ref name="IMaBIMiCT-116">{{cite book|last1=Toutounchian|first1=Iraj|title=Islamic money and banking: Integrating money in capital theory.|date=2009|publisher=John Wiley & Sons (Asia) |location=Singapore|page=116}}</ref> and charging for credit ''is'' a violation of Sharia.<ref name="PCCS">{{cite web|last1=Usmani|first1=Muhammad Taqi|title=Pricing for Cash and Credit Sales|url=https://www.islamicbanker.com/education/pricing-cash-and-credit-sales|website=Islamic Banker|access-date=29 August 2016|archive-date=20 November 2016|archive-url=https://web.archive.org/web/20161120011438/https://www.islamicbanker.com/education/pricing-cash-and-credit-sales|url-status=dead}}</ref> The cash loan is different because "money has no intrinsic utility".<ref name="PCCS"/>

Other orthodox supporters (such as Kahf) have defended the Sharia-compliance of the practice saying that among other things, attaching commodities to money in finance prevents money from being used for speculative purposes.<ref name="kahf-2007">{{cite web |last1=Kahf |first1=Monzer |title=Islamic finance: Business as usual |date=c. 2007 |url=http://www.nzibo.com/IB2/Kahf.pdf |access-date=31 August 2016 |archive-date=20 October 2016 |archive-url=https://web.archive.org/web/20161020124626/http://www.nzibo.com/IB2/Kahf.pdf |url-status=dead }}</ref> Critics report widespread abuses of "synthetic" ''murabaha'', which are loans with interest in all but name.<ref name="Vogel and Hayes, pp.8-9">Frank VOGEL and Samuel Hayes, III. Islamic Law and Finance: Religion, Risk and Return [The Hague: Kluwer Law International, 1998], pp.8–9</ref><ref name="MOFRIE-2005:19">[[#HIHB2015|Farooq, ''Riba-Interest Equation and Islam'', 2005]]: p.19</ref>

===Types of Islamic lending===

One of the pioneers of Islamic banking, [[Mohammad Najatuallah Siddiqui]], suggested a two-tier ''mudarabah'' model as the basis of a ''riba''-free banking. The bank would act as the capital partner in ''mudarabah'' accounts with the depositor on one side and the entrepreneur on the other side.<ref name="CMPCM">{{cite web|last1=Curtis|title=Islamic Banking: A Brief Introduction|url=http://omanlawblog.curtis.com/2012/07/islamic-banking-brief-introduction.html|website=Oman Law Blog|publisher=Curtis, Mallet-Prevost, Colt & Mosle LLP|access-date=10 August 2015|date=3 July 2012}}</ref> (Another pioneer Taqi Uthmani called ''mudarabah'' and another profit-sharing form of finance ''musharakah'', the "real and ideal instruments of financing in Shari‘ah".)<ref name=IIFTU1998:12/> This model would be supplemented by a number of fixed-return models—mark-up (''murabaha''), leasing (''ijara''), cash advances for the purchase of agricultural produce (''salam'') and cash advances for the manufacture of assets (''istisna'''), etc. In practice, the fixed-return models, in particular the ''[[murabaha]]'' model, became the industry staples, not supplements, as they bear results most similar to interest-based finance models. Assets managed under these products far exceed those in "[[Profit and loss sharing|profit-loss-sharing]] modes" such as ''mudarabah'' and ''musharakah''.{{sfn|Khan|2013|p=275}}

===Time value of money===
The [[time value of money]]{{sfn|Khan|2013|pp=200-203}} – the idea that there is greater benefit in receiving money now rather than later, so that savers/investors/lenders should be compensated for delayed gratification – has been called one of the "most significant" arguments in favor of charging interest on loans.{{sfn|Khan|2013|p=200}} As such, some Islamic finance supporters have opposed the concept, arguing that some consumption, such as eating, can only be done over time, and discounting for time encourages negative outcomes such as [[desertification]], since the desertification comes in the discounted future.<ref name="irfan-196">{{cite book |last1=Irfan|first1=Harris|title=Heaven's Bankers: Inside the Hidden World of Islamic Finance|date=2015|publisher=Little, Brown Book Group.|page=196 |url=https://books.google.com/books?id=uJ3ABAAAQBAJ&q=nizam|access-date=28 October 2015|isbn=9781472105066}}</ref> 
However, since Islamic banking also calls for rewarding delayed gratification in the form of "return on investment" on both profit-sharing and credit sales, Islamic scholars and economists have tended to insist that time value of money is a valid concept "provided the rate of discount is the 'rate of return' on capital rather than the rate of interest," a position critics find specious.{{sfn|Khan|2013|p=200}}<ref name="Zarqa-1983">{{cite book |last1=Zarqa |first1=M. Anas |date=1983 |chapter=An Islamic perspective on the Economics of discounting in project evaluation. |title=Fiscal policy and resource allocation in Islam |editor1=Ziauddin Ahmed |editor2=Munawar Iqbal |editor3=M. Fahim Khan |location=Jeddah |publisher=International Centre for Research in Islamic Economics, King Abdulaziz University; and Islamabad: Institute of Policy studies}}</ref><ref name="M.F.Khan-1991">{{cite journal |last1=Khan |first1=Muhammad Fahim |title=The value of money and discounting in the Islamic perspective |journal=Review of Islamic Economics |volume=1 |issue=2 |pages=35–45}}</ref><ref name="TVMCiIF2009">{{cite journal |last1=Ahmad and|first1=Abu Umar Faruq|last2=Hassan|first2=M. Kabir|title=The Time Value of Money Concept in Islamic Finance|date=2009|journal=The American Journal of Islamic Social Sciences |volume=23 |issue=1 |url=http://iefpedia.com/english/wp-content/uploads/2009/11/The-Time-Value-of-Money-Concept-in-Islamic-Finance.pdf|access-date=31 August 2016}}</ref>

===Early payment of debt===
The opposite of credit sales (i.e. the opposite of charging more in exchange for giving the buyer time to pay) is reduced charges for early payment. This is considered ''[[haram]]'' by the four Sunni schools of jurisprudence (''[[Hanafi]]'', ''[[Maliki]]'', ''[[Shafi'i]]'', ''[[Hanbali]]''), but not by all jurists according to Ridha Saadullah. He notes that such reductions have been permitted by some companions of [[Muhammad|the Prophet]] and some of their followers. This position has been advanced by [[Ibn Taymiyya]] and [[Ibn al-Qayyim]], and it has, more recently, been adopted by the Islamic ''[[Fiqh]]'' Academy of the [[Organisation of Islamic Cooperation|OIC]]. The Academy decided that "reduction of a deferred debt in order to accelerate its repayment, whether at the request of the debtor or the creditor is permissible under ''Shariah''. It does not constitute forbidden ''riba'' if it is not agreed upon in advance and as long as the creditor-debtor relationship remains bilateral."<ref>(Islamic Fiqh Academy, 7th session, 1992, Resolution 66/2/77)</ref><ref name="Saadullah-1994:7">{{cite journal |last=Saadullah |first=Ridha |date=1994 |title=Concept of time in Islamic economics |journal=Islamic Economic Studies |volume=2 |issue=1 |pages=1–15}}</ref>

=== Islamic laws on trading ===
[[File:IDB Dhaka.jpg|thumb|right|An Islamic Development Bank branch in [[Dhaka]]]]
{{main|Sharia and securities trading}}

As noted above, the primary focus of Islamic banking is on financing without interest to avoid ''riba'',<ref name=MNSMET1981/> while trade is not an issue (per the [[Quran]]ic statement that ''"God has permitted trade and forbidden riba [usury]"''.<ref name=2:275/> However trade transactions that involve [[gambling]] (''[[maisir]]''), or excessive risk (''bayu al-[[gharar]]'') are ''not'' permitted. Among the financial instruments and activities common in conventional finance that are considered forbidden (or at least Islamically problematic) by many Islamic scholars and Muslims are: 
*[[Margin (finance)|Margin trading]]: using borrowed money to buy shares of stock or other financial instruments. It both involves forbidden interest on the borrowed money,<ref name=dummies-FMTaIF/> and much greater risk than non-margin investing because losses can be greater than the amount borrowed.<ref name="MG-2005">{{cite web|title=Investing in stock market: the Shariah way|url=http://www.milligazette.com/Archives/2005/01-15July05-Print-Edition/011507200530b.htm|website=Milli Gazette|access-date=21 October 2017|date=1–15 July 2005}}</ref>
*[[Short (finance)|Short selling]]: borrowing/renting shares of stock or some other instruments and selling it, sometimes without possessing it, on the hope that it can be later repurchased at a lower price for a profit. It is traditionally thought to violate the hadith stating "Do not sell which you do not possess," and has been declared impermissible by numerous sources (Raj Bhala,<ref name="Bhala-26.05">{{cite book|last1=Bhala|first1=Raj|title=Understanding Islamic Law |date=2011|publisher=LexisNexis |chapter-url=https://books.google.com/books?id=P8MuP_POzh0C&q=example+of+trading+forbidden+as+gharar&pg=PT552 |access-date=18 May 2017|chapter=26.05|isbn=9781579110420}}</ref> Taqi Usmani,<ref name="IIFTU1998:11"/> Humayon Dar<ref name="Dar-2012">{{cite web|last1=Dar|first1=Humayon|title=Short-Selling in Islamic Finance|url=https://www.youtube.com/watch?v=XbG0kAWjz-0  |archive-url=https://ghostarchive.org/varchive/youtube/20211211/XbG0kAWjz-0| archive-date=2021-12-11 |url-status=live|website=youtube |access-date=16 October 2017 |publisher=Islamic Institute of Banking and Insurance |date=16 February 2012}}{{cbignore}}</ref>).
*[[Day trading]]: very short term buying and selling of financial instruments. It has been called un-Islamic because the short period of "ownership" means day traders do not truly own what they trade, and furthermore pay interest.<ref name="fsb">{{cite web|title=UAE System, Laws and Regulations for Foreign Investors, Permitted Activities|url=http://www.fbsemirates.com/uae-system-laws-and-regulations-for-foreign-investors-permitted-activities/|website=Focus Business Services|date=9 December 2013 |access-date=18 May 2017}}</ref> Among the sources calling it un-Islamic include Yusuf Talal DeLorenzo,<ref name="DeLorenzo-day">{{cite web|last1=DeLorenzo |first1=Yusuf Talal |title=Day Trading in Stocks vs. Investment|url=https://muslim-investor.com/answers/day-trading-vs-investment.html |website=muslim-inestor.com |access-date=18 May 2017}}</ref> and Focus Business Services of the UAE.<ref name="fsb"/>
*[[Derivative (finance)|Derivatives]]: contracts that derive their value from the performance of an underlying asset. (The "notional value" of the world's over-the-counter derivatives at the end of 2007 was $596 trillion and the gross market value of all outstanding derivatives was $14.5 trillion.)<ref>{{cite news |url=http://www.slate.com/articles/news_and_politics/explainer/2008/10/596_trillion.html |work=slate.com |last1=Leibenluft |first1=Jacob |date=15 October 2008 |title=$596 Trillion! |access-date=8 August 2017}}</ref> Options, futures and "other derivatives" are "generally" not used in Islamic finance "because of the prohibition against maisir".<ref name="TRPL">{{cite web|title=Maisir|publisher=Thomson Reuters|url=https://uk.practicallaw.thomsonreuters.com/9-500-7087?transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1|website=uk.practicallaw.thomsonreuters.com|access-date=19 October 2017}}</ref> Sources stating that most derivative or some kinds of derivative are banned by Islamic scholars include Juan Sole and Andreas Jobst,<ref name="Sole-2012-4">Solé, Juan A. and Jobst, Andreas (Andy), Operative Principles of Islamic Derivatives – Towards a Coherent Theory (March 2012). IMF Working Paper No. NO.12/63. Available at SSRN: https://ssrn.com/abstract=2028239</ref> P. S. Mills and J. R. Presley,<ref name="Mills and Presley 1999">{{cite book|title=Islamic Finance: Theory and Practices|last2=Presley |first2=J.R.|date=1999|publisher=St. Martins Press|location=New York|last1=Mills|first1=P.S.}}</ref>{{sfn|Khan|2015|p=111}} Taqi Usmani,<ref name="INCEIF">{{cite web |last1=bin Kamaruzdin |first1=Thaqif |title=Derivatives and Islamic Finance |url=http://www.inceif.org/research-bulletin/derivatives-islamic-finance/ |website=INCEIF |access-date=16 June 2017 |date=15 October 2014 |archive-url=https://web.archive.org/web/20170816233744/http://www.inceif.org/research-bulletin/derivatives-islamic-finance/ |archive-date=16 August 2017 |url-status=dead }}</ref> and [[Investopedia]].<ref name="investo-terms">{{cite web |title=Gharar |url=http://www.investopedia.com/terms/g/gharar.asp |website=Investopedia|access-date=18 May 2017}}</ref> The most commonly used<ref name="FJIFD2012:183"/> derivatives are: 
**[[Forward contract|forwards]]: customized contracts to buy or sell an asset at a specified price on a future date. unlike futures contracts forward contracts are not traded on any exchanges; 
**[[Futures contract|futures]]: a legal agreement to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future; 
**[[Option (finance)|options]]: contracts offering the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date); and
**[[Swap (finance)|swaps]]: contracts through which two parties exchange financial instruments to transfer risk.

On the other hand, at least one Islamic scholar (Mohammed Hashim Kamali) finds "nothing inherently objectionable" in selling and using options, which like other kinds of trade is ''[[mubah]]'' (permissible) in [[fiqh]], and "simply an extension of the basic liberty that the Quran has granted".<ref>Kamali, M.H. (1997) "Islamic commercial law: an analysis of options", ''The American Journal of Islamic Social Sciences'', v.14 n.3, pp. 17–18</ref> Both Islamic finance practitioners and critics find benefit in at least some uses of derivatives and short selling – managing risk in times of financial trouble<ref name="Y-Sing">{{cite news|last1=Y-Sing|first1=Liau|title=ANALYSIS – Derivatives dispute divides Islamic finance market|url=http://in.reuters.com/article/idINIndia-37874420090206|archive-url=https://web.archive.org/web/20090220220220/http://in.reuters.com/article/idINIndia-37874420090206|url-status=dead|archive-date=20 February 2009|access-date=19 May 2017|work=Reuters|date=6 February 2009}}</ref> and improving market efficiency and employee productivity.<ref name="Jobst-5-2008">{{cite journal|title=Derivatives in Islamic Finance|url=http://www.eurekahedge.com/NewsAndEvents/News/728/Derivatives_in_Islamic_Finance|journal=Islamic Finance News|volume=4|issue=50|last1=Jobst|first1=Andreas A|access-date=19 May 2017}}</ref>

At least some in the Islamic finance industry use derivatives and make short sales, and the permissibility of this is a subject of "heated debate".<ref name="Kettell-2010">{{cite book|last1=Kettell|first1=Brian|title=Frequently Asked Questions in Islamic Finance|date=2010|publisher=John Wiley & Sons.|chapter-url=https://books.google.com/books?id=QKgF8TPpr9AC&q=maisir+Derivatives&pg=PT105|access-date=19 October 2017|chapter=4. Derivatives and Islamic Finance|isbn=9780470711897}}</ref>
Global standards for trading Islamic profit-rate and [[currency swap]] [[derivative (finance)|derivatives]] were set in 2010 with the "Hedging Master Agreement"<ref name="hma">{{Cite web |title=Hedging Master Agreement |url=http://www.isda.org/media/press/2010/press030110.html |access-date=12 October 2017 |archive-url=https://web.archive.org/web/20171014083539/http://www.isda.org/media/press/2010/press030110.html |archive-date=14 October 2017 |url-status=dead }}</ref><ref name="GIF-2010">{{cite news|title=ISDA, IIFM Set Global Islamic Derivatives Standards|url=http://www.global-islamic-finance.com/2010/03/isda-iifm-set-global-islamic.html|access-date=21 July 2016|agency=Bloomberg|publisher=Global Islamic Finance|date=3 March 2010}}</ref><ref name="iran-daily.com">[http://www.iran-daily.com/1388/12/11/MainPaper/3630/Page/5/Index.htm iran-daily.com]| (click on "Islamic Derivatives Standards Set")| 2 March 2010</ref> (see below).
A "Shariah-certified" short-sale had been created by some Shariah-compliant hedge funds.{{sfn|Khan|2015|p=111}}<ref name="Morais 2007:132">{{cite journal |last1=Morais |first1=R.C. |date=23 July 2007 |journal=Forbes |title=Don't call it interest |url=https://www.forbes.com/forbes/2007/0723/122.html |page=132 |access-date=11 June 2017}}</ref> However, both have been criticized as un-Islamic.{{sfn|Khan|2015|p=111}}<ref name="Morais 2007:132"/>

===Justification for Islamic banking ===
It has been praised – or at least described positively – for 
*turning a "theory" into a trillion dollar<ref name="FosterMM2010">{{cite news |url=https://news.bbc.co.uk/2/hi/business/8401421.stm |last1=Foster |first1=John |title=How Sharia-compliant is Islamic banking? |agency=BBC News |date=11 December 2009 |access-date=24 November 2017}}</ref><ref name="farooq-130">{{cite web
 |last=Farooq
 |first=M.O.
 |title=Riba, Interest and Six Hadiths: Do We Have a Definition or a Conundrum?
 |url=https://financelish.com/what-is-riba-in-islam-and-why-it-matters-more-than-you-think/
 |website=Financelish
 |publisher=Review of Islamic Economics
 |volume=13
 |issue=1
 |page=130
 |date=2009
 |access-date=2025-10-31
 |language=en
}}</ref>
<ref name="IIFTU1998:162-3">[[#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.162-3</ref> "reality", asserting the presence Islam in international financial markets (according to Taqi Usmani);<ref name="IIFTU1998:162-3"/>
*enriching the Islamic legal system by providing it with real world business questions to find shariah-compliant solutions for (Usmani);<ref name="IIFTU1998:162-3"/> 
*creating an "ethical, sustainable, environmentally- and socially-responsible" system (according to Abayomi A. Alawode);<ref name="Alawode-WB-2015">{{cite web|last1=Alawode|first1=Abayomi A.|title=Islamic Finance|url=http://www.worldbank.org/en/topic/financialsector/brief/islamic-finance|website=World Bank|access-date=9 November 2017|date=31 March 2015}}</ref>
*drawing conventional banks into the industry in search of Muslim customers (Munawar Iqbal and Philip Molyneux);{{#tag:ref|"Another achievement of Islamic banking may be gauged from the fact that many conventional banks have also started using Islamic banking techniques in the conduct of their business, particularly in dealing either with Muslim clients or in dominantly Muslim regions."<ref name="[Iqbal and Molyneux, p. 58]">Munawar IQBAL and Philip Molyneux. Thirty Years of Islamic Banking: History, Performance and Prospects [Palgrave, 2005], p.58</ref>{{sfn|Farooq|2005|pp=12-13}}|group=Note}}
*drawing new customers and money into banking, rather than taking existing customers and their money away from conventional banking, (Laurent Gheeraert);<ref name="Gheeraert-2014">{{cite journal|last1=Gheeraert|first1=Laurent |title=Does Islamic finance spur banking sector development? |journal=Journal of Economic Behavior & Organization|date=July 2014 |volume=103|issue=Supplement|pages=S4–S20 |doi=10.1016/j.jebo.2014.02.013 }}</ref>
*creating a less risky form of finance (according to Zeti Akhtar Aziz and others): 
**by forbidding speculation,<ref name="Bahru-5-5-15">{{cite news|date=5 January 2013|title=Banking on the ummah|url=https://www.economist.com/news/finance-and-economics/21569050-malaysia-leads-charge-islamic-finance-banking-ummah|newspaper=The Economist|volume=406|issue=8817|page=60|last1=Bahru|first1=Johor|access-date=5 May 2015}}</ref> so that, for example, the excesses that led to the [[2008 financial crisis]] are avoided (according to Ibrahim Warde);<ref name="Sergie-cfr-2014">{{cite journal|last1=Sergie|first1=Mohammed Aly|title=The Rise of Islamic Finance|journal=Council on Foreign Relations|date=30 January 2014|url=https://www.cfr.org/backgrounder/rise-islamic-finance|access-date=9 November 2017}}</ref>
**and by use of two kinds of accounts:{{sfn|Khan|2013|pp=329-330}}
***"current accounts" – where funds earn no return and (in theory) are held, not invested by the bank, so not subject to risk;{{sfn|Khan|2013|pp=329-330}}
***and ''mudarabah'' accounts – where the depositors share in any losses with the bank, so diminishing the bank's risk.{{sfn|Khan|2013|p=330}}
*While the industry has problems and challenges, these can be explained by
**its relative youth and low position on the "[[learning curve]]" that will solve these difficulties over time;<ref name="IIFTU1998:xviii">[[#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.xviii</ref><ref name="auto">{{cite book |last=Ahmad |first=A. |year=1993 |title=Contemporary Practices of Islamic Financing Techniques |series=Research Paper #20 |location=Jedddah |publisher=Islamic Research and Training Institute, Islamic Development Bank |url=http://www.irti.org/English/Research/Documents/IES/154.pdf |access-date=6 June 2017 |archive-date=17 May 2017 |archive-url=https://web.archive.org/web/20170517134948/http://www.irti.org/English/Research/Documents/IES/154.pdf |url-status=dead }}</ref> and by
**non-Islamic influences which can only be eliminated when the industry operates in a truly Islamic society and environment.{{sfn|Farooq|2005|p=36}}

==Industry framework==
Islamic financial institutions take different forms. They may be:
#Full-fledged Islamic financial institutions (for example [[Islami Bank Bangladesh Ltd]], [[Meezan Bank]] in Pakistan);{{sfn|Khan|2013|p=290}}
#Islamic "windows" – i.e. separate, sharia-compliant units<ref name="FJIFD2012:53">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:53</ref> – in conventional financial institutions (for example: [[HSBC]] – HSBC Amanah, [[American Express Bank]], [[ANZ Grindlays]], [[BNP-Paribas]], [[Chase (bank)|Chase Manhattan]], [[UBS]], Kleinwort Benson, Commercial Bank of Saudi Arabia, [[Ahli United Bank Kuwait]], [[Riyad Bank]]);{{sfn|Khan|2013|p=290}} (Scholars debate the Sharia compliance of this form, according to Faleel Jamaldeen, "primarily" because of "where" the funds for these windows come from.<ref name="FJIFD2012:121">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:121</ref>);
#Islamic subsidiaries of conventional financial institutions (for example: [[Citibank]] subsidiary Citi Islamic Investment Bank (Bahrain), [[Union Bank of Switzerland]] subsidiary Noriba Bank); or {{sfn|Khan|2013|p=290}}
#in India, Islamic non-banking financial institutions ([[NBFC & MFI in India|NBFCs]]).

===Size and locations===

{| class="wikitable floatright" 
|+ id="market-share-table-caption" | Percentage of world market share of Islamic banking industry by country, 2014<ref name="ey-2016">{{cite web|title=World Islamic Banking Competitiveness Report 2016. Participation industry footprint|url=http://www.ey.com/Publication/vwLUAssets/ey-world-islamic-banking-competitiveness-report-2016/$FILE/ey-world-islamic-banking-competitiveness-report-2016.pdf|website=ey.com|access-date=21 September 2016|page=12|archive-date=19 June 2018|archive-url=https://web.archive.org/web/20180619000548/http://www.ey.com/Publication/vwLUAssets/ey-world-islamic-banking-competitiveness-report-2016/$FILE/ey-world-islamic-banking-competitiveness-report-2016.pdf|url-status=dead}}</ref>
|-
! scope="row" | Saudi Arabia
| 33
|-
! scope="row" | Malaysia
| 15.5
|-
! scope="row" | UAE
| 15.4
|-
! scope="row" | Kuwait
| 10.1
|-
! scope="row" | Qatar
| 8.1
|-
! scope="row" | Turkey
| 5.1
|-
! scope="row" | Indonesia
| 2.5
|-
! scope="row" | Bahrain
| 1.6
|-
! scope="row" | Pakistan
| 1.4
|-
! scope="row" | Rest of the world
| 7.3
|}

Sharia-compliant banking grew at an annual rate of 17.6% between 2009 and 2013, faster than conventional banking,<ref name="The Economist"/> and is estimated to be $2 trillion in size,<ref name="The Economist"/> but at 1% of total world banking,<ref name="The Economist"/><ref name="islamic-finance-2014"/><ref name="Hasan_2010_3-4">see also: Hasan, Maher and Jemma Dridi (2010). ''The effects of the global crisis on Islamic and conventional banks: A comparative study. IMF working paper WP 10/201, September . Washington, DC: International Monetary Fund. p.3-4''</ref> still much smaller than the conventional sector.

As of 2010, Islamic financial institutions operate in 105 countries. Statistics differ on which country has the largest Islamic banking sector. According to the 2016 World Islamic Banking Competitiveness Report (see table), [[Saudi Arabia]], [[Malaysia]], [[United Arab Emirates]], [[Kuwait]], [[Qatar]], and [[Turkey]] represented over 87% of international Islamic banking assets.<ref>[http://www.mifc.com/index.php?ch=28&pg=72&ac=58&bb=uploadpdf World Islamic Banking Competitiveness Report 2013–14] {{Webarchive|url=https://web.archive.org/web/20140314090532/http://www.mifc.com/index.php?ch=28&pg=72&ac=58&bb=uploadpdf |date=14 March 2014 }} EY Global Centre of Excellence, Bahrain</ref> A 2006 report by ISI Analytics also lists Saudi Arabia at the top and Iran as insignificant.<ref name="askari-2010">Askari, Hossein, Zamir Iqbal and Abbas Mirakhor. 2010. ''Globalization and Islamic finance: Convergence, prospects and challenges.'' Singapore: John Wiley & Sons (Asia). cited in ...</ref>{{sfn|Khan|2013|p=5}} In Qatar, Islamic banking assets were valued at $97 billion at the end of 2017, accounting for nearly 81% of total Islamic finance assets, according to QFC Authority chief executive officer Yousuf Mohamed al-Jaida.<ref>{{Cite news|url=https://gulf-times.com/story/624607|title=Islamic banking assets in Qatar valued at $97bn by end-2017: QFC Authority CEO|date=2019-03-11|website=Gulf-Times|language=ar|access-date=2019-03-21}}</ref> The country also announced the launch of an energy-focused Islamic bank with $10 billion capital in 2019, which would make it the biggest Islamic lender for energy projects in the world.<ref>{{Cite news|url=https://www.reuters.com/article/us-qatar-energy-bank-idUSKCN1R00MR|title=Qatar to launch energy-focused Islamic bank with $10 billion capital|date=2019-03-19|work=Reuters|access-date=2019-03-21|language=en}}</ref>

However, according to Ibrahim Warde, Shia-majority Iran dominates Islamic banking with $345 billion in Islamic assets, Saudi Arabia with $258 billion, Malaysia $142 billion, Kuwait with $118 billion and UAE with $112 billion. Islamic banks in the UAE also provide Islamic investment programs which are Shariah compliant.{{sfn|Khan|2013|p=290}}<ref name="IFGE2010:1">[[#IFGE2010|Warde, ''Islamic finance in the global economy'', 2000]]: p.1</ref> And according to [[Reuters]], [[List of banks in Iran|Iranian banks]] accounted for "over a third" of the estimated worldwide total of Islamic banking assets, (although sanctions have hurt Iran's banking industry and "its Islamic financial system has evolved in ways that will complicate ties with foreign banks"). According to the latest central bank data, Iran's banking assets as of March 2014 totalled 17,344 trillion riyals or $523 billion at the free market exchange rate.<ref name="Reuters-iran">{{cite news |title=MIDEAST MONEY-Iran's isolated banks may have slow, painful return to global system |url=https://www.reuters.com/article/iran-banks-idUSL5N0XV0BY20150512 |access-date=3 August 2015 |work=Reuters |date=12 May 2015}}</ref><ref>{{cite web |url=http://www.thebanker.com/news/fullstory.php/aid/6129/Iran_dominates_sharia_ranking_as_newcomers_make_their_mark.html |title=Home |author=The Banker |access-date=12 February 2015}}</ref>
According to [[The Banker]], as of November 2015, three out of ten top Islamic banks in the world based on return on assets were Iranian.<ref>{{cite web |title=The Banker's Top Islamic Financial Institutions 2015 – Methodology |website=The Banker |author=James King |date=2 November 2015 |url=https://www.thebanker.com/Reports/Special-Reports/Top-500-Islamic-financial-institutions/The-Banker-s-Top-Islamic-Financial-Institutions-2015-Methodology/(language)/eng-GB |url-access=registration <!-- Old URL: www.thebanker.com/content/.../Top%20%20Islamic%20Financial%20Institutions.pdf-->}}</ref>

{{See also|Islamic Development Bank}}

=== Sharia advisory councils and consultants ===
{{main|Shariah Board}}

[[File:KotaKinabalu Sabah BankSimpananNasional-01.jpg|thumb|right|An Islamic bank branch in the UMNO building in [[Kota Kinabalu]]]]
Because compliance with [[Shariah]] law is the ''[[wikt:raison d'etre|raison d'être]]'' of Islamic finance, Islamic banks and banking institutions that offer Islamic banking products and services may establish a Shariah Supervisory Board (SSB) – to advise them on whether some proposed transaction or product follows the Sharia, and to ensure that the operations and activities of the banking institution comply with Shariah principles.<ref name="IIBI">{{cite web|title=Shari'ah Supervisory Board [Religious Board] |url=http://www.islamic-banking.com/shariah_supervisory_board.aspx|website=Institute of Islamic Banking and Insurance|access-date=9 August 2017|archive-url=https://web.archive.org/web/20170810052522/http://www.islamic-banking.com/shariah_supervisory_board.aspx|archive-date=10 August 2017|url-status=dead}}</ref><ref>{{Cite web|url=https://www.noorbank.com/english/info/about-us/fatwa-and-shari'a-supervisory-board-(fssb) |title=Shari'a Supervisory Committee|website=Noorbank|language=en|access-date=23 January 2018|archive-url=https://web.archive.org/web/20180331133819/https://www.noorbank.com/english/info/about-us/fatwa-and-shari'a-supervisory-board-(fssb)|archive-date=31 March 2018|url-status=dead}}</ref>

According to various Islamic banking organizations some requirements for SSBs include: 
*that they be composed of jurists specializing in ''fiqh al-[[muamalat]]'', i.e. Islamic commercial jurisprudence, ([[Accounting and Auditing Organization for Islamic Financial Institutions]], AAOIFI);{{sfn|Khan|2013|p=315}}<ref name="AAOIFI(2005)">AAOIFI 2005. ''Accounting, auditing and governance standards for Islamic financial institutions.'' Manana, Bahrain: Accounting and Auditing Organization for Islamic Financial Institutions</ref>
*their fatwas (legal opinions) and ruling be binding, (AAOIFI);{{sfn|Khan|2013|p=315}}<ref name=AAOIFI(2005)/>
*that they have at least three members, (Institute of Islamic Banking and Insurance);<ref name="IIBI"/>
*that their members not be employees of the financial institution they supervise; 
*and be appointed and have their remuneration set by a "general assembly" rather than the institution's board of directors, ([[International Association of Islamic Banks]]).<ref name="Warde_2000:226-27">Warde Ibrahim, 2000: Islamic finance in the global economy, Edinburg, Edinburg university press. p.226-27</ref><ref name="Nadwi-2012">{{cite book|last1=Nadwi|first1=Mohammad Abdullah|title=Analysing the Role of Shariah Supervisory Boards in Islamic Financial Institutions|date=1 February 2012|page=5|doi=10.2139/ssrn.2217926 |ssrn=2217926|s2cid=219373988 }}</ref>
In addition, their duties should include:<ref name="Grais_Pellegrini_(2006:7)">Grais, Wafik and Matteo Pellegrini. 2006. ''Corporate governance and Shari'ah compliance in institutions offering Islamic financial services.'' Policy research working paper 4054, November. Washington, DC: World Bank., p.7</ref>{{sfn|Khan|2013|p=316}}
*calculating [[zakat]] payable by Islamic financial institutions, (AAOIFI);
*disposing of non-Shariah-compliant income, (AAOIFI);
*advising on the distribution of income among investors and shareholders, (AAOIFI).

Since the beginning of modern Islamic finance, the work of the Shariah boards has become more standardized.
Among the organizations that have issued guidelines and standards for Shariah compliance are the AAOIFI,<ref name="AAOIFI-2008">AAOIFI. 2008. ''Governance standards. Shari'a supervisory board: Appointment, composition and report.'' Manana, Bahrain: Accounting and Auditing Organization for Islamic Financial Institutions.</ref> Fiqh Academy of the [[OIC]], [[Islamic Financial Services Board]] (IFSB) (2009). The guidelines and standards are not regulations though, and each Islamic financial institution has its own SSB, which are not generally obliged to follow them.{{sfn|Khan|2013|p=315}}

However, their home country many have a regulatory organization that they are required to follow.
As of 2013, regulators in Bahrain, Indonesia, Jordan, Kuwait, Lebanon, Malaysia and Pakistan have developed guidelines for SSBs in their respective jurisdictions. Some countries, like Indonesia, Kuwait, Malaysia, Pakistan, Sudan, and the UAE have centralized SSBs.<ref name="Askari_et_al_2010:21">Askari, Hossein, Zamir Iqbal Mirakhor. 2010. ''Globalization and Islamic finance: Convergence, prospects and challenges.'' Singapore: John Wiley & Sons (Asia), 21</ref> A number of Shariah advisory firms have now emerged to offer Shariah advisory services to institutions offering Islamic financial services.

===Financial accounting standards===
The '''[[Accounting and Auditing Organization for Islamic Financial Institutions]]''' (AAOIFI) has been publishing standards and norms for Islamic financial institutions since 1993.{{sfn|Khan|2013|p=6}} By 2010, it had issued "25 accounting standards, seven auditing standards, six governance standards, 41 ''shari'ah'' standards and two codes of ethics."{{sfn|Khan|2013|p=6}} (By 2017 it had issued 94 standards in the "areas of Shari’ah, accounting, auditing, ethics and governance".)<ref name="AAOIFI-web">{{cite web|title=About AAOIFI|url=http://aaoifi.com/about-aaoifi/?lang=en|website=AAOIFI|access-date=14 August 2017}}</ref> Although it is an independent body, its "pronouncements on the acceptability or otherwise of contractual structures in relation to Islamic financial instruments are to be viewed in the same vein as regulatory edicts."<ref name="HIHB2015:33">[[#HIHB2015|Irfan, ''Heaven's Bankers'', 2015]]: p.33</ref><ref name="irfan-33">{{cite book|last1=Irfan|first1=Harris|title=Heaven's Bankers: Inside the Hidden World of Islamic Finance|date=2015|publisher=Little, Brown Book Group.|page=33|url=https://books.google.com/books?id=uJ3ABAAAQBAJ&q=nizam|access-date=28 October 2015|isbn=9781472105066}}</ref> Its standards are mandatory for Islamic financial institutions in Bahrain, Sudan, Jordan and Saudi Arabia, and recommended for other Muslim countries and Islamic financial institutions according to Muhammad Akram Khan.{{sfn|Khan|2013|p=6}}
{{#tag:ref|According to Oxford-Analytica, as of 2010 AAOIFI's standards are mandatory for Islamic financial institutions in Bahrain, Dubai International Financial Centre, Jordan, Sudan, Syria and Qatar.<ref name="Oxford-Analytica">{{cite journal|last1=Oxford Analytica|title=Islamic Finance Moves Toward Common Standards|journal=Forbes|date=9 March 2010|url=https://www.forbes.com/2010/03/08/islam-finance-sharia-business-oxford-analytica.html|access-date=14 August 2017}}</ref>|group=Note}} Established in Algiers in 1990, its original name was the Financial Accounting Organization for Islamic Banks and Financial Institutions. It later moved its headquarters to Bahrain.{{sfn|Khan|2013|p=6}}

The '''International Islamic Financial Market''' – a standardization body of the '''[[Islamic Financial Services Board]]''' for Islamic capital market products and operations – was founded in November 2001 through the cooperation of the governments and central banks of Brunei, Indonesia and Sudan. Its secretariat is located in Manama, Bahrain. It is not a regulatory body and its recommendations are "not implemented by most Islamic banks".{{sfn|Khan|2013|pp=309-310}} Faleel Jamaldeen differentiates its controlling body (Islamic Financial Services Board) from the other Islamic Financial standards organ, the AAOIFI, saying,<blockquote>the AAOIFI sets best practices for handling the financial reporting requirements of Islamic financial institutions, IFSB standards are mainly concerned with the identification, management, and disclosure of risk related to Islamic financial products.<ref name="FJIFD2012:54">[[Sukuk#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:54</ref></blockquote>
Individual countries also have accounting standards. The [[Institute of Chartered Accountants of Pakistan]] issues Islamic Financial Accounting Standards (IFAS).

===Supporting institutions===
The '''Islamic Interbank Money Market''' was established by Bank Negara Malaysia on 3 January 1994, and has developed instruments to manage the liquidity needs of the Islamic financial institutions – "funding and adjusting portfolios over the short term".{{sfn|Khan|2013|pp=309-310}}

The '''[[Islamic Financial Services Board]]''' was founded on 3 November 2002 in [[Kuala Lumpur]] by the central banks of Bahrain, Iran, Kuwait, Malaysia, Pakistan, Saudi Arabia, Sudan along with the [[Islamic Development Bank]], [[AAOIFI]], and [[IMF]].{{sfn|Khan|2013|pp=309-310}}
As of April 2015, the 188 members of the IFSB comprise 61 regulatory and supervisory authorities, eight international inter-governmental organisations, and 119 market players (financial institutions, professional firms and industry associations) operating in 45 jurisdictions.<ref name="IFSB-us">{{cite web|title=Published Standards|url=http://www.ifsb.org/background.php|publisher=The Islamic Financial Services Board (IFSB)|access-date=7 August 2015|archive-url=https://web.archive.org/web/20150819183918/http://ifsb.org/background.php|archive-date=19 August 2015|url-status=dead}}</ref> From 2002 to 2012 it issued 17 standards, guiding principles and notes.<ref name="FJIFD2012:260">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]: p.260</ref>
Its objective is to standardize and harmonize the operation and supervision, standards and capital adequacy, risk management and corporate governance of Islamic financial institutions in consultation with a wide array of stakeholders and after following a lengthy process. It complements the task of the [[Basel Committee on Banking Supervision]].{{sfn|Khan|2013|pp=309-310}} As of 2015 it had published 17 standards and six guidance notes.<ref name="IFSB">{{cite web|title=Published Standards|publisher=The Islamic Financial Services Board (IFSB)|url=http://www.ifsb.org/published.php|access-date=7 August 2015|archive-url=https://web.archive.org/web/20150819192852/http://ifsb.org/published.php|archive-date=19 August 2015 |url-status=dead}}</ref>

The [[Islamic International Ratings Agency]] started operations in July 2005 in Bahrain. It is sponsored by 17 multilateral development institutions, banks and other rating agencies.<ref name="IIRA">{{cite web|title=Islamic International Rating Agency (IIRA)|url=http://www.iirating.com/|website=iirating.com|access-date=8 August 2015|archive-url=https://web.archive.org/web/20190618082427/http://iirating.com/|archive-date=18 June 2019|url-status=dead}}</ref>{{sfn|Khan|2013|pp=313-314}}

The '''[[Dow Jones Islamic Market Index]]''' (DJIMI) was established in 1996.<ref>{{cite web|title=Dow Jones Islamic Market Indecises|url=http://www.djindexes.com/islamicmarket/|website=djindexes.com|access-date=8 August 2015|archive-date=12 August 2015|archive-url=https://web.archive.org/web/20150812120654/http://djindexes.com/islamicmarket/|url-status=dead}}</ref> The Index has been approved by Fiqh Academy of the OIC.<ref name="McMillen 2008: 730">McMillen, Michael J.T. 2008. "Asset securitization sukuk and Islamic capital markets: Structural issues in these formative years." ''Wisconsin International Law Journal'' 25 (4) (Winter), p.730</ref> It uses three levels of screening—eliminating businesses involved in activities not allowed by Islamic law (alcohol, pork, gambling, prostitution, pornography, etc.); eliminating companies whose total debts divided by their 12-month average market capitalization are 33% or more of their total sources of funds; eliminating companies that have 'impure income or expenditure' (including, of course, interest) of more than 5–10 per cent of their income or expenditure (eliminating businesses with ''any'' 'impure income' being considered impractical).{{sfn|Khan|2013|pp=313-314}}

In 2006, Citigroup launched the '''Dow Jones Citigroup Sukuk Index'''. The sukuk making up the Index must be at least $250 million in size, have a maturity of at least one year and a minimum rating of BBB-/Baaa3.{{sfn|Khan|2013|pp=313-314}} In 1998, the FTSE Global Islamic Index was launched. It has 15 Islamic indices for various regions.{{sfn|Khan|2013|pp=313-314}}
In 2007, the MSCI Islamic Index series was launched, one of the "MSCI 'Faith-Based' Indexes". It is constructed from the conventional MSCI country indices and covers 69 developed, emerging and frontier markets, including regions such as the [[Gulf Cooperation Council]] and Arabian markets.{{sfn|Khan|2013|pp=313-314}}

===Central banking===
Although no Muslim country has yet banned interest on loans completely, suggestions have been made as to how to deal with monetary policy when [[central bank]]s operate in an interest-free environment and there are no longer any interest rates to lower or raise. Economist [[Mohammad Najatuallah Siddiqui|Mohammad N. Siddiqi]] has proposed that central banks offer "refinance facilities" to expand or contract credit as needed to deal with inflation or deflation.<ref>Siddiqi, Mohammad Nejatullah, ''Muslim Economic Thinking: A Survey of Contemporary Literature'', The Islamic Foundation, Leicester, 2007, p.34</ref><ref name="158:105">Siddiqi, Muhammad Nejatullah. ''Some aspects of the Islamic Economy.'' Lahore, Islamic Publications, 1970; New Delhi, Markazi Matabah Islami, 1972, 105</ref>

He also proposes that short term credit for the production sector of the economy be estimated by the central banks and then adjusted by manipulating the "refinance ratio" and the "lending ratio".<ref>Siddiqi, Mohammad Nejatullah, ''Muslim Economic Thinking: A Survey of Contemporary Literature'', The Islamic Foundation, Leicester, 2007, p.35</ref><ref>Siddiqi, Muhammad Nejatullah. ''Ghair sudi bank kari (Banking Without Interest) Lahore, Islamic Publications, 1969. Dekhi, Markazi Maktabah Jamat'at-e-Islami Hind, 1969 pp 44–60''</ref>

According to economist and Islamic finance critic Feisal Khan, a "true" or strict Islamic banking and finance system of [[profit and loss sharing]] (the type supported by [[Taqi Usmani]] and the Shariah Appellate Bench of the [[Supreme Court of Pakistan]]) would severely cripple central banks' ability to fight a [[credit crunch]] or [[liquidity crisis]] that leads to a severe recession (such as happened in 2007–8). This is because if credit was provided by taking "a direct equity stake in every enterprise" (the PLS approach) it would contract in a credit crunch. But situations like this – when financiers are "less and less sure of the creditworthiness of their financial sector counterparties" and essentially stop lending to even the biggest and most stable borrowers or even other banks – is exactly the time when credit expansion and "flooding" the economy with liquidity is needed to prevent widespread business bankruptcy and unemployment.{{sfn|Khan|2015|pp=160-161}}

==Products, services and contracts==
{{further|Islamic finance products, services and contracts}}
Banking makes up most of the Islamic finance industry. Banking products are often classified in one of three broad categories,<ref name="IMF-2015-9">{{cite book|last1=Towe|first1=Christopher|last2=Kammer|first2=Alfred|last3=Norat|first3=Mohamed |last4=Piñón|first4=Marco |last5=Prasad|first5=Ananthakrishnan |last6=Zeidane|first6=Zeine |title=Islamic Finance: Opportunities, Challenges, and Policy Options |date=April 2015|publisher=IMF|page=9|url=https://www.imf.org/external/pubs/cat/longres.aspx?sk=42816.0 |access-date=13 July 2016}}</ref><ref>Hussain, M., A. Shahmoradi, and R. Turk. 2014. "Overview of Islamic Finance," IMF Working Paper (forthcoming), International Monetary Fund, Washington, DC.</ref> two of which are "investment accounts":{{sfn|Khan|2013|pp=329-330}}<ref name="IIBI-PLS">{{cite web |title=Islamic Banking. Profit-and-Loss Sharing |url=http://www.islamic-banking.com/profit_and_lose_sharing.aspx |website=Institute of Islamic Banking and Insurance |access-date=15 August 2015 |date=15 August 2015 |archive-date=30 July 2012 |archive-url=https://web.archive.org/web/20120730053812/http://www.islamic-banking.com/profit_and_lose_sharing.aspx |url-status=dead }}</ref>{{#tag:ref|Faleel Jamaldeen divides Islamic finance instruments into four groups – designating ''bay al-muajil'' and ''salam'' "trade financing instruments" rather than asset-based instruments.<ref name="FJIFD2012:160-2">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:160-2</ref>|group=Note}} 
*[[Profit and loss sharing]] modes (''musharakah'' and ''mudarabah''), where the financier and the customer share profits and losses, are based on "contracts of partnership".<ref name="FJIFD2012:96">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:96</ref> These have been called the "real and ideal" modes of Islamic finance<ref name=IIFTU1998:12/> as Islam calls for sharing of rewards and losses by all who contribute capital to a commercial enterprise (according to Taqi Usmani<ref name="IIFTU1998:14">[[#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.14</ref> and other theoreticians of Islamic finance).
*"Asset-backed financing"<ref name="IIFTU1998:12"/> and "debt-like instruments" such as [[Markup (business)|mark-up]] (''[[murabaha]]''), leasing (''ijara''), cash advances for the purchase of agricultural produce (''salam''), and cash advances for the manufacture of assets (''istisna''').<ref name=CMPCM/> These are based on "contracts of exchange",<ref name="PFICMTA-85">{{cite book |url=https://books.google.com/books?id=MFoBDgAAQBAJ&q=%22debt-based+contracts%22+or+%22contracts+of+exchange%22&pg=PA85 |title=Public Finance and Islamic Capital Markets: Theory and Application |page=85 |access-date=31 July 2017|isbn=9781137553423 |last1=Rizvi |first1=Syed Aun R. |last2=Bacha |first2=Obiyathulla I. |last3=Mirakhor |first3=Abbas |date=2016-11-01 |publisher=Springer }}</ref> and involve the "purchase and hire of goods or assets and services on a fixed-return basis".<ref name=IIBI/> The fixed return resembles the interest of conventional banking rather than variable profits and losses, but is called "profit" or "markup", not "interest".{{sfn|Khan|2015|p=87}}{{sfn|Khan|2013|pp=322-323}}<ref name="dummies-cheat">{{cite web|title=islamic finance for dummies cheat sheet.|url=http://www.dummies.com/how-to/content/islamic-finance-for-dummies-cheat-sheet.html|access-date=24 July 2016}}</ref> Originally these modes were intended by Islamic banking advocates to be "interim" measures, or to be used for situations where participatory financing was not practical,{{sfn|Khan|2015|p=90}} but now account for the great bulk of investments in many Islamic banks.<ref name="Dusuki-2007-146-7">{{cite journal |last1=Dusuki|first1=A. W.|last2=Abozaid |first2=A.|title=A Critical Appraisal on the Challenges of Realizing Maqasid al-Shariah|journal=International Journal of Economic, Management & Accounting|date=2007|volume=19 |issue=Supplementary Issues|pages=146, 147}}</ref>
*Modes based on contracts of safety and security include safe-keeping contracts (''wadi’ah'') for current deposits (the equivalent of a checking account in the US), and agency contracts (''wakalah'').<ref name="IMF-2015-9"/>{{sfn|Khan|2013|pp=329-330}}<ref name="FI">{{cite web|url=http://www.financialislam.com/deposits.html |title=Current account deposits|website=financialislam.com|access-date=19 August 2015}}</ref>{{sfn|Khan|2013|p=330}}

Most Islamic finance is in banking, but non-banking finance, such as ''sukuk'', equity markets, investment funds, insurance (''takaful''), and [[microfinance]],<ref name=IFSB-2014/><ref name="IMF-2015-9"/> 
is also fast-growing,<ref name=IFSB-2014/><ref name="IMF-2015-9"/> and as of 2013 represented about one-fifth of total assets in Islamic finance.<ref name="IFSB-2014">Islamic Financial Services Board (IFSB). 2014. [http://www.ifsb.org/docs/2014-05-06_IFSI%20Stability%20Report%202014%20(Final).pdf Islamic Financial Services Industry Stability Report] {{Webarchive|url=https://web.archive.org/web/20170317005134/http://www.ifsb.org/docs/2014-05-06_IFSI%20Stability%20Report%202014%20(Final).pdf |date=17 March 2017 }}. Kuala Lumpur: IFSB.</ref><ref name="IMF-2015-9" />

These products – and Islamic finance in general – are based on Islamic commercial contracts and contract law,<ref name="FJIFD2012:89">[[Sukuk#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:89</ref> with many products named after a particular type of contract (e.g. ''mudaraba'') although they are combinations of more than one contract.{{#tag:ref|For example ''bay al-muajil'' instruments are used in combination with ''murabaha'',<ref name="FJIFD2012:160">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:160</ref> an ''ijara'' (leasing) may be used in combination with a ''bai'' (purchasing) contract,<ref name="FJIFD2012:158">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:158</ref> and sukuk ("Islamic bonds") can be based on ''mudaraba'', ''murabaha'', ''salam'', ''ijara'', etc.<ref name="FJIFD2012:218-26">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:218-26</ref>|group=Note}}

===Profit and loss sharing===
{{further|Profit and loss sharing}}
While the original Islamic banking proponents hoped profit-loss sharing (PLS) would be the primary mode of finance replacing interest-based loans,<ref name=CMPCM/>
long-term financing with profit-and-loss-sharing mechanisms is "far riskier and costlier" than the long term or medium-term lending of the conventional banks – according to critics such as economist Tarik M. Yousef<ref name="Yousef">{{cite book|last1=Yousef|first1=Tarik M. |editor1-last=Henry |editor1-first=Clement M.|editor2-last=Wilson|editor2-first=Rodney|title=THE POLITICS OF ISLAMIC FINANCE|date=2004|publisher=Edinburgh University Press|location=Edinburgh|chapter-url=http://mpra.ub.uni-muenchen.de/22664/1/Book_Review_THE_POLITICS_OF_ISLAMIC_FINANCE_Edited_by_Clement_Henry_and_Rodney_Wilson.pdf |access-date=5 August 2015 |chapter=The Murabaha Syndrome in Islamic Finance: Laws, Institutions, and Politics}}</ref> – and has "declined to almost negligible proportions".<ref name="Iqbal_Molyneux_2005">Iqbal, Munawar, and Philip Molyneux. 2005. ''Thirty years of Islamic banking: History, performance and prospects.'' New York: Palgrave Macmillan.</ref><ref name="Kuran_2004">Kuran, Timur. 2004. ''Islam and Mammon: The economic predicaments of Islamism''. Princeton, NJ; Princeton University Press</ref><ref name="Lewis_and_Algaoud_(2001)"/><ref name="Yousef_2004">Yousef, T.M. 2004. The murabaha syndrome in Islamic finance: Laws, institutions and policies. In ''Politics of Islamic finance,'' ed. C.M. Henry and Rodney Wilson. Edinburgh: Edinburgh University Press</ref> Loans are permitted in Islam if the interest that is paid is linked to the profit or loss obtained by the investment. The concept of profit acts as a symbol in Islam as equal sharing of profits, losses, and risks.<ref>{{Cite journal|last=Di Mauro|first=Filippo|title=Islamic Finance in Europe|journal=European Central Bank|pages=74 |url=https://www.ecb.europa.eu/pub/pdf/scpops/ecbocp146.pdf?50223aa58804d7b4f32f4f302534672d}}</ref>

====''Mudarabah''====
A ''mudarabah'' or ''mudharabah'' contract is a profit sharing partnership in a commercial enterprise. One partner, the ''rabb-ul-mal'', is a [[Partnership#Silent partners|silent]] or sleeping partner who provides money. The other partner, the ''mudarib'', provides expertise and management.{{sfn|Khan|2015|p=91}} The arrangement is similar to [[venture capital]] in conventional finance, in which a venture capitalist finances an entrepreneur, who provides management and labor.<ref name="wilson-2012-184">{{cite book|last1=Wilson|first1=Rodney|title=Legal, Regulatory and Governance Issues in Islamic Finance|date=2012|publisher=Edinburgh University Press|page=184 |url=https://books.google.com/books?id=JZlvAAAAQBAJ&q=mudaraba+very+similar+to+venture+capital&pg=PA184|access-date=16 September 2017|isbn=9780748655274}}</ref>

Profits are shared between the parties according to a pre-agreed ratio, usually either 50%–50%, or 60% for the ''mudarib'' and 40% for the ''rabb-ul-mal''. If there is a loss, the ''rabb-ul-mal'' loses the invested capital, and the ''mudarib'' loses the invested time and effort. The sharing of risk reflects the view of Islamic banking proponents that under Islam, the user of capital – [[labor (economics)|labor]] and management – should not bear all the risk of failure. Sharing of risk, according to proponents, results in a balanced distribution of income, and prevents financiers from dominating the economy.<ref name="CIEF">{{cite web|website=Concepts in Islamic Economics and Finance |date=2 April 2006 |url=https://cief.wordpress.com/2006/04/02/mudarabah/|title=Mudarabah|access-date=17 August 2015}}</ref><ref>[http://www.central-mosque.com/fiqh/limliability.htm Musharakah & Mudarabah By Mufti Taqi Usmani] | Limited Liability| central-mosque.com</ref><ref name="IIFTU1998:17-36">[[Islam in Saudi Arabia#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.17-36</ref>

==== ''Musharakah'' (joint venture) ====
Like ''mudaraba'', ''musharakah'' is also a profit and loss sharing partnership, but one where investment comes from all the partners, all partners are given the option of participating in the management of the business, and all partners share in losses according to the ratio (''[[pro rata]]'') of their investment.<ref>{{cite web |title=The Declining Balance Co-ownership Program. An Overview |year=2012 |url=http://www.guidanceresidential.com/wp-content/themes/residential/images/gr-white-paper-2012.pdf |publisher=Guidance Residential, LLC |url-status=dead |archive-date=2014-09-06 |archive-url=https://web.archive.org/web/20140906133304/http://www.guidanceresidential.com/wp-content/uploads/2013/10/gr-white-paper-2012.pdf}}</ref>

''Musharakah'' may be "permanent" or "diminishing". It is often used in investment projects, letters of credit, and the purchase of real estate or property. Use of ''musharaka'' is not great. In Malaysia, for example,{{#tag:ref|according to Mehmet Asutay who quotes Zubair Hasan<ref>Zubair Hasan, "Fifty years of Malaysian economic development: Policies and achievements", ''Review of Islamic Economics'', 11 (2) (2007)</ref>|group=Note}} the share of ''musharaka'' (or at least permanent ''musharaka'') financing declined from 1.4 percent in 2000 to 0.2 per cent in 2006.<ref name="Asutay_2007:173">{{cite journal |last=Asutay |first=Mehmet |date=2007 |title=Conceptualization of the second best solution in overcoming the social failure of Islamic banking and finance: Examining the overpowering of the homoislamicus by homoeconomicus |journal=IIUM Journal of Economics and Management |volume=15 |issue=2 |page=173}}</ref>{{sfn|Khan|2013|pp=322-323}}

====Diminishing ''musharaka''====
''Musharaka al-Mutanaqisa'' (literally "diminishing partnership") is a popular type of financing for major purchases such as housing. In it, the bank and purchaser (customer) have joint ownership of a purchased asset with the customer also leasing the asset.<ref name="NRinvest">{{cite book
  | last = Nomani
  | first = Farhad
  | author2=Rahnema, Ali.
  | title = Islamic Economic Systems
  | publisher = Zed books limited
  | year=1994
  | location = New Jersey
  | pages = 99–101
  | isbn = 978-1-85649-058-0}}</ref> As the customer gradually pays off the cost the bank's [[Equity (finance)|equity]] share diminishes from all but the customer percentage of the down payment to nothing.<ref name="ifn">{{cite web|url=http://www.islamicfinancenews.com/glossary/musharakah-mutanaqisah |title=Is Musharakah Mutanaqisah a practical alternative to conventional home financing? |website=Islamic Finance News |date=2 December 2015 |access-date=1 August 2016}}</ref> 
If the customer defaults and the asset is sold, the bank and the customer split the proceeds according to each party's current equity.<ref name="Kettell-2011-25">{{cite book|last1=Kettell|first1=Brian|title=The Islamic Banking and Finance Workbook: Step-by-Step Exercises to Help You ...|date=2011|publisher=John Wiley & Sons.|page=25|url=https://books.google.com/books?id=EXmCKEsb4wQC&q=If+default+occurs%2C+both+the+bank+and+the+borrower+receive+a+proportion+of+the+proceeds+from+the+sale+of+the+property&pg=PA25|access-date=8 June 2017|isbn=9780470978054}}</ref>

To highlight how ''Musharaka al-Mutanaqisa'' is different from conventional banking mortgages in terms of law and practice is understood, compare it to a typical United States mortgage:

When a buyer wishes to purchase a home, she approaches the lender and requests a loan. The lender in turn, if the buyer qualifies, will lend money to buy the house, and the bank will usually set a fixed percentage of interest to be paid to the lender. Each payment to the lender will then include a return of a portion of the principal and the interest accrued on the remaining balance for that period. Over time, the entire principal is paid back to the lender, together with all the interest that is due. In terms of the ownership of the house, the buyer/borrower/debtor will have legal title to the house during the term of repayment and thereafter too. In the county title records office, the borrower will have a title deed showing the buyer as the title holder, and not the bank. The risk of the house diminishing in value is assumed by the borrower and not the bank. On the other hand, any appreciation is also assumed by the borrower and the bank cannot ask for more principal due to appreciation. Hence, the bank and the borrower know at the outset their exact obligations to each other. The bank, in an effort to secure its loan, will place a lien (a charge) on the property, so that if the borrower does not repay the loan, the bank gets the right to foreclose on the borrower's right to hold title and have the title be transferred to the bank (or the house be auctioned and the proceeds received by the bank). In the U.S., most states have a judicial foreclosure process where the bank asks the court to sell the property to recover the balance of its loan and accrued interest, plus any other costs of the suit.

The ''Musharaka al-Mutanaqisa'' differs from the US mortgage in how it addresses the interest portion of the payment from the borrower to the bank. The concept of title is critical, because the Islamic bank will still come up with the money to buy the house, but the bank will buy the house in partnership with the homeowner. Together the bank and the borrower will become "tenants in common" and the local records office will show both the bank and the buyer as joint owners. The percentage of ownership of the house at this point will be based on the contributed money ratio between the bank and buyer. Assuming the buyer paid 10% of the price and the bank paid 90% of the price, since the bank will not be living in the house, the buyer will agree to a rental payment for the use of the 90% of the property that they do not own outright. In addition, the buyer will also agree to buy a certain percent of the bank's portion on a monthly basis. Hence, the buyer pays rent for usage of house, and also to buy out the bank's portion of ownership. Since there is no interest being paid, this form of ownership (in partnership) is acceptable under Shariah. At the end of the agreed rental term, the buyer will have bought out the entire partnership, and the buyer can then ask the bank to dissolve the partnership. The recorder's office will have a new title deed recorded, whereby the bank ceases to be a tenant-in-common with the buyer, and the buyer becomes the entire title holder (whether alone or with their spouse, or any other entity as chosen by the buyer).

The essence of both transactions is different, based which entity legally has title to the house at the outset. The other difference is that the monthly payments by the buyer in Islamic banking are considered to be rent and partnership buyout payments, and not the return of principal and interest as they are in conventional banking. The Islamic bank also shares in the risk of a depreciation in the value of the house, where in the conventional banking model the bank does not take on this risk. The opposite is true also, where both the Islamic bank and the buyer gain if the house is sold for more than the book value of the partnership. In conventional banking, the bank does not benefit from rising prices.

Skeptics of Islamic banking argue that the result is the same: the buyer makes monthly payments to own the house, much like a conventional mortgage. However, as the risk of the price of the house decreasing is shared between buyer and bank in Islamic banking, it is legally distinct from the conventional mortgage transaction.

=== Asset-backed financing ===
[[File:Bankaŭtomato – Faisal Islamic Bank (Khartoum) 001.jpg|thumb|right|The Faisal Islamic Bank in [[Khartoum]].]]
Asset-backed or debt-type instruments (also called contracts of exchange) are sales contracts that allow for the exchange of one commodity for another commodity, the exchange of a commodity for money, or the exchange of money for money.<ref name="dummies-cheat"/> They include ''[[murabaha]]'', ''musawamah'', ''salam'', ''istisna’a'', and ''tawarruq''.<ref name="FIIF">{{cite web|title=Modes of financing |website=Financial Islam – Islamic Finance |url=http://www.financialislam.com/modes-of-financing.html |access-date=14 July 2016|archive-url=https://web.archive.org/web/20160712012159/http://www.financialislam.com/modes-of-financing.html|archive-date=12 July 2016|url-status=dead}}</ref>

==== ''Murâbaḥah'' ====
{{Main|Murabahah}}

''Murabahah'' (or ''murabaha'') is an Islamic contract for a sale where the buyer and seller agree on the [[Markup (business)|markup]] (profit) or "[[Cost-plus pricing|cost-plus]]" price<ref name="RATMTRIBP2014:31">Turk, ''Main Types and Risks'', 2014: p.31</ref><ref name="Irfan-2015-135">{{cite book|last1=Irfan|first1=Harris|title=Heaven's Bankers|date=2015|publisher=Overlook Press|page=135}}</ref> for the item(s) being sold.<ref name="IIFTU1998:65"/>
In Islamic banking it has become a term for both a marked-up price and deferred payment – a way of financing a good (home, car, business supplies, etc.) whereby the bank buys the good and resells it to the customer at a higher price (informing the customer of the price increase), and offering to take payment in installments or in a lump sum.<ref name="IIFTU1998:72-81">[[#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.72-81</ref>

''Murabahah'' has also come to be the most common type of Islamic finance.<ref name="IFIM"/><ref name="Irfan-2015-139"/><ref name="IIFTU1998:65">[[#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.65</ref> One estimate is that 80% of Islamic lending is by ''murabahah''.<ref name="Haltom2014">{{cite web|last1=Haltom|first1=Renee|title=Econ Focus. Islamic Banking, American Regulation|url=https://www.richmondfed.org/publications/research/econ_focus/2014/q2/feature1|website=Federal Reserve Bank of Richmond|access-date=26 August 2015|date=2014 |version=Second Quarter}}</ref> This is despite the fact that (according to Uthmani) Islamic finance Shari‘ah supervisory boards "are unanimous" in agreement that ''murabahah'' loans "are not ideal modes of financing", and should be used only "when more preferable means of finance – ''musharakah'', ''mudarabah'', ''salam'' or ''istisna''' – are not workable for some reasons".<ref name="IIFTU1998:12" />

''Murabahah'' differs from conventional finance (such as [[mortgage loan|mortgage]]s for homes or [[hire purchase]] for furniture or appliances), in that the fixed return with which the bank is compensated is called "profit" and not interest,<ref name="IFIM"/> and that the financier may not keep for itself any penalties for late payment.<ref name="RATMTRIBP2014:31"/>{{#tag:ref|"In order to pressurize the buyer to pay the installments promptly, the buyer may be asked to promise that in case of default, he will donate some specified amount for a charitable purpose."<ref name="IIFTU1998:71">[[#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.71</ref>|group=Note}}

Economists have questioned whether ''murabahah'' is actually distinct from debt- and interest-based finance. The fact that there is a principal and a payment plan means that there is an implied interest rate,<ref name="Haltom2014" /> based on conventional banking interest rates such as [[LIBOR]]. Others complain that in practice most "''murabaḥah''" transactions do not involve actual buying or selling of goods or commodities, but are merely cash-flows between banks, brokers and borrowers.<ref name="mmhi-2008">{{cite magazine|url=http://www.arabianbusiness.com/misused-murabaha-hurts-industry-122008.html|title=Misused murabaha hurts industry|magazine=Arabian Business|date=1 February 2008}}</ref> In contrast to LIBOR, Islamic banks lend money based on their own reference rate, known as the Islamic Interbank Benchmark Rate, which "uses expected profits from short-term money and a forecasted return on the assets of the bank receiving funds".<ref>{{Cite news|url=https://www.wsj.com/articles/SB10001424052970204443404577054150155788364|title=Islamic Banks Get a 'Libor' of Their Own|last=Burne|first=Katy|date=2011-11-25|work=[[The Wall Street Journal]]|access-date=2019-11-09|language=en-US|issn=0099-9660}}</ref>

=====''Bai' muajjal''=====
In Islamic jurisprudence (''[[fiqh]]''), ''bai' muajjal'', also called ''bai'-bithaman ajil'',<ref>{{cite web |title=TRADE-BASED FINANCING MURABAHA (COST-PLUS SALE) |url=http://staff.uob.edu.bh/files/620922311_files/Murabaha.pdf |archive-url=https://web.archive.org/web/20110917150404/http://staff.uob.edu.bh/files/620922311_files/Murabaha.pdf |url-status=dead |archive-date=17 September 2011 |access-date=15 August 2017 }}</ref> or BBA, is a credit sale or deferred payment sale, i.e. the sale of goods on a deferred payment basis. In Islamic finance, the ''bai' muajjal'' product also involves the price markup of a ''murabahah'' contract, and a ''murabahah'' product involves a ''bai-muajjal'' deferred payment. Thus the terms and are often used interchangeably, (according to Hans Visser),{{sfn|Visser|2013|p=66}} or "in practice ... used together" (according to Faleel Jamaldeen).<ref name="FJIFD2012:160"/><ref name="IFN-BM">{{cite web|title=Bai Muajjal |website=IFN, Islamic Finance News |date=27 November 2015 |url=http://www.islamicfinancenews.com/glossary/bai-muajjal |access-date=26 September 2016}}</ref>
 
However, according to another source, ''bai' muajjal'' differs from ''murabahah'' in that the client, not the bank, is in possession of and bear the risk for the goods being purchased before completion of payment.<ref name="investmodes">{{cite web|title=INVESTMENT MODES: MUDARABA, MUDHARAKA, BAI-SALAM AND ISTISNA'A|url=http://bankingarticle.blogspot.com/2011/02/investment-modes-mudaraba-mudharaka-bai.html|website=Banking Articles|access-date=7 December 2016|date=February 2011}}</ref> And according to a Malaysian source, the main difference between BBA (short for ''bai'-bithaman ajil'') and ''murabaha'' – at least as practiced in Malaysia – is that ''murabaha'' is used for medium and short term financing and BBA for longer term.<ref name="IBaFiM2013-121">{{cite book|chapter-url=https://books.google.com/books?id=HWBkCgAAQBAJ&q=muamalat+contracts&pg=PA117|title=Islamic Banking and Finance in Malaysia; System, Issues and Challenges|date=2013|publisher=Al Manhal|isbn=9789670393728|page=121|chapter=6. Muamalat Contracts in Islamic Banking and Finance|last1=ABʻAZIZ|first1=MUHAMMAD RIDWAN|access-date=5 April 2017}}</ref><ref name="Iqbal-2007-91">{{cite book|last1=Iqbal|first1=Zamir|last2=Mirakhor|first2=Abbas|title=An Introduction to Islamic Finance Theory and Practice|date=2007|publisher=Wiley Finance|page=91}}</ref>

''Bai' muajjal'' as a finance product was introduced in 1983 by Bank Islam Malaysia Berhad.{{sfn|Visser|2013|p=66}}<ref>{{cite book |url=https://mpra.ub.uni-muenchen.de/29414/ |last1=Hasan |first1=Zubair |date=2011 |title=Scarcity, self-interest and maximization from Islamic angle.| access-date=22 March 2017 |page=318}}</ref>

=====''Bai' al 'inah'' (sale and buy-back agreement)=====
''Bai' al 'inah'' (literally, "double sale"<ref name="Kettell">{{cite book |last1=Kettell |first1=Brian |title=Frequently Asked questions in Islamic Finance |pages=299–304 |date=2010 |chapter=Index|doi=10.1002/9781118371923.index |isbn=9781118371923 }}</ref> or "a loan in the form of a sale"),<ref name="TaPoMIB">{{cite book|last1=Abu Umar Faruq Ahmad|title=Theory and Practice of Modern Islamic Finance: The Case Analysis from Australia|publisher=Universal-Publishers|page=308|url=https://books.google.com/books?id=wRlI0nJp5mEC&q=Bai%27+al+%27inah&pg=PA244|access-date=21 July 2015|isbn=9781599425177|year=2010}}</ref> 
is a financing arrangement where the financier/bank buys some asset from the customer on a [[Spot market|spot]] basis, with the financier's payment constituting the "loan". The asset is then sold back to the customer, who pays in installments over time, essentially "repaying the loan". Since the loaning of cash for profit is forbidden in Islamic finance, some scholars do not believe ''bai' al 'inah'' is permissible in Islam. According to the Institute of Islamic Banking and Insurance, it "serves as a ruse for lending on interest",<ref name="ISBI-B">{{cite web |title=Glossary of Financial Terms – B |url=http://www.islamic-banking.com/glossary_B.aspx |website=Institute of Islamic Banking and Insurance |access-date=26 August 2015 |archive-url=https://web.archive.org/web/20150829025808/http://www.islamic-banking.com/glossary_B.aspx |archive-date=29 August 2015 |url-status=dead }}</ref> but ''bai' al 'inah'' is practiced in Malaysia and similar jurisdictions.<ref>{{cite web |url=https://islamicbankers.me/islamic-banking-islamic-contracts/financing-commodity-murabaha-tawarruq/ |title=Financing : Commodity Murabaha & Tawarruq | website=Islamic Bankers Resource Centre | first1=Amir |last1=Alfatakh |date=11 June 2014 |access-date=18 August 2017}}</ref><ref>[http://www.azmilaw.com/Article/Article_8_&_9/Article_9_Tawarruq_00093603_.pdf The emergence of Islamic financing based on the Syariah concept of Tawarruq] |AZMI and Associates| 2008</ref>

==== ''Musawamah'' ====
A ''musawamah'' (literally "bargaining") contract is used if the exact cost of the item(s) sold to the bank/financier either cannot be or is not ascertained.<ref name="IFIM"/> ''Musawamah'' differs from ''murabahah'' in that the "seller is not under the obligation to reveal his cost or purchase price".{{sfn|Visser|2013|p=67}} ''Musawamah'' is the "most common" type of "trading negotiation" seen in Islamic commerce.<ref name="Barāzī-2009-210">{{cite book |last1=Barāzī|first1=Maʻn|title=The Lender of First Resort: A Handbook in Islamic finance and risk management, resilience and best practices, a post crisis outlook|date=2009|publisher=Datalnvest Arabia Incorporated|page=210 |url=https://books.google.com/books?id=YXlFAQAAIAAJ&q=Musawamah+in+commerce|access-date=25 August 2017}}</ref>

==== ''Istisna'' and ''bai salam''====
''Istisna'' (also ''bia istisna'' or ''bai' al-istisna'') and ''bai salam'' (also ''bai us salam'' or just ''salam'') are "[[forward contract]]s"<ref>{{cite web |title= Islamic Finance: Types of Contracts |date=18 January 2015 |url=https://rifqilazio.wordpress.com/2015/01/18/islamic-finance-types-of-contracts/ |access-date=30 August 2017 }}</ref> – customized contracts where immediate payment is made for goods in the future (i.e. goods not yet manufactured, built, or harvested).<ref name="IIFTU1998:136">[[#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.136</ref><ref name="Investopedia">{{cite web|title=Forward Contract|url=http://www.investopedia.com/terms/f/forwardcontract.asp|website=Investopedia|access-date=31 August 2017}}</ref><ref name="review"/>
''Istisna'' contracts (literally, a request to manufacture something) are limited by Islamic fiqh to use for manufacturing, processing, or construction, and may be applied in these regards within the sphere of supply chain management,<ref name=IIFTU1998:136/><ref name="review">{{cite journal|last1=El-Gamal|first1=Mahmoud|title=Letter by Mahmoud El-Gamal following A Review of Forward, Futures and Options From the Islamic Perspective. From Complexity to Simplicity. |url=https://www.academia.edu/2070625 |journal=Seminar Ekonomi & Kewangan Islam (Seki) Conference, August 29–30, 2005 |access-date=31 August 2017}}</ref><ref>{{Cite journal |last=El Daouk |first=Mohamad |date=2022-01-01 |title=Introducing ḥalāl to construction supply chains in the UK's construction sector |url=https://doi.org/10.1108/JIMA-01-2022-0016 |journal=Journal of Islamic Marketing |volume=14 |issue=10 |pages=2385–2403 |doi=10.1108/JIMA-01-2022-0016 |s2cid=252059540 |issn=1759-0833|url-access=subscription }}</ref> while salam "can be effected on anything"<ref name=IIFTU1998:136/><ref name="ib">{{cite web |url=https://www.islamicbanker.com/education/istisna-vs-salam |title=Istisna vs. Salam |website=Islamic Banker |access-date=22 September 2017 |archive-date=18 January 2018 |archive-url=https://web.archive.org/web/20180118122626/https://islamicbanker.com/education/istisna-vs-salam |url-status=dead }}</ref> except gold, silver, or currencies based on these metals.<ref name="Kettell-2011-155">{{cite book|last1=Kettell|first1=Brian|title=Introduction to Islamic Banking and Finance|date=2011|publisher=John Wiley & Sons.|page=[https://archive.org/details/introductiontois0000kett/page/155 155]|url=https://archive.org/details/introductiontois0000kett|url-access=registration|quote=salam cannot be gold silver.|access-date=29 March 2017|isbn=9781119990604}}</ref> 
On the other hand, a salam contract cannot be cancelled unilaterally,<ref name=IIFTU1998:136/> the full price must be paid in advance,<ref name=IIFTU1998:136/><ref name="FJIFD2012:162">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:162</ref> and the time of delivery must be specified<ref name=IIFTU1998:136/><ref name="FJIFD2012:162"/> – restrictions that do not apply to ''istisna''.

In a ''istisna'' contract, the financier/bank makes payments in stages, to finance raw materials (in the case of manufacturing), or construction materials (in the case of the construction project).<ref name="Sapovadia-234">{{cite book|last1=Sapovadia|first1=Vrajlala|title=Developing Africa's Financial Services: The Importance of High-Impact ...|date=2017|publisher=Emerald Group Publishing|isbn=978-1-78714-187-2|page=234|chapter-url=https://books.google.com/books?id=0DrTDgAAQBAJ&q=istisna+help+manufacturers+pay+for+an+order+of+raw+materials&pg=PA243|access-date=31 August 2017|chapter=Appendix F}}</ref> When the product/structure is finished and sold, the bank can be repaid.

''Bai salam'' and ''istisna'' contracts should be as detailed as possible to avoid uncertainty.<ref name="FJIFD2012:159">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:159</ref><ref name="FJIFD2012:162"/><ref name="RATMTRIBP2014:64">Turk, ''Main Types and Risks'', 2014: p.64</ref><ref name="IIFTU1998:128">[[#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.128</ref> 
''Salam'' contracts predate ''istisna''<ref name="MeGIFLEP2006:81">[[#MeGIFLEP2006|El-Gamal, ''Islamic Finance'', 2006]]: p.81</ref> and were designed to fulfill the needs of small farmers and traders.<ref name="IIFTU1998:133">[[#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.133</ref><ref name="Kettell-2011-155"/><ref name="FJIFD2012:161">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:161</ref> Salam is a preferred financing structure and carries a higher order of ''[[Shariah]]'' compliance than ''murabahah'' or ''musawamah'' contracts.<ref name="IIFTU1998:130">[[#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.130</ref>

''Istisna'' are used in the Islamic finance world by the Kuwait Finance House<ref name="FJIFD2012:158"/> and the Barzan gas project in Qatar.<ref name="Meshari-2013">{{cite web |last1=Meshari |first1=Ahmad |title=Qatar Islamic Bank: Setting the benchmark for Islamic banking |url=http://www.worldfinance.com/banking/setting-the-benchmark-for-islamic-banking |website=worldfinance.com |access-date=9 April 2017 |archive-date=14 September 2017 |archive-url=https://web.archive.org/web/20170914125913/https://www.worldfinance.com/banking/setting-the-benchmark-for-islamic-banking |url-status=dead }}</ref> Examples of banks using ''salam'' are ADCB Islamic Banking and Dubai Islamic Bank.<ref name="FJIFD2012:162"/>

==== ''Ijarah'' ====
''Ijarah'' (literally "to give something on rent")<ref name="Islamicity">{{cite web |title=Islamic Glossary. Ijarah |url=http://www.islamicity.org/IslamicGlossary/action.lasso.asp?-Search=fsearch&-database=Services&-Table=islamicglossary&-noresultserror=searchglossary.asp&-Response=searchglossary.asp&-MaxRecords=30&-SortField=Term&-SortOrder=Ascending&-op=cn&fsearch=Ijarah |website=Islamicity |access-date=19 August 2017 }}{{Dead link|date=August 2025 |bot=InternetArchiveBot |fix-attempted=yes }}</ref>
is a leasing or renting contract.<ref name="Ijara-Contracts">{{cite web|title=Ijara Contracts|url=https://ijaracdc.com/ijara-contracts/|website=IjaraCDC|access-date=5 October 2017}}</ref> In traditional Islamic jurisprudence (''[[fiqh]]''), it means a contract for the hiring of persons, services, or the "[[usufruct]]" of a property, generally for a fixed period and price.<ref name="meaning">{{cite journal|title=MEANING OF IJARAH|url=https://www.academia.edu/3583126|website=academia.edu|access-date=21 July 2016|last1=Fatma|first1=Asma |date=21 May 2013 }}</ref>

In Islamic finance, ''al ijarah'' usually refers to a leasing contract that also includes a sales contract. Some property, such as a manufacturing plant, office automation, or motor vehicle, is leased to a client for a stream of rental and purchase payments, so that the end of the leasing period coincides with the completion of purchase payments and transfer of ownership to the lessee.<ref name="meaning"/> 
There are several types of ''ijarah'' in Islamic finance ("operating ijarah" or ''ijarah tashgheeliah'' are leases without sales and finance):

===== ''Ijarah thumma al bai{{'}}'' and ''ijarah wa-iqtina'' =====
''Ijarah thumma al bai{{'}}'' ("hire purchase")<ref>{{cite web|title=Ijarah thumma al bai'|url=https://ijaracdc.com/ijarah-thumma-al-bai/|website=IjaraCDC|access-date=4 October 2017}}</ref> and ''ijarah wa-iqtina''<ref name="Definition of Ijarah wa-iqtina">{{cite web|url=https://www.islamicbanker.com/dictionary/i/ijarah-wa-iqtina|title=Definition of "Ijarah wa-iqtina "|website=Islamic Banker|access-date=21 July 2016|archive-date=11 July 2015|archive-url=https://web.archive.org/web/20150711201441/http://www.islamicbanker.com/dictionary/i/ijarah-wa-iqtina|url-status=dead}}</ref> ("lease and ownership")<ref name="if-literal">{{cite web|title=ijara|url=http://www.islamic-finance.com/item_ijara_f.htm|website=Islamic-finance.com|access-date=19 August 2017}}</ref> involve the leasing/renting/hiring of a good, paid in installments and ending with its purchase (or option to purchase) by/for the customer.<ref name="Definition of Ijarah wa-iqtina "/> Both involve two contracts – a lease and a transfer of ownership of the asset or the property – that should be recorded in separate documents.<ref name=":1">{{cite web|url=https://ijaracdc.com/what-is-ijara-wa-iqtina/|title=What is Ijara wa Iqtina?|website=Ijara CDC|access-date=21 July 2016}}</ref>

The two modes differ in that in ''ijarah wa-iqtina'' (or ''ijara muntahia bittamleek'') sale/ownership transfer is "an option given to the lessee" and cannot be a precondition.<ref name=":1"/> In ''ijara thumma al bai''' the sale is part of the contract.<ref name="I&F">{{cite web|title=What is the Difference Between Ijara Muntahia Bittamleek and Ijara Thumma Bay'?|url=http://investment-and-finance.net/islamic-finance/questions/what-is-the-difference-between-ijara-muntahia-bittamleek-and-ijara-thumma-bay.html|website=Investment & Finance|access-date=4 October 2017}}</ref>

===== ''Ijara mawsoofa bi al dhimma'' =====
In a "forward ijarah" or ''ijara mawsoofa bi al dhimma'', the service or benefit being leased is defined, rather than the particular unit providing that service/benefit.
In contemporary Islamic finance, it is used to finance construction (of a home, office, factory, etc.) combined with a ''istisna'' contract.<ref name="FJIFD2012:158"/> The party begins leasing the asset after "taking delivery" of it.<ref name="i&f">{{cite web |title=Ijarah Mawsufa fi al-Dhimmah |website=investment&finance |url=http://investment-and-finance.net/islamic-finance/i/ijarah-mawsufah-fi-al-dhimmah.html |date=12 February 2013|access-date=25 September 2017}}</ref>

===== ''Ijarah'' challenges =====
Among the complaints made against ''ijara'' are that in practice some rules protecting the customer are overlooked,<ref name="IIFTU1998:167">[[#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.167</ref> that its rules provide weaker legal standing and consumer protection<ref name="Ahmad-2010-210">{{cite book|last1=Ahmad|first1=Abu Umar Faruq |title=Theory and Practice of Modern Islamic Finance: The Case Analysis from Australia|date=2010 |publisher=Universal-Publishers |page=210 |url=https://books.google.com/books?id=wRlI0nJp5mEC&q=Ijara+wa+Iqtina&pg=PA209 |access-date=4 October 2017 |isbn=9781599425177}}</ref> and less flexibility{{sfn|Visser|2009|p={{page needed|date=September 2022}}}}{{sfn|Khan|2013|p=349}} than a conventional [[mortgage loan]] or [[car finance contract]], as well as higher costs.<ref name="MeGIFLEP2006:14">[[Murabaha#MeGIFLEP2006|El-Gamal, ''Islamic Finance'', 2006]]: p.14</ref>

====''Tawarruq''====
{{further|Murabaha#Bay.27_al-Tawarruq}}
A ''tawarruq'' (literally "turns into silver",<ref name="lexicon">{{Cite web|url=http://lexicon.ft.com/Term?term=tawarruq|title=Tawarruq Definition from Financial Times Lexicon|website=lexicon.ft.com|language=en|access-date=9 March 2017|archive-date=11 September 2015|archive-url=https://web.archive.org/web/20150911223058/http://lexicon.ft.com/Term?term=tawarruq|url-status=dead}}</ref> or "monetization")<ref name="MeGIFLEP2006:342"/> is a contract/product where the client/customer can raise cash to be repaid later by buying and selling some readily saleable asset.
An example of this would be a customer wishing to borrow $1,000 in cash having their bank buy $1,100 worth of a commodity such as iron from a supplier, buying the iron from the bank on credit with 12 months to pay the $1,100 back, and immediately selling the metal back to the bank for $1,000 cash to be paid on the spot. The bank then resells the iron to the supplier. (This would be the equivalent of borrowing $1,000 for a year at an interest rate of 11 percent.)<ref name=lexicon/>

Like the ''bai' al 'inah'' mentioned above, the greater complexity of this transaction means more fees and higher costs than a conventional bank loan, but (in theory) greater compliance with Shariah law because of the tangible assets that underlie the transactions. 
However, critics complain that "billions of dollars" of putative commodity-based tawarruq transactions have evaded the required commodity trades;<ref name="FT-tawarruq">{{cite web|title=Definition of tawarruq ft.com/lexicon|url=http://lexicon.ft.com/Term?term=tawarruq|website=Financial Times|access-date=9 August 2015|archive-date=11 September 2015|archive-url=https://web.archive.org/web/20150911223058/http://lexicon.ft.com/Term?term=tawarruq|url-status=dead}}</ref> and both contemporary<ref name="MeGIFLEP2006:72">[[Murabaha#MeGIFLEP2006|El-Gamal, ''Islamic Finance'', 2006]]: p.72</ref>{{#tag:ref|(Resolution 179 (19/5)).<ref>{{Cite journal|title=Fatwa in Islamic Finance|url=http://ifikr.isra.my/documents/10180/16168/blp-isra%20sep%20bulletin%20Tawarruq.pdf|journal=ISRA|date=September 2013|pages=4|access-date=18 January 2018|archive-url=https://web.archive.org/web/20170516224233/http://ifikr.isra.my/documents/10180/16168/blp-isra%20sep%20bulletin%20Tawarruq.pdf|archive-date=16 May 2017|url-status=dead}}</ref>|group=Note}} and classical<ref>{{Cite journal |last=Ebrahim |first=Muhammed Shahid |date=n.d. |title=Debt Instruments in Islamic Finance: A Critique |url=http://dbs-applicant.dur.ac.uk/images/e/ef/ALQ-D-15-00017.pdf |journal=Arab Law Quarterly |access-date=18 January 2018 |archive-date=14 September 2017 |archive-url=https://web.archive.org/web/20170914040528/http://dbs-applicant.dur.ac.uk/images/e/ef/ALQ-D-15-00017.pdf |url-status=dead}}</ref> Islamic scholars have forbidden the practice. Nonetheless, as of 2012 Islamic banks using ''tawarruq'' include the [https://www.uab.ae/en United Arab Bank],<ref>{{Cite web |url=https://www.uab.ae/-/media/Project/UAB/PDF/kfs/islamic/Islamic-Personal-Finance-KFS-English-F.pdf |title=Islamic Personal Finance}}</ref> QNB Al Islamic, [[Standard Chartered]] of the United Arab Emirates, and [[Bank Muamalat Malaysia]].<ref name="FJIFD2012:156">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:156</ref>

===Charitable lending===
====''Qardh-ul hasan''====
Taqi Usmani insists that the "role of loans" (as opposed to investment or finance) in a truly Islamic society is "very limited", and that Shariah law permits loans not as an ordinary occurrence, "but only in cases of dire need".<ref name="MTUHJI1999:159"/>
A Shariah-compliant loan is known as ''qardh-ul hasan'' (also ''qard hasan'', literally "benevolent loan" or "beneficence loan"). It is often described as an interest-free loan extended to needy people.<ref>{{cite web|url=http://financial-dictionary.thefreedictionary.com/Qard+al+Hasan|title=Qardhul Hasan|website=Financial dictionary|access-date=5 January 2017}}</ref><ref>{{cite web|url=http://investment-and-finance.net/islamic-finance/a/al-qard-al-hasan.html|title=Al-Qard al-Hasan|website=Investment and finance|access-date=5 January 2017}}</ref><ref name="MTUHJI1999:196">[[#MTUHJI1999|Usmani, ''Historic Judgment on Interest'', 1999]]: para 196</ref> 
Such loans are often made by social service agencies, or by a firm as a benefit to its employees,<ref name="case study">{{cite journal|last2=Alwi|first2=Norhayati Mohd|last3=Ariffin|first3=Noraini Mohd|date=2011|title=A Case Study on the Implementation of Qardhul Hasan Concept as a Financing Product in Islamic Banks in Malaysia |url=http://journals.iium.edu.my/enmjournal/index.php/enmj/article/view/201 |journal=International Journal of Economics, Management & Accounting|issue=Supplementary Issue 19|pages=81–100|last1=Abidin|first1=Ahmad Zainal|access-date=5 January 2017}}</ref> rather than by Islamic banks. They are analogous to the [[microcredit]] of conventional finance, when it does not provide for interest.

Quoting the Islamic prophet Muhammad, some sources insist that lenders may not gain "any advantage or benefits" from the loan, let alone interest.<ref>Takaful.com. "Origins and Operations of Takaful System", Retrieved 15 December 2007 from http://www.takaful.com.sa/m1sub2.asp {{Webarchive|url=https://web.archive.org/web/20141217135329/http://www.takaful.com.sa/m1sub2.asp |date=17 December 2014 }}. This view is based on fatwa of the Shari'ah advisory board of al-Rajhi Bank, dated April 2001; cited in {{cite journal|last1= Farooq|first1=Mohammad Omar |title=Qard al-Hasana, Wadiah/Amanah and Bank Deposits: Applications and Misapplications of Some Concepts in Islamic Banking |ssrn=1418202 |journal=Arab Law Quarterly |volume=25 |issue=2 | date=19 January 2012}}</ref> 
However, some Islamic banks offer products called ''qardh-ul hasan'' which charge lenders a management fee,<ref name="Management Fees">{{cite news|url=http://www.zaharuddin.net/index2.php?option=com_content&do_pdf=1&id=161 |title=Management Fees in 'Qardul Hasan' |date=20 September 2006 |publisher=zaharuddin.net |agency=NST Business Times |last1=Abdul Rahman|first1=Ust Hj Zaharuddin Hj |access-date=5 January 2017}}</ref>
and others have savings account products called ''qardh-ul hasan,'' (the "loan" being a deposit to a bank account) where the debtor (the bank) may pay an extra amount beyond the principal amount of the loan (known as a ''hibah'', literally gift) if the extra is not an obligation of the account/loan agreement.<ref name=":0" />

===Contracts of safety, security, and service===
These contracts are intended to help individual and business customers keep their funds safe.<ref name=IFDCS/>

====''Hawala''====
{{further|Hawala}}
''[[Hawala]]'' (also ''hiwala'', ''hewala'', or ''hundi''; literally "transfer" or "trust") is a widely used, informal [[informal value transfer system|"value transfer system"]] for transferring funds from one geographical area to another, based not on [[wire transfer]]s but on a huge network of money brokers (known as "hawaladars") throughout the Muslim world.<ref name=treasury/> 
''Hawala'' was not started as a ''[[halal]]'' alternative to conventional banking transfers, since electronic wire transfers have not been found to be in violation of Sharia. However, ''hawala'' has the advantage of being available in places wire transfer is not,<ref name="Vaknin">{{cite web |last1=Vaknin |first1=Sam |title=Hawala, or the Bank that Never Was |url=http://samvak.tripod.com/nm104.html |website=samvak.tripod.com |access-date=5 September 2017 |date=June 2005 |archive-url=https://web.archive.org/web/20170920054104/http://samvak.tripod.com/nm104.html |archive-date=20 September 2017 |url-status=dead }}</ref> and predates conventional banking [[remittance]] systems by many centuries.

In the first half of the 20th century it lost ground to instruments of the conventional banking system, but regained it starting in the late 20th century with the economic migration of Muslim workers to wealthier countries in the West and the Gulf and their need to send money home.<ref>{{Cite book|url=https://books.google.com/books?id=DQJeCwAAQBAJ&q=hiwala&pg=PA24 |title=Islamism: What it Means for the Middle East and the World |last=Osman|first=Tarek| publisher=Yale University Press|year=2016 |isbn=9780300216011|pages=24| language=en}}</ref> Dubai has traditionally served as a hub for ''hawala''.<ref name="treasury">{{Cite web|url=https://www.treasury.gov/resource-center/terrorist-illicit-finance/Documents/FinCEN-Hawala-rpt.pdf|title=Hawala|website=treasury.gov|publisher=Financial Crimes Enforcement Network with Interpol/FOPAC|access-date=16 October 2016}}</ref>

''Hawala'' is based on a short term, discountable, negotiable, promissory note (or bill of exchange) called "hundi",<ref name="Vaknin"/> transferred from one debtor to another. After the debt is transferred to the second debtor, the first debtor is free from his/her obligation.<ref name="IFDCS"/> Recipient of the funds often identify themselves with passwords given to them by the sender.<ref name="IMFFSD-2005-30-2">{{cite book|last1=International Monetary Fund. Monetary and Financial Systems Dept |title=Regulatory Frameworks for Hawala and Other Remittance Systems |date=2005|pages=30–32 |publisher=International Monetary Fund |url=https://books.google.com/books?id=Drq18kMTTKIC&q=hawala&pg=PA31 |access-date=2 September 2017|isbn=9781589064232 }}</ref> Hawaladars are often small traders who work at ''hawala'' as a sideline or moonlighting operation.<ref name="Vaknin"/> ''Hawaladar'' networks are usually family or clan-based,<ref name="Vaknin"/> and enforcement of the contracts is based on these networks rather than the power of the state.<ref name="Vaknin"/>

====''Kafala''====
''Kafala'' (literally "guarantee")<ref name="IBRC-kafala">{{cite web|title=Synopsis of 2013 BNM Exposure Drafts|url=https://islamicbankers.me/tag/kafala/|website=Islamic Bankers Resource Centre|date=24 December 2013 |access-date=2 September 2017}}</ref> is called "surety" or "guaranty" in conventional finance. A third party accepts an existing obligation and becomes responsible for fulfilling someone's liability.<ref name=IFDCS/>

====''Rahn''====
''Rahn'' ("collateral" or "pledge contract") is property pledged against an obligation.<ref name="FJIFD2012:97">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:97</ref> A ''rahn'' contract is made in order to secure a financial liability.<ref name=IFDCS/> According to [[Mecelle]], ''rahn'' is "to make a property a security in respect of a right of claim, the payment in full of which from the property is permitted." Hadith tradition states that the Islamic prophet Muhammad purchased food on credit pledging his armor as ''rahn''.<ref name="Kureshi-2015-159">{{cite book|last1=Kureshi|first1=Hussein|last2=Hayat|first2=Mohsin|title=Contracts and Deals in Islamic Finance: A UserÂs Guide to Cash Flows ...|date=2015|publisher=John Wiley & Sons|page=159|url=https://books.google.com/books?id=FRcHBgAAQBAJ&q=Rahn+islamic+finance&pg=PA159|access-date=27 September 2017|isbn=9781119020578}}</ref>

==== ''Wakalah''====
In a ''wakalah'' contract, a person (the principal or ''muwakkel'') appoints a representative (the agent or ''wakil'') to undertake transactions on his/her behalf which the principal does not have the time, knowledge or expertise to perform themselves – similar to a [[power of attorney]] agreement in conventional legal terms. ''Wakalah'' should be a non-binding contract for a fixed fee. The agent's services may include selling and buying, lending and borrowing, debt assignment, guarantee, gifting, litigation and making payments, and ''wakil'' are involved in numerous Islamic products like ''musharakah'', ''mudarabah'', ''murabaha'', ''salam'' and ''ijarah''.<ref>{{cite web |url= http://www.deposits.org/dictionary/term/wakalah/ |title= Wakalah |website=depostis.org |access-date= 24 July 2016}}</ref>

An example of ''wakalah'' is found in a ''mudarabah'' profit and loss sharing contract where the ''mudarib'' (the party that receives the capital and manages the enterprise) serves as a ''wakil'' for the ''rabb-ul-mal'' (the silent party that provides the capital).{{#tag:ref|(although the ''mudarib'' may have more freedom of action than a strict ''wakil'')<ref name="Kureshi-2015-152">{{cite book|last1=Kureshi|first1=Hussein|last2=Hayat|first2=Mohsin|title=Contracts and Deals in Islamic Finance: A UserÂs Guide to Cash Flows ...|date=2015|publisher=John Wiley & Sons.|page=152|url=https://books.google.com/books?id=FRcHBgAAQBAJ&q=wakalah&pg=PA152|access-date=27 September 2017|isbn=9781119020578}}</ref>|group=Note}}

=== Deposits in Islamic banking===
From the point of view of depositors, the "investment accounts" of Islamic banks – based on profit and loss sharing and asset-backed finance – play a similar role to the "time [[Fixed deposit|deposits]]" of conventional banks. (For example, one Islamic bank – [[Al Rayan Bank]] in the United Kingdom – offers "fixed term" deposits or savings accounts).<ref>{{Cite web|url=https://www.alrayanbank.co.uk/savings/|title=Islamic Savings Accounts / Halal investments – Al Rayan Bank|website=alrayanbank.co.uk|language=en|access-date=11 April 2017}}</ref> In both, the depositor agrees to hold the deposit at the bank for a fixed amount of time.<ref name="FJIFD2012:105">[[Sukuk#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:105</ref> In Islamic banking return is measured as "expected profit rate" rather than interest.<ref>{{Cite web|url=https://www.alrayanbank.co.uk/savings/instant-access-savings/| title=Banking you can believe in. Instant Access Savings |website=alrayanbank.co.uk |language=en |access-date=22 March 2017}}</ref><ref>{{Cite web|url=https://www.ubluk.com/pages/index/islamic_savings_accounts|title=Al Rayan Bank. ISLAMIC SAVINGS ACCOUNTS [download Expected Profit Rate] Expected Profit Rates for UBL Islamic Mudaraba Products|date=15 March 2017|website=United Bank UK|access-date=18 January 2018|archive-date=29 June 2017|archive-url=https://web.archive.org/web/20170629001102/https://www.ubluk.com/pages/index/islamic_savings_accounts|url-status=dead}}</ref>

"[[Demand deposit]]s" of Islamic financial institutions, which provide no return, are structured with ''qard al-hasana'' (also known as ''qard'') contracts'','' or less commonly as ''wadiah'' or ''amanah'' contracts, according to Mohammad O. Farooq.<ref name="Qard-Hasan-Farooq-2011">{{cite journal|last1=Farooq|first1=Mohammad Omar |title=Qard al-Hasana, Wadiah/Amanah and Bank Deposits: Applications and Misapplications of Some Concepts in Islamic Banking |ssrn=1418202 |journal=Arab Law Quarterly |volume=25 |issue=2 | date=19 January 2012}}</ref>

====Restricted and unrestricted investment accounts====
At least in one Muslim country with a strong Islamic banking sector (Malaysia), there are two main types of investment accounts offered by Islamic banks for those investing specifically in profit and loss sharing modes<ref name="FJIFD2012:253-4">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:253-4</ref><ref name="bnm"/> – restricted or unrestricted.
*Restricted investment accounts (RIA) enable customers to specify the investment mandate and the underlying assets that their funds may be invested in, 
*Unrestricted investment accounts (UIAs) do not,<ref name="bnm">{{cite web |title=Financial Stability and Payment System Report 2014. Investment accounts under Islamic Financial Services Act 2013 |url=http://www.bnm.gov.my/files/publication/fsps/en/2014/cp02_001_box.pdf |website=bnm.gov.my |access-date=6 August 2016 |archive-date=19 September 2015 |archive-url=https://web.archive.org/web/20150919165425/http://www.bnm.gov.my/files/publication/fsps/en/2014/cp02_001_box.pdf |url-status=dead }}</ref> leaving the bank or investing institution full authority to invest funds as "it deems fit", unrestricted by purpose, geography, or means of investing.<ref name="UIA-IaF">{{cite web|title=Unrestricted Investment Account|url=http://www.investment-and-finance.net/islamic-finance/u/unrestricted-investment-account.html|website=Investment and Finance|access-date=6 August 2016|date=8 March 2013}}</ref> In exchange the accounts may be "tailored to meet a diverse range of customer needs and preferences", but are not guaranteed against losses.<ref name="bnm"/>

Some have complained that UIA accounts lack transparency, fail to follow Islamic banking standards, lack customer representation on the board of governors,<ref>{{cite journal|title=Corporate governance in Islamic financial institutions: the issues surrounding unrestricted investment account holders| last1=Magalhaes|first1=Rodrigo|last2=Al-Saad|first2=Shereen|journal=Corporate Governance: The International Journal of Business in Society |volume=13 |issue=1 |pages=39–57 |year=2011| doi=10.1108/14720701311302404}}</ref> and have sometimes hidden poor performance from investors.{{sfn|Khan|2013|p=320}}

====Demand deposits====
Islamic banks also offer "demand deposits", i.e. accounts which promise the convenience of returning funds to depositors on demand, but in return usually pay little if any return on investment and/or charge more fees.<ref name="difference">{{cite web|last1=Maverick|first1=J.B.|title=What is the difference between a demand deposit and a term deposit?|url=http://www.investopedia.com/ask/answers/070615/what-difference-between-demand-deposit-and-term-deposit.asp|website=Investopedia|access-date=27 September 2017|date=13 June 2017}}</ref>{{#tag:ref|Deposit accounts held at a bank or other financial institution may be called [[transaction account]]s, checking accounts, current accounts or demand deposit accounts. Funds are available to the account owner "on demand" for frequent and immediate access by the account owner or to others as the account owner may direct. Transaction accounts are known by a variety of descriptions, including a current account (British English), chequing account or checking account when held by a bank,<ref name=IFDCS/> or share draft account when held by a credit union in North America. In the United Kingdom, Hong Kong, India and a number of other countries, they are commonly called current or cheque accounts.)|group=Note}}

====''Qard''====
Because demand deposits pay little if any return and ''qard al-hasana'' (mentioned [[Sharia investments#Charitable lending|above]]) loans are forbidden to pay any "stipulated benefit", the ''qard'' is a popular Islamic finance structure for demand deposits. In this mode, customer deposits constitute "loans" and the Islamic bank a "borrower" who guarantees full return of the "lenders" deposits.<ref>Ziauddin Ahmad, "Islamic Banking: The State of the Art", IDB Islamic Training and Research Institute, 1994. Munawar Iqbal and Philip Molyneux, ''Thirty Years of Islamic Banking: History, Performance and Prospects'', (Palgrave Macmillan, 2005), 41.</ref><ref name="Qard-Hasan-Farooq-2011"/>

However, critics (M.O. Farooq, Mohammad Hashim Kamali)<ref name="Qard-Hasan-Farooq-2011"/><ref name=MHKPIJ/> see conflicts between qard's role in demand deposits and the dictates of traditional Islamic jurisprudence. ''Qard al-hasana'' loans are intended to be acts of charity to the needy, allowed lenient repayment as such.<ref name="30-years">Munawar Iqbal and Philip Molyneux, ''Thirty Years of Islamic Banking: History, Performance and Prospects'', (Palgrave Macmillan, 2005), p.39, cited in {{cite journal|last1= Farooq|first1=Mohammad Omar |title=Qard al-Hasana, Wadiah/Amanah and Bank Deposits: Applications and Misapplications of Some Concepts in Islamic Banking |ssrn=1418202 |journal=Arab Law Quarterly |volume=25 |issue=2 | date=19 January 2012}}</ref> 
Islamic banks, on the other hand, are multi-million or billion dollar profit-making institutions, and their depositors/lenders typically expect to be able to withdraw their deposits on demand rather than be asked to be lenient with the bank.<ref name=30-years/><ref name="Qard-Hasan-Farooq-2011"/>

A further issue is that at least some conventional banks do pay a modest interest on their demand/savings deposits,<ref name=":0" /> and Islamic banks often feel a need to compete with them, finding an (at least putative) Shariah-compliant technique to do so. The means that has been used is ''hibah'' (literally "gift"),<ref name="FI" /> in the form of prizes, exemptions, etc.,<ref name="Qard-Hasan-Farooq-2011" /> which officially differ from the conventional banks' interest/''riba'' in not being legally stipulated or time bound.<ref name="Hibah">{{cite web |url=http://www.rhbislamicbank.com.my/index.asp?fuseaction=learning.details&recID=77 |archive-url=https://web.archive.org/web/20090515182310/http://www.rhbislamicbank.com.my/index.asp?fuseaction=learning.details&recID=77 |url-status=dead |archive-date=15 May 2009 |title=Learn more about Islamic Banking – Returns on deposits are competitive |date=17 May 2006 |publisher=RHB Banking Group |access-date=26 March 2009 }}</ref> 
Its use has nonetheless has been attacked by at least one scholar as the "entry of ''riba'' through the back door".<ref name="MHKPIJ">Mohammad Hashim Kamali. Principles of Islamic Jurisprudence [Islamic Texts Society, 3rd Ed., 2003], p.45, cited in {{cite journal|last1= Farooq|first1=Mohammad Omar |title=Qard al-Hasana, Wadiah/Amanah and Bank Deposits: Applications and Misapplications of Some Concepts in Islamic Banking|ssrn=1418202 |journal=Arab Law Quarterly |volume=25 |issue=2 | date=19 January 2012}}</ref>

==== ''Wadi'ah'' and ''amanah''====

Two other contracts sometimes used by Islamic finance institutions for pay-back-on-demand accounts instead of ''qard al-hasanah''<ref name=":0">{{Cite book|url=https://books.google.com/books?id=eb2IAAAAQBAJ&q=Wadiah+islamic+finance&pg=PA121 |title=Islamic Finance: Understanding its Principles and Practices |last1=Abdullah|first1=Daud Vicary |last2=Chee |first2=Keon |publisher=Marshall Cavendish International Asia Pte Ltd |year=2010 |isbn=9789814312448|language=en |via=Google Books}}</ref>{{#tag:ref|According to Mahmud El-Gamal Classical jurists "recognized two types of property possession based on liability risk": trust and guaranty. 
1) With a trust (which result, e.g., from deposits, leases, and partnerships), the possessor only responsible for compensating the owner for damage to property if the trustee has been negligence or committed a transgression. 
2) With guaranty the possessor guarantees the property against any damage, whether or not the guarantor was negligent or committed a transgression.
Classical jurists consider the two possessions mutually exclusive, so if two different "considerations" conflict – one stating the property is held in trust and another stating in guaranty – "the possession of guaranty is deemed stronger and dominant,
and rules of guaranty are thus applied".<ref name="MeGIFLEP2006:41">[[Murabaha#MeGIFLEP2006|El-Gamal, ''Islamic Finance'', 2006]]: p.41</ref>|group=Note}} 
are ''wadi'ah'' (literally "safekeeping")<ref name="GFT-IIBI">{{cite web |url=http://www.islamic-banking.com/glossary_W.aspx |title=Glossary of Financial Terms |website=Institute of Islamic Banking and Insurance |access-date=19 August 2015 |archive-url=https://web.archive.org/web/20150831062134/http://www.islamic-banking.com/glossary_W.aspx |archive-date=31 August 2015 |url-status=dead }}</ref> and ''amanah'' (literally "trust").
Sources disagree over the definition of these two contracts. "Often the same words are used by different banks and have different meanings."<ref>Volker Nienhaus, "The Performance of Islamic Banks: Trends and Cases", in: Chibli Mallat (Ed.), ''Islamic Law and Finance'' (London: Graham & Trotman), pp. 129–170, 131., cited in {{cite journal|ssrn=1418202|title=Qard al-Hasana, Wadiah/Amanah and Bank Deposits: Applications and Misapplications of Some Concepts in Islamic Banking|date=19 January 2012|last1=Farooq |first1=Mohammad Omar|journal=Arab Law Quarterly|volume=25|issue=2}}</ref> 
Sometimes ''wadi'ah'' and ''amanah'' are used interchangeably.<ref>Maulana Shamsud Doha, a Shari'ah expert with the Islami Bank Bangladesh Limited cited in {{cite journal|ssrn=1418202|title=Qard al-Hasana, Wadiah/Amanah and Bank Deposits: Applications and Misapplications of Some Concepts in Islamic Banking |date=19 January 2012 |last1=Farooq|first1=Mohammad Omar |journal=Arab Law Quarterly |volume=25|issue=2}}</ref>

Sources differ over whether ''wadi'ah'' deposits are simply guaranteed by the bank<ref>{{cite web |url=http://www.financialislam.com/glossary.html |title=Financial Islam Islamic Finance |access-date=27 September 2017}}</ref><ref>{{cite web |url=http://www.islamic-banking.com/glossary_W.aspx |title=Glossary of Financial Terms – W |website=Institute of Islamic Banking and Insurance |access-date=27 September 2017 |archive-url=https://web.archive.org/web/20150831062134/http://www.islamic-banking.com/glossary_W.aspx |archive-date=31 August 2015 |url-status=dead }}</ref> or must be kept unused with 100% reserve,<ref name="YTDGtIF-57">{{cite book|last1=Delorenzo|first1=Yusuf Talal|title=A Guide to Islamic Finance |date=n.d.|publisher=Thomson Reuters |page=57 |title-link=Sharia investments }}</ref> with another type of contract – called ''wadi'ah yadd ad daman'' – allowing "rights of disposal" to invest but guaranteeing "repayment of the whole or part" of "current account deposit".<ref name="YTDGtIF-57"/><ref name="IB-w">{{cite web|url=https://www.islamicbanker.com/education/wadiah|title=Wadiah|website=Islamic Banker|access-date=20 July 2016|archive-date=29 April 2016|archive-url=https://web.archive.org/web/20160429181354/https://www.islamicbanker.com/education/wadiah|url-status=dead}}</ref><ref name=":0" /> 
Sources also differ on whether banks can use ''amanah'' accounts for their operations – if it "obtains" the "authority" of depositor<ref name="GFT-IIBI" /> – or not.<ref name=":0" /><ref name="GFT-IIBI" /> Sources do agree that the trustee of ''amanah'' is not liable for "unforeseen mishap" (Abdullah and Chee),<ref name="IB-w" /> "resulting from circumstances beyond its control",<ref name="FI" /> or if there has not been a "breach of duty" ([[Reuters]]).<ref name="GtIF">{{cite web
 |last=Delorenzo
 |first=Yusuf Talal
 |title=Guide to Islamic Finance
 |url=https://financelish.com/principles-of-islamic-finance-a-beginners-guide/
 |website=Financelish
 |access-date=2025-10-31
 |language=en
}}</ref>
<ref>Mohammad Hashim Kamali. ''Principles of Islamic Jurisprudence'' [Islamic Texts Society, 3rd Ed., 2003], p. 335., cited in {{cite journal|ssrn=1418202|title=Qard al-Hasana, Wadiah/Amanah and Bank Deposits: Applications and Misapplications of Some Concepts in Islamic Banking|date=19 January 2012 |last1=Farooq |first1=Mohammad Omar |journal=Arab Law Quarterly|volume=25|issue=2}}</ref>

According to at least one report, in practice no examples of 100 percent reserve banking are known to exist.<ref>{{cite web|url=http://www.islamibankbd.com/page/ih_12.htm|archive-url=https://web.archive.org/web/20070716151628/http://www.islamibankbd.com/page/ih_12.htm|title=Concept and ideology :: Issues and problems of Islamic banking|archive-date=16 July 2007|publisher=Islami Bank Bangladesh Limited |access-date=12 February 2015}}</ref>

===Other ''Sharia''-compliant financial instruments===
==== ''Sukuk'' (bonds) ====
{{Main|Sukuk}}

''[[Sukuk]]'' (plural of صك ''sakk'') – often called "Islamic" or "sharia compliant" bonds – are financial certificates developed as an alternative to conventional bonds. Different types of sukuk are based on the different structures of Islamic contracts mentioned above (''murabaha'', ''ijara'', ''wakala'', ''istisna'', ''musharaka'', ''istithmar'', etc.), depending on the project the ''sukuk'' are financing.<ref name="FJIFD2012:214">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:214</ref>

Like conventional bonds, ''sukuk'' have expiration dates, but instead of receiving interest payments on money lent as bonds do, ''sukuk'' holders are given "(nominal) part-ownership of an asset" from which they receive income "either from profits generated by that asset or from rental payments made by the issuer".<ref name="Economist-8-10-2014"/>
The part ownership element and (at least in theory) the lack of a guaranteed repayment of initial investment resemble [[Equity (finance)|equity]] instruments.<ref name="IFSE">{{Cite web|url=https://www.ft.com/content/cec38bf2-440b-11df-9235-00144feab49a |archive-url=https://ghostarchive.org/archive/20221210/https://www.ft.com/content/cec38bf2-440b-11df-9235-00144feab49a |archive-date=10 December 2022 |url-access=subscription |url-status=live |title=Islamic finance's sukuk explained |last=Hayat|first=Usman |date=11 April 2010|website=ft.com |language=en-GB|access-date=29 March 2017}}</ref> However, in practice, most ''sukuk'' are "asset-based" rather than "asset-backed"—their assets are not truly owned by their [[Special-purpose entity|Special Purpose Vehicle]], and (like conventional bonds), their holders have recourse to the originator if there is a shortfall in payments.<ref name="FJIFD2012:210">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:210</ref>

The ''sukuk'' market began to take off around 2000 and as of 2013, ''sukuk'' represent 0.25 percent of global bond markets.<ref name="IMF-2015-15">{{cite book|url=https://www.imf.org/external/pubs/cat/longres.aspx?sk=42816.0|title=Islamic Finance: Opportunities, Challenges, and Policy Options|last2=Kammer|first2=Alfred|last3=Norat|first3=Mohamed|last4=Piñón|first4=Marco|last5=Prasad|first5=Ananthakrishnan|last6=Zeidane|first6=Zeine|date=April 2015|publisher=IMF|page=15|last1=Towe|first1=Christopher|access-date=13 July 2016}}</ref> The total value of outstanding ''sukuk'' as of the end of 2014 was $294 billion, with $188 billion from Asia, and $95.5 billion from the countries of the [[Gulf Cooperation Council]].{{#tag:ref|According to data published by the Islamic Financial Services Board.<ref name=sukuk-market-size>{{cite news| url=http://www.islamicfinance.com/2015/05/size-islamic-finance-industry/#Breakdown_of_Islamic_Finance_Segments_by_Region | work=Islamic Finance | title=Islamic Finance Market Size| date=21 May 2015 | first=Naveed | last=Mohammed}}</ref>|group=Note}} Demand for ''sukuk'' should able to support further growth.<ref name="IMF-2015-7">{{cite book|last1=Towe|first1=Christopher|last2=Kammer|first2=Alfred|last3=Norat|first3=Mohamed |last4=Piñón|first4=Marco |last5=Prasad|first5=Ananthakrishnan |last6=Zeidane|first6=Zeine |title=Islamic Finance: Opportunities, Challenges, and Policy Options |date=April 2015 |publisher=IMF|page=7 |url=https://www.imf.org/external/pubs/cat/longres.aspx?sk=42816.0 |access-date=13 July 2016}}</ref>

==== ''Takaful'' (insurance) ====
{{Main|Takaful}}

''Takaful'', sometimes called "Islamic insurance", differs from conventional insurance in that it is based on [[Mutualism (movement)|mutuality]] so that the risk is borne by all the insured rather than by the insurance company.<ref name="DBTCI"/> Rather than paying premiums to a company, the insured contribute to a pooled fund overseen by a manager, and they receive any profits from the fund's investments.<ref name="Economist-8-10-2014"/>
Any surplus in the common pool of accumulated premiums should be redistributed to the insured. (As with all Islamic finance, funds must not be invested in ''[[haram]]'' activities like interest-bearing instruments and enterprises involved in alcohol or pork.)<ref name="DBTCI">{{cite web|title=Difference between Takaful and Conventional Insurance|url=http://www.takaful.com.pk/TakafulVsConventional.html|website=Takaful Pakistan|access-date=21 July 2016|date=c. 2009|archive-url=https://web.archive.org/web/20160722213627/http://www.takaful.com.pk/TakafulVsConventional.html|archive-date=22 July 2016|url-status=dead}}</ref>

Like other Islamic finance operations, the ''takaful'' industry has been praised by some for providing "superior alternatives" to conventional equivalents;<ref name="PfEoTit21C">{{cite web |author1=Omar Fisher |author2=Dawood Y. Taylor |date=April 2000 |url=http://ifpprogram.com/login/view_pdf/?file=Prospects%20for%20the%20Evolution%20of%20Takaful%20in%20the%2021st%20Century.pdf&type=Project_Publication |title=Prospects for Evolution of Takaful in the 21st Century: Origins of Takaful |work=[[President and Fellows of Harvard College]] |access-date=18 January 2018 |archive-date=2 August 2020 |archive-url=https://web.archive.org/web/20200802012313/http://ifpprogram.com/login/view_pdf/?file=Prospects%20for%20the%20Evolution%20of%20Takaful%20in%20the%2021st%20Century.pdf&type=Project_Publication |url-status=dead }}</ref> and criticized by others for not being significantly different from them in its use of the "[[law of large numbers]]" to spread risk,<ref>Siddiqui, Mohammad Najatuallah "Islamic banking and finance in theory and practice: A survey of the state of the art." ''Islamic Economic Studies'', 13 (2) (February): 1–48</ref> or its use of conventional corporate (not mutual) management practices.{{sfn|Khan|2013|p=409}}<ref name="MeGIFLEP2006:170">[[Murabaha#MeGIFLEP2006|El-Gamal, ''Islamic Finance'', 2006]]: p.170</ref>

The industry is projected to reach $25 billion in size by the end of 2017.<ref name="bi.com">{{cite web|title=Global takaful industry to reach $25 billion: Research |url=http://www.businessinsurance.com/article/20170106/STORY/912311289/Global-takaful-industry-to-reach-$25-billion-Research|website=BusinessInsurance.com|date=6 January 2017 |access-date=6 September 2017}}</ref>

====Credit cards====
While a number of scholars (Manzur Ahmad, Hossein Askari, Zamir Iqbal and Abbas Mirakhor) have cast doubt on the Shariah compliance of any kind of credit card – or at least cards that "can offer the same service as the conventional credit card"<ref name="Ahmad_2008:83-124">Ahmad, Manzur. 2008. Credit cards ki shari'i hathiyat [Legal position of credit cards]. Urdu. ''Fikro Nazar'' (Islamibad) 45 (4)(April–June): 83–125.</ref>{{sfn|Khan|2013|p=255}}<ref name="Askari_Iqbal_Mirakhor_2009:135">Askari, Hossein, Zamir Iqbal and Abbas Mirakhor (2009. ''New Issues in Islamic finance and economics: Progress and challenges.'' Singapore: John Wiley & Sons (Asia) p.135)</ref> – there are credit cards claiming to be Shariah-compliant (particularly in Malaysia, where as of about 2012 they were offered by Bank Islam Malaysia Berhad, CIMB Islamic Bank Berhad, HSBC Amanah Malaysia Berhad, Maybank Islamic Berhad, RHB Islamic Bank Berhad, Standard Chartered Berhad, and Am Islamic Bank Berhad.<ref name="basri-7-8">{{cite web|last1=Binti Hasan Basri|first1=Maryam Nasuha|last2=Nor|first2=Normadalina Mohamad|last3=Binti Abdul Haklif|first3=Siti Zubaidah|last4=Binti Hashim|first4=Mastura|title=ISLAMIC CREDIT CARDS: ISSUES AND CHALLENGES IN ACHIEVING MAQASID SHARIAH|url=https://www.academia.edu/11334804|website=academia.edu|access-date=27 September 2017|pages=7–8|date=n.d.}}{{Dead link|date=February 2023 |bot=InternetArchiveBot |fix-attempted=yes }}</ref>)<ref name="basri-3">{{cite web|last1=Binti Hasan Basri|first1=Maryam Nasuha|last2=Nor|first2=Normadalina Mohamad|last3=Binti Abdul Haklif|first3=Siti Zubaidah|last4=Binti Hashim|first4=Mastura|title=ISLAMIC CREDIT CARDS: ISSUES AND CHALLENGES IN ACHIEVING MAQASID SHARIAH|url=https://www.academia.edu/11334804|website=academia.edu|access-date=27 September 2017|page=3|date=n.d.}}{{Dead link|date=February 2023 |bot=InternetArchiveBot |fix-attempted=yes }}</ref>
These generally follow one of a number of arrangements:

#''ujra'' (the client simply pays an annual service fee for using the card);<ref name="Paxford-2010-19"/>
#''ijara'' (The card is used as a leased asset. Ownership of whatever is purchased is transferred to the card user after installment payments are complete.);<ref name="Paxford-2010-19"/>
#''kafala'' (The bank acts as a kafil (guarantor) for the transactions of the card holder. For its services, the card holder is obligated to pay ''kafala bi ujra'' (a fee));<ref name="Paxford-2010-19"/>
#''qard'' (The client acts as the borrower and the bank as a lender.);<ref name="Paxford-2010-19"/>
#''bai' al 'ina/wadi'ah'' (The bank sells the customer some item/commodity at a certain price and then shortly thereafter repurchases it from the client at a lower price. The difference between the two prices is the income of the bank for its services in administering the card. The customer's initial payment to the bank serves as the account balance for the credit card and ceiling limit of what can be spent. The bank's repayment to the customer constitutes whatever balance is left over after purchases.)<ref name="Paxford-2010-19">{{cite journal|last1=Paxford|first1=Beata|title=Questions of price and ethics: Islamic banking and its competitiveness|journal=Newhorizon|date=April–June 2010|issue=175|pages=18–19|url=http://www.islamic-banking.com/resources/7/NewHorizon%20Previouse%20Issues/NewHorizon_Apr-Jun-10.pdf|access-date=27 September 2017|issn=0955-095X|archive-url=https://web.archive.org/web/20180219024157/http://www.islamic-banking.com/resources/7/NewHorizon%20Previouse%20Issues/NewHorizon_Apr-Jun-10.pdf|archive-date=19 February 2018|url-status=dead}}</ref>
#cards that act much like [[debit card]]s, with any transaction "directly debited" from the holder's bank account.<ref name="FJIFD2012:107">[[Sukuk#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:107</ref>

==== Funds ====

Islamic funds are professionally managed investment funds that pool money from many investors to purchase securities that have been screened for Sharia compliance. They include mutual funds holding [[Stock|equity]] and/or [[sukuk]] securities,<ref name="cpivsmf-2005-2">{{cite book|last1=Elfakhani|first1=Said|last2=Hassan|first2=M Kabir|last3=Sidani|first3=Yusuf |title=Comparative Performance of Islamic Versus Secular Mutual Funds|date=November 2005 |page=2 |url=https://www.isfin.net/sites/isfin.com/files/comparative_performance_of_islamic_versus_secular_mutual_funds.pdf |access-date=11 October 2017}}</ref><ref name="pwc-2009">{{cite web |url=https://www.pwc.com/gx/en/financial-services/islamic-finance-programme/assets/shariah-compliant-funds.pdf |title=Shariah-compliant funds: A whole new world of investment |date=2009 |publisher=Price Waterhouse Cooper |access-date=17 January 2018}}</ref> but Islamic "alternative" funds deal in "anything from private equity and real estate to infrastructure and commodity asset classes."<ref name="Kamso">{{cite book|last1=Kamso|first1=Noripah|title=Investing in Islamic Funds: A Practitioner's Perspective|publisher=Wiley|url=https://books.google.com/books?id=E9xvQgNQoNAC&q=islamic++funds+and+reits&pg=PT71|access-date=6 November 2017|isbn=9781118638880|date=2013-05-13}}</ref> They began growing fairly rapidly in about 2004,<ref>{{Cite web|url=https://www.pwc.com/gx/en/financial-services/islamic-finance-programme/assets/shariah-compliant-funds.pdf |title=Shariah-compliant funds: A whole new world of investment* |date=2009 |website=pwc.com|access-date=19 January 2017}}</ref> and as of 2014 there were 943 Islamic mutual funds worldwide and as of May 2015, they held $53.2 billion of assets under management,<ref name="Reuters-2015">{{cite news|last1=Vizcaino|first1=Bernardo|title=Islamic mutual funds fall short of global demand -study |url=https://www.reuters.com/article/islam-financing-funds/islamic-mutual-funds-fall-short-of-global-demand-study-idUSL5N0YA04I20150519 |access-date=7 September 2017 |work=Reuters|date=19 May 2015}}</ref> with "latent demand" for considerable growth.<ref name="Reuters-2015"/>

For equity mutual funds, companies whose shares are being considered for purchase must be screened 
#to exclude those that are involved in alcohol, tobacco, pork, adult entertainment industry, gambling, weapons, etc., but also 
#those that are "engaged in prohibited speculative transactions (involving uncertainty or gambling), which are likely leveraged with debt", by examining the company's "financial ratios" to meet "certain financial benchmarks".<ref name="dummie-types">{{cite web|title=Types of Islamic Financial Products|url=http://www.dummies.com/how-to/content/types-of-islamic-financial-products.html|website=For Dummies|access-date=6 August 2016}}</ref>

Benchmarks to gauge the (equity) funds' performance include the Dow Jones Islamic market index series<ref>{{cite web |url=http://us.spindices.com/index-family/shariah/dow-jones-islamic-market |title=S&P Dow Jones Indices » DOW JONES ISLAMIC MARKET |access-date=12 February 2015}}</ref> and the FTSE Global Islamic Index Series.<ref>{{Cite web |url=http://www.ftse.com/japanese/Indices/FTSE_Global_Islamic_Index_Series/index.jsp |title=FTSE Global Islamic Index Series |access-date=13 April 2013 |archive-date=15 January 2012 |archive-url=https://web.archive.org/web/20120115172808/http://www.ftse.com/japanese/Indices/FTSE_Global_Islamic_Index_Series/index.jsp |url-status=dead }}</ref>

At least from 2000 to 2009, Islamic equity funds under-performed both Islamic and conventional equity benchmarks, particularly as the [[2008 financial crisis]] set in (according to a study by Raphie Hayat and Roman Kraeuss).<ref name="Hayat">{{cite journal|last1=Hayat|first1=Raphie|last2=Kraeussl|first2=Roman|title=Risk and return characteristics of Islamic equity funds|journal=Emerging Markets Review|date=June 2011|volume=12|issue=2|pages=189–203|doi=10.1016/j.ememar.2011.02.002|s2cid=6820282}}</ref>

====Derivatives====
{{See also|Sharia and securities trading#Use in Islamic finance}}
As mentioned above (see Islamic laws on trading), "almost all conservative Sharia scholars" believe [[derivative (finance)|derivatives]] (i.e. securities whose price is dependent upon one or more underlying assets) are in violation of Islamic prohibitions on ''gharar''.<ref name="Mills and Presley 1999"/>{{sfn|Khan|2015|p=111}}<ref name="dummies-FMTaIF">{{cite web|title=FINANCIAL MARKET TRADING AND ISLAMIC FINANCE |url=http://www.dummies.com/personal-finance/islamic-finance/financial-market-trading-and-islamic-finance/ |website=Dummies.com |publisher=Wiley |access-date=18 May 2017}}</ref> This, however, has not stopped the Islamic finance industry from using some of these instruments, and derivative permissibility in Islam is a subject of "heated debate".<ref name="Kettell-2010"/>

As of 2013 the Islamic derivatives market was "in its infancy" and its size was not known. 
Contracts or combinations of contracts for derivatives<ref name="FJIFD2012:183">[[#FJIFD2012|Jamaldeen, ''Islamic Finance For Dummies'', 2012]]:183</ref> include swaps and options:

=====Swaps=====
Faleel Jamaldeen describes the Islamic swap market as being composed of two kinds of swaps: 
*Profit rate swaps are "based on exchanging fixed for floating rate profits".<ref name="FJIFD2012:183"/> (Similar to interest rate swaps in conventional finance. As of 2007, this kind of swap had the largest market of any variety of swaps.)<ref>BIS Semiannual OTC derivatives statistics at end-December 2008</ref> According to Harris Irfan, the Islamic finance market is "awash" with "profit rate swap" contracts,<ref name="HIHB2015:174-5">[[#HIHB2015|Irfan, ''Heaven's Bankers'', 2015]]: p.174-5</ref> including a global standard developed by the IIFM and [[International Swaps and Derivatives Association]].<ref name=HIHB2015:174-5/><ref name="launch">{{cite web |title=IIFM and ISDA Launch Tahawwut (Hedging) Master Agreement |url=http://www.isda.org/media/press/2010/press030110.html |website=ISDA |access-date=12 October 2017 |date=1 March 2010 |archive-url=https://web.archive.org/web/20171014083539/http://www.isda.org/media/press/2010/press030110.html |archive-date=14 October 2017 |url-status=dead }}</ref> In Malaysia, the "Islamic Profit Rate Swap" (IPRS) hedging tool is popular.<ref name="IBRC">{{Cite news|url=https://islamicbankers.me/islamic-banking-islamic-contracts/in-focus-islamic-profit-rate-swap/|title=Treasury : Waad in Islamic Profit Rate Swap|date=17 August 2011|work=Islamic Bankers Resource Centre|access-date=25 October 2017|language=en-US}}</ref>
*Cross-currency swaps are used by investors to "transfer currency fluctuation risk among themselves."<ref name="FJIFD2012:183"/>

=====Put and call options=====
The Islamic finance equivalent of a conventional [[call option]]{{#tag:ref|[[Option (finance)|Options]] are a "common form" of a financial derivative.<ref name="OCaP">{{cite web|title=Options: Calls and Puts|url=http://www.investopedia.com/exam-guide/cfa-level-1/derivatives/options-calls-puts.asp|website=Investopedia|access-date=7 September 2017}}</ref>| group=Note}} is known as an ''urbun'' (lit. "down payment"); the equivalent of a [[put option]] is known as a "reverse ''urbun''".<ref name="Ayub 2007:209-210">{{cite book |last1=Ayub |first1=M. |year=2007 |title=Understanding Islamic Finance |location=Chichester |publisher=John Wiley and Sons}}</ref> In each the seller has the right but not the obligation to either buy (in the case of a call or ''urbun'') or sell (in the case of a put or "reverse ''urbun''") at a pre-determined price by some point in the future. These two Islamic options also have a different name for a "premium", (called a "down payment") and for the "strike price" ("preset price").<ref name="MeGIFLEP2006:181">[[#MeGIFLEP2006|El-Gamal, ''Islamic Finance'', 2006]]: p.181</ref><ref>{{cite book|last1=Kureshi|first1=Hussein|title=Contracts and Deals in Islamic Finance: A User s Guide to Cash Flows, Balance Sheets, and Capital Structures by|chapter-url=https://www.safaribooksonline.com/library/view/contracts-and-deals/9781119020585/c10.xhtml|chapter=10. Bai al Urbun |date=29 December 2014 |publisher=John Wiley & Sons |isbn=978-1-119-02058-5 }}</ref> The options' Islamic distinctiveness has been questioned by analysts,<ref name="MeGIFLEP2006:92">[[#MeGIFLEP2006|El-Gamal, ''Islamic Finance'', 2006]]: p.92</ref><ref name="Ayoub_2014:119">{{cite book |last1=Ayoub |first1=Sherif |year=2014 |title=Derivatives in Islamic Finance: Examining the Market Risk Management Framework  |location=Edinburgh |publisher=Edinburgh University Press |page=119 |url=https://books.google.com/books?id=wFurBgAAQBAJ&q=islamic+finance+reverse+urbun&pg=PA119 |access-date=26 October 2017|isbn=9780748695713  }}</ref> and its use has been criticized by conservative scholars.<ref name="Ayoub_2014:119"/>

====Microfinance====
[[Microfinance]] seeks to help the poor and spur economic development by providing small loans to entrepreneurs too small and poor to interest non-microfinance banks. Its strategy meshes with the "guiding principles" or objectives of Islamic finance, and with the needs of Muslim-majority countries where a large fraction of the world's poor live,{{#tag:ref|("Half of global poverty reside in Muslim world ..."<ref>{{Cite web|url=http://www.alhudacibe.com/imhd/news22.php|title=Islamic Microfinance A Real Hope for Poor|access-date=18 January 2018|archive-date=15 January 2018|archive-url=https://web.archive.org/web/20180115130250/http://www.alhudacibe.com/imhd/news22.php|url-status=dead}}</ref>|group=Note}} many of them small entrepreneurs in need of capital, and most unwilling or unable to use formal financial services.<ref name="Honohon-2007">Honohon, Patrick. 2007. "Cross-Country Variations in Household Access to Financial Services." Presented at the World Bank Conference on Access to Finance, Washington, D.C., 15 March., p.1</ref>

According to the Islamic Microfinance Network website (as of {{circa|2013}}),<ref>{{cite web|url=http://imfn.org/|title=Islamic Microfinance News |work=imfn.org}}</ref>{{sfn|Khan|2013|p=301}} there are more than 300 Islamic microfinance institutions in 32 countries.<ref name="AHCIBE">{{cite web|last1=Mughal|first1=Muhammad Zubair|title=Funding Sources for Islamic Microfinance Institutions |url=http://www.alhudacibe.com/imhd/news43.php|website=alhudacibe.com|publisher=AlHuda Centre of Islamic Banking & Economics|access-date=6 August 2015|archive-date=2 January 2016|archive-url=https://web.archive.org/web/20160102064100/http://www.alhudacibe.com/imhd/news43.php|url-status=dead}}</ref> The products used in Islamic microfinance may include some of those mentioned above – ''qard al hassan'', ''musharaka'', ''mudaraba'', ''salam'', and others.<ref name="microworld.org">{{cite web|title=What is islamic Microfinance ?|url=https://www.microworld.org/en/news-from-the-field/article/what-islamic-microfinance|website=microworld.org|access-date=7 September 2017|date=17 April 2013|archive-date=14 September 2017|archive-url=https://web.archive.org/web/20170914035646/https://www.microworld.org/en/news-from-the-field/article/what-islamic-microfinance|url-status=dead}}</ref>

A number of studies<ref name="NKIM2008:1">[[#NKIM2008|Karim, "Islamic microfinance", 2008]]: p.1</ref><ref name=Dar_2012:184/>{{sfn|Khan|2013|p=301}} have found "very few examples" of microfinance institutions "operating in the field of Islamic finance" and few Islamic banks "involved in microfinance".<ref name="Segrado-2005-4">{{cite book|last1=Segrado|first1=Chiara|title=Case study "Islamic microfinance and socially responsible investments"|date=August 2005|publisher=MEDA PROJECT. Microfinance at the University. University of Torino|page=4}}</ref> 
One 2012 report<ref name="Dar_2012:184">Dar, Humayon A. Rizwan Rahman, Rizwan Malik and Asim Anwar Kamal, ed. 2012. Global Islamic finance report 2012. London: Edbiz Consulting.</ref> found that Islamic microfinance made up less than 1 percent of the global microfinance outreach, "despite the fact that almost half of the clients of microfinance live in Muslim countries and the demand for Islamic microfinance is very strong."{{sfn|Khan|2013|p=301}}

== Monetary system integration ==
Integration of Islamic banking principles with modern monetary systems presents opportunities and challenges for comprehensive financial reform. By 2012, Sharia-compliant assets had grown to over $1.8 trillion,<ref>{{Cite book |last1=Alam |first1=Nafis |url=https://books.google.com/books?id=gr5DDwAAQBAJ&dq=Islamic+finance+$2+trillion&pg=PA33 |title=Islamic Finance: A Practical Perspective |last2=Gupta |first2=Lokesh |last3=Shanmugam |first3=Bala |date=2017-12-18 |publisher=Springer |isbn=978-3-319-66559-7 |language=en}}</ref> raising the importance of how institutions interact with conventional monetary frameworks.<ref>{{Cite book |last1=Askari |first1=Hossein |url=https://books.google.com/books?id=ZDTPfr8Mv-EC&dq=Islamic+conventional+monetary+frameworks+interaction&pg=PA117 |title=Globalization and Islamic Finance: Convergence, Prospects and Challenges |last2=Iqbal |first2=Zamir |last3=Mirakhor |first3=Abbas |date=2011-11-11 |publisher=John Wiley & Sons |isbn=978-1-118-17890-4 |language=en}}</ref>

=== Central banking and Islamic finance interface ===

==== Dual banking systems ====
Most countries with significant Islamic banking sectors operate dual banking systems where central banks supervise both Islamic and conventional banks.<ref>{{Cite book |last1=Molyneux |first1=P. |url=https://books.google.com/books?id=ENFlCwAAQBAJ&dq=Islamic+dual+banking+systems&pg=PA162 |title=Banking and Financial Systems in the Arab World |last2=Iqbal |first2=M. |date=2016-01-13 |publisher=Springer |isbn=978-0-230-51212-2 |language=en}}</ref> Malaysia pioneered this system, which requires central banks to develop specialized regulatory frameworks accommodating interest-based as well as profit-sharing models.<ref>{{Cite book |last1=Hassan |first1=Kabir |url=https://books.google.com/books?id=jvTtDzD5uFQC&dq=Islamic+dual+banking+systems&pg=PA135 |title=Handbook of Islamic Banking |last2=Lewis |first2=Mervyn |date=2009-01-01 |publisher=Edward Elgar Publishing |isbn=978-1-84720-541-4 |language=en}}</ref>

The Bank Negara Malaysia has established a [[Islamic Financial Services Board|board]], setting international standards<ref>{{Cite book |last1=Bacha |first1=Obiyathulla Ismath |url=https://books.google.com/books?id=S7ySDwAAQBAJ&dq=Bank+Negara+Malaysia+become+%22international+standard%22&pg=PA59 |title=Islamic Capital Markets: A Comparative Approach |last2=Mirakhor |first2=Abbas |date=2019-02-27 |edition=Second |publisher=World Scientific |isbn=978-981-327-465-5 |language=en}}</ref> for separate Islamic banking subsidiaries with distinct capital requirements, liquidity management tools, and supervisory frameworks.<ref>{{Cite book |last1=Ismail |first1=Abdul Ghafar |url=https://books.google.com/books?id=fAHzEAAAQBAJ&dq=islamic+banking+separate+subsidiary+capital+requirement&pg=PA222 |title=Economic Capital and Risk Management in Islamic Finance |last2=Zulkhibri |first2=Muhamed |date=2024-03-06 |publisher=Taylor & Francis |isbn=978-1-003-85817-1 |language=en}}</ref> Under this system, central banks maintain parallel monetary policy instruments: conventional tools based on interest rate, and Islamic alternatives based on profit-sharing ratios.<ref>{{Cite book |last1=Zulkhibri |first1=Muhamed |url=https://books.google.com/books?id=rkqzDwAAQBAJ&dq=Islamic+banking+policy+conventional+interest+profit-sharing&pg=PA48 |title=Islamic Monetary Economics and Institutions: Theory and Practice |last2=Manap |first2=Turkhan Ali Abdul |last3=Muneeza |first3=Aishath |date=2019-10-01 |publisher=Springer Nature |isbn=978-3-030-24005-9 |language=en}}</ref>

==== Monetary policy transmission mechanisms ====
Traditional monetary policy operates by central banks altering benchmark rates, affecting variable retail rates.<ref>{{Cite book |last1=Mahadeva |first1=Lavan |url=https://books.google.com/books?id=Wz5PEAAAQBAJ&dq=monetary+policy+benchmark+rates+influence&pg=PA18 |title=How Monetary Policy Works |last2=Sinclair |first2=Peter J. N. |date=2004-08-02 |publisher=Routledge |isbn=978-1-134-28984-4 |language=en}}</ref> Islamic banking's prohibition on interest challenges this transmission mechanism.<ref>{{Cite book |last1=Monga |first1=Célestin |url=https://books.google.com/books?id=uFn1CgAAQBAJ&dq=Islamic+banking+prohibition+interest+transmission+challenge&pg=RA1-PT461 |title=The Oxford Handbook of Africa and Economics: Volume 2: Policies and Practices |last2=Lin |first2=Justin Yifu |date=2015-07-02 |publisher=Oxford University Press |isbn=978-0-19-151074-8 |language=en}}</ref>

Alternative transmission channels in Islamic banking include:<ref>{{Cite book |last1=Juhro |first1=Solikin M. |url=https://books.google.com/books?id=5MhCEQAAQBAJ |title=Inclusive Welfare: On the Role of Islamic Social-Public Finance and Monetary Economics |last2=Syarifuddin |first2=Ferry |last3=Sakti |first3=Ali |date=2025-01-30 |publisher=Springer Nature |isbn=978-981-96-0051-9 |language=en}}</ref>

* The '''asset price channel''' works through exchange rates and equity prices.
* The '''credit channel''' impacts bank lending and corporate balance sheets.
* The '''profit- and loss-sharing channel''' works through reference rate increases raising interbank and lending rates, which restrict borrowing.

In Islamic economics frameworks, zakat helps avoid the zero lower bound liquidity trap.<ref>{{Cite book |last=Akkas |first=Erhan |url=https://books.google.com/books?id=BNE9EQAAQBAJ&dq=Islamic+less+%22liquidity+trap%22&pg=PA25 |title=Islamic Economics and Financial Crisis |date=2025-02-18 |publisher=Taylor & Francis |isbn=978-1-040-31113-4 |language=en}}</ref>

=== 100% reserve banking models ===
Some Islamic economists advocate for full reserve banking as more consistent with Islamic principles.<ref>{{Cite book |last1=Çıkıryel |first1=Burak |url=https://books.google.com/books?id=jHu3EAAAQBAJ&dq=Islamic+finance+advocates+full+reserve+banking&pg=PA1936 |title=The Islamic Finance Industry: Issues and Challenges |last2=Azrak |first2=Tawfik |date=2023-05-26 |publisher=Taylor & Francis |isbn=978-1-000-88265-0 |language=en}}</ref>

Under this system:

* '''Demand deposits''' would be backed by 100% reserves, functioning as safekeeping services (wadi'ah) rather than loans to banks.<ref>{{Cite book |last1=Al-Shammari |first1=Minwir |url=https://books.google.com/books?id=1_ZGEAAAQBAJ&dq=demand+deposit+wadiah+not+loan&pg=PT303 |title=Islamic Business Administration: Concepts and Strategies |last2=Farooq |first2=Mohammad Omar |last3=Masri |first3=Hatem |date=2020-03-13 |publisher=Bloomsbury Publishing |isbn=978-1-350-30518-2 |language=en}}</ref>
* '''Investment accounts''' would have depositors accept risk of loss in exchange for potential profits.<ref>{{Cite book |last=Alrifai |first=Tariq |url=https://books.google.com/books?id=DCWsBwAAQBAJ&dq=Islamic+investment+accounts+risk+loss+potential+profits&pg=PA141 |title=Islamic Finance and the New Financial System: An Ethical Approach to Preventing Future Financial Crises |date=2015-06-02 |publisher=John Wiley & Sons |isbn=978-1-118-99063-6 |language=en}}</ref>
* '''Money creation''' would be limited to central bank issuance, potentially backed by gold.<ref>{{Cite book |last=Krichene |first=Noureddine |url=https://books.google.com/books?id=XSazUrPgniUC&dq=Islamic+full+reserve+money+creation+central+bank+gold&pg=PT454 |title=Islamic Capital Markets: Theory and Practice |date=2012-11-28 |publisher=John Wiley & Sons |isbn=978-1-118-24716-7 |language=en}}</ref>

=== Asset-backed money creation ===
Islamic banking's asset-backed financing offers an equilibrium between conventional fractional reserve banking and full reserve systems.<ref>{{Cite book |last1=Maghrebi |first1=Nabil |url=https://books.google.com/books?id=3bA7CwAAQBAJ&dq=Islamic+banking+asset-backed+financing+fractional+full+reserve&pg=PA312 |title=Intermediate Islamic Finance |last2=Mirakhor |first2=Abbas |last3=Iqbal |first3=Zamir |date=2016-01-08 |publisher=John Wiley & Sons |isbn=978-1-118-99076-6 |language=en}}</ref>

Under this approach:

* '''Credit creation''' is backed by real assets.<ref>{{Cite book |last1=Hassan |first1=M. Kabir |url=https://books.google.com/books?id=Vt76DwAAQBAJ&dq=Islamic+credit+creation+backed+real+economic+assets&pg=PA159 |title=Introduction To Islamic Banking And Finance: An Economic Analysis |last2=Shaikh |first2=Salman Ahmed |last3=Kayhan |first3=Selim |date=2020-08-12 |publisher=World Scientific |isbn=978-981-12-2270-2 |language=en}}</ref>
* '''Speculative lending''' is restricted by requirements for underlying commodities or services.{{sfn|Visser|2013|p=90}}
* '''Money supply growth''' becomes closer tied to real production than monetary policy decisions.<ref>{{Cite book |last1=Iqbal |first1=Zamir |url=https://books.google.com/books?id=dFo8EAAAQBAJ&dq=Islamic+money+supply+closely+real+economic+activity+than+monetary+policy+decisions&pg=PT225 |title=Handbook of Analytical Studies in Islamic Finance and Economics |last2=Akin |first2=Tarik |last3=Maghrebi |first3=Nabil El |last4=Mirakhor |first4=Abbas |date=2020-08-10 |publisher=Walter de Gruyter GmbH & Co KG |isbn=978-3-11-058517-9 |language=en}}</ref>

Research suggests this approach shows greater resilience, though trade-offs between self-insurance against liquidity risks and opportunity costs remain.<ref>{{Cite book |last1=Dolgun |first1=Muhammed Habib |url=https://books.google.com/books?id=LOsUEAAAQBAJ&dq=Islamic+approach+greater+financial+stability+efficiency&pg=PA17 |title=An Alternative Approach to Liquidity Risk Management of Islamic Banks |last2=Mirakhor |first2=Abbas |date=2021-01-18 |publisher=Walter de Gruyter GmbH & Co KG |isbn=978-3-11-058290-1 |language=en}}</ref>

== Compliance with Islamic goals and Sharia ==
{{main|Assessments, controversies, challenges in Islamic finance}}

[[File:Bank Islam Brunei Darussalam (Seria).jpg|thumb|[[Bank Islam Brunei Darussalam]] in [[Brunei]].]]

These are the [[Emic and etic|emic]] (from within) issues discussed within the Islamic community for the compliance of Islamic banking and finance with Sharia and desired Islamic objectives.

===Challenges, criticism – industry view===
Key among the challenges faced by Islamic banking, as of 2016 (according to the [[Sukuk#SGIER2015-6|''State of the Global Islamic Economy Report'', 2015/16]] and the [[International Monetary Fund|IMF]]), are:
*"low levels" of public awareness;<ref>"What customers want; Customer insights to inform growth strategies of Islamic banks in the Middle East", PwC, October 2014</ref><ref name=SGIER2015-6:70/>
*a need for better regulation, better cooperation between Islamic and conventional financial standard-setters to deal with complexity and to "address the unique risks of the industry";<ref name=imf-2015/>
*a "scarcity of Shariah-compliant [[monetary policy]] instruments";<ref name="imf-2015">"[https://www.imf.org/external/pubs/ft/sdn/2015/sdn1505.pdf Islamic Finance: Opportunities, Challenges, and Policy Options]", IMF, April 2015, p.6-7</ref>
*"underdeveloped" safety nets and resolution frameworks such as Sharia compliant deposit insurance systems and "[[Lender of last resort|lenders-of-last-resort]]";<ref name=imf-2015/><ref name=SGIER2015-6:70/>
*better Shariah compliance by regulators.<ref name="SGIER2015-6:70">[[#SGIER2015-6|''State of the Global Islamic Economy Report'', 2015/16]]:70</ref>

Another challenge in Islamic banking has been the exploitation of poor or vulnerable people in the name of religion.

===Challenges, criticism – scholars and critics===
Critics have complained that Islamic banking and finance closely resembles the conventional sort but has "higher costs, bigger risks",{{sfn|Khan|2013|p=400}} – a situation that has not been remedied by "learning" over the decades.{{sfn|Farooq|2005|p=36}}
Other issues/complaints include a lack of policies to uplift small traders and the poor;<ref name=IIFTU1998:167-8/> the challenge of inflation,{{sfn|Khan|2013|p=204}} late payments,{{sfn|Khan|2013|pp=207-208}} the lack of [[Hedge (finance)|hedging]] of currencies and rates <ref name=HIHB2015:163-4/> or of Sharia-compliant places to park short term funds for liquidity, the non-Muslim ownership of much of Islamic banking,<ref name=HIHB2015:237/> and the concentration of what ownership is in Muslim hands.<ref name="Iqbal and Molyneux, p. 122"/>

====Hegemony of hand-picked highly paid Shariah experts ====
Some Islamic banking observers believe the industry suffers from handpicked, highly paid Shariah experts who have been approving financial products using ''[[ḥiyal]]'' (legal stratagems) to follow Sharia law,{{sfn|Farooq|2005|p={{page needed|date=September 2022}}}} "shunning controversial issues", and/or "rubber stamping" bank management decisions after perfunctory reviews,<ref name="IFGE2010:227">[[Shariah Board#IFGE2010|Warde, ''Islamic finance in the global economy'', 2000]]: p.227</ref>{{sfn|Khan|2013|p=318}} and that the banking practices approved by this small number of Islamic jurists have moved closer and closer to the practices of conventional non-Islamic banking.<ref name="MeGIFLEP2006:342">[[Murabaha#MeGIFLEP2006|El-Gamal, ''Islamic Finance'', 2006]]: p.34</ref>

====="Fatwa shopping", independence=====
Journalist John Foster quotes an "investment banker based in Dubai":
<blockquote>"We create the same type of products that we do for the conventional markets. We then phone up a Sharia scholar for a Fatwa ... If he doesn't give it to us, we phone up another scholar, offer him a sum of money for his services and ask him for a Fatwa. We do this until we get Sharia compliance. Then we are free to distribute the product as Islamic."<ref name=FosterMM2010/></blockquote>

According to Foster, this practice of "shopping" for an Islamic scholar who will issue a fatwa testifying that a banking product obeys [[Shari'ah]] law has led to "top scholars" earning "six-figure sums" for each ''fatwa'', and to Islamic financing mechanisms that appear to outsiders to be [[mortgage]]s "dressed up in Arabic terminology"—such as ''mudarabah'', or ''ijarah'' ([[Lease|lease agreements]]).<ref name=FosterMM2010/>

Mahmoud El-Gamal believes that from the 1970s to the 2000s there has been an evolution of the industry towards "progressively closer approximations" of the practices of conventional banking, approved by "progressively smaller" numbers of jurists (with only a small group for example approving "unsecured lending" to retail and corporate customers through the ''tawarruq'' mode in the early 2000s).<ref name="MeGIFLEP2006:342"/> The scarcity of qualified Shariah supervisors – who need to be trained in both Islamic commercial law and contemporary financial practices – has been noted. One study found the 20 most popular Shariah scholars holding 621 Sharia board positions,<ref name="Unal (2011)">{{cite web|last1=Unal |first1=Murat|date=19 January 2011 |title=The small world of Islamic finance: Shari'ah scholars and governance – A network analytic perspective |volume=6 |publisher=Funds@Work; Zawya Shariah Scholars |url=http://www.iefpedia.com/english/wp-content/uploads/2011/01/Sharia-Network_by_Funds_at_Work_2.pdf-1.pdf}}</ref> creating potential conflicts of interest.{{sfn|Khan|2013|pp=316-317}}

This scarcity also increases fees. Two researchers noted the small group of Shariah experts "earn as much as US$88,5000 per year per bank" and can "charge up to US$500,000 for advice on large capital market transactions."<ref name="Khan_Bhatti_2008:71">Khan, M Mansoor and M Ishaq Bhatti. 2008. ''Developments in Islamic banking: the case of Pakistan''. Houndmills, Basingstoke: Palgrave Macmillan. p.71</ref><ref name="Hasan_2009:96">see also: Hasan, Zubair. 2009. Islamic finance education at the graduate level: Current state and challenges. ''Islamic Economic Studies'' 16 (1, 2) (January): 96</ref>
Income far in excess of what has been customary for Islamic scholars, as well as being eagerly asked for a legal opinion by wealthy, high-status people,<ref name="Kahf_2004:26">Kahf, Monzer. 2004. Islamic banks: The rise of a new power alliance of wealth and Shari'ah scholarship. In ''The politics of Islamic finance,'' ed. Clement Henry and Rodney Wilson, p.26. Edinburgh: Edinburgh University Press.</ref>{{sfn|Khan|2013|p=317}} may lead to what one writer (Muhammad O. Farooq) calls a "certain changes in viewpoint" resulting in "over-stretching the rules of Shariah".{{sfn|Farooq|2005|p={{page needed|date=September 2022}}}}<ref name="Foster_2008:12">Foster, John. 2008. Curb your Enthusiasm. ''Islamic Business and Finance'' 28 (March) 11–13.</ref>

A study of the practice of boards of financial institutions setting the pay and employment of SSB members found this arrangement "compromise(s) the independence of the SSB".<ref name="IFGE2010:236">[[#IFGE2010|Warde, ''Islamic finance in the global economy'', 2000]]: p.236</ref>
Another study found Islamic financial institutions do "not have practices which ensure transparency in the role and functions of the SSBs".<ref name="Grais_Pellegrini_(2006:12)">Grais, Wafik and Matteo Pellegrini. 2006. ''Corporate governance and Shari'ah compliance in institutions offering Islamic financial services.'' Policy research working paper 4054, November. Washington, DC: World Bank., p.12</ref>

====Imitation of conventional finance====
A number of scholarly supporters (such as Taqi Usmani, D.M. Qureshi, Saleh Abdullah Kamel, Harris Irfan) and skeptics of Islamic banking (Muhammad Akram Khan, Muhammad O. Farooq, Feisal Khan, Mahmoud El-Gama, Timur Kuran) have complained of Islamic finance's similarity to conventional banking.

Taqi Usmani argues that the industry has "totally" neglected its "basic philosophy", undermining its own ''raison d'être'';<ref name="IIFTU1998:166">[[#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.166</ref> so that non-Muslims and the Muslim "masses" have now gotten the impression that Islamic banking is "nothing but a matter of twisting documents..."<ref name="IIFTU1998:166"/>

This has happened first by the sidelining [[Profit and loss sharing|risk-sharing finance]] in favor of ''[[murabaha]]'' and other fixed-markup financing of purchases,{{sfn|Khan|2013|p=303}} and further by distorting the rules of that fixed-markup ''murabaha'' (see also '''Ignoring required commodities''' below){{sfn|Khan|2013|pp=xv-xvi}} to effectively provide conventional cash interest loans with "profit rates" that follow conventional interest rates,<ref name="IIFTU1998:165-8">[[#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.165-8</ref><ref name=Qureshi_(2005)/><ref name=Fadel_(2008:656)/>{{sfn|Khan|2013|pp=xv-xvi}}{{sfn|Khan|2013|p=400}} the "net result" being "not materially different from interest based transactions".<ref name="IIFTU1998:165">[[#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.165</ref> (Another violation is the use of ''ijarah'' (leasing) without the "lessor either assuming "the liability for his ownership" or offering "any [[usufruct]] to the lessee".)<ref name="IIFTU1998:167"/>

In March 2009, Usmani<ref name="FosterMM2010"/> (as chairman of the board of scholars of the [[Accounting and Auditing Organization for Islamic Financial Institutions]], or AAOIFI), declared that 85% of sukuk, or Islamic bonds, were "un-Islamic".<ref name="ab-22-11-2007">{{cite news| title=Most sukuk 'not Islamic', body claims| date=22 November 2007| url=http://www.arabianbusiness.com/most-sukuk-not-islamic-body-claims-197156.html#.V4KDEtIrLq4| access-date=10 July 2016| agency=Reuters| publisher=arabianbusiness.com}}</ref> 
Others (Hassan Heikal) have also criticized the authenticity of sukuk.<ref name="Corbett-2007">{{cite web |last1=Sergie|first1=Mohammed Aly|last2=Corbett|first2=Christina|date=17 August 2007|title=Banking on piety |url=http://www.arabianbusiness.com/banking-on-piety-57460.html|website=Arabian Business|access-date=9 November 2017}}</ref> Critics of Islamic banking have called it "a labeling industry" (D.M. Qureshi),{{#tag:ref|at the First Pakistan Islamic Banking and Money Market Conference<ref name=Qureshi_(2005)/>|group=Note}}<ref name="Khan_Bhatti_2008:73">Khan M. Mansoor and M. Ishaq Bhatti. 2008. ''Developments in Islamic banking: The case of Pakistan''. Houndsmills, Basingstoke: Palgrave Macmillan, p.73</ref> or complained that the industry was "busy searching for ways to make it ''similar''" to conventional banking, when it should be demonstrating its differences ([[Mohammad Najatuallah Siddiqui]]).<ref name="Siddiqi_(2006:8)">Siddiqi, M.N. 2006. Islamic banking and finance in theory and practice: A survey of the state of the art. ''Islamic Economic Studies'' 13 (2) February p.8</ref> (A Sharia committee at one bank – Lariba – even issued a fatwa in 1990 stating "no objection to using the term "interest" as an alternative to the term "profit" or "rate of return".)<ref>{{cite web |url=http://www.lariba.com/fatwas/qaradawi.htm |website=Lariba Bank |title=DOCUMENTED SHARI'AA – JURISPRUDENCE – OPINIONS |date=1990 |access-date=27 November 2017 |archive-date=16 September 2017 |archive-url=https://web.archive.org/web/20170916153217/http://www.lariba.com/fatwas/qaradawi.htm |url-status=dead }}</ref>{{sfn|Farooq|2005|p=26}}
Other criticisms of Islamic finance include that:
*the industry uses "a whole host of ruses and subterfuges to conceal" rather than eliminate interest (Muhammad Akram Khan);{{sfn|Khan|2013|pp=xv-xvi}}
*the industry charges higher fees for financial products that have "all the economic features of that conventional product"Mahmoud Amin El-Gamal,{{#tag:ref|a professor of economics at [[Rice University]] (United States)|group=Note}} and Mohammad Fadel<ref name=Fadel_(2008:656)/><ref name="MeGIFLEP2006:20">[[#MeGIFLEP2006|El-Gamal, ''Islamic Finance'', 2006]]: p.20</ref>
*the industry uses the same "formulas for SLR (statutory liquidity requirements), capital adequacy ratio, and risk management standards" as those of "interest-based banks" (Sayyid Tahir).<ref name="(Tahir_(2009:69)">Tahir, Sayyid. 2009. Islamic finance: Undergraduate education. ''Islamic Economic Studies'' 16 (1&2) (January) 53–77</ref>
*it is the same as conventional banking other than in "the technicalities and legal forms", keeping interest but calling it "by another name, such as commissions or profits ...`" (A. W. Duskuki and Abdelazeem Abozaid).<ref name="Dusuki_Abozaid_(2007:146,147)">Duskuki, A.W. and Abdelazeem Abozaid. 2007. A critical appraisal on the challenges of realizing maqasid al-shariah in Islamic banking and finance. ''IIUM Journal of Economics and Management'', 15 (2) 143–165</ref>

=====Explanations=====
Explanations for the similarity between Islamic and conventional banking include: 
*The pressure on Shari'ah boards (which serve as a sort of modern-day equivalent of the medieval "court ulama") to approve the products of institutions that pay their salaries (M.O. Farooq).{{sfn|Farooq|2005|p=25}}{{#tag:ref|M.O. Farooq cites Monzer Kahf as pointing out how the shariah board of one bank (Bank al Taqwa) defended that bank's management after its failure in 1998 "stating that ... the board of directors and the management did their best and took sound finance and investment decisions", when in fact the management had "invested in one single project more than 60 per cent bank's assets .... in violation of well-established banking rules".<ref name="[Kahf in Henry and Wilson, note #18, p.35]"/>{{sfn|Farooq|2005|p=27}}|group=Note}}
*The clash between the large demand by pious Muslims for Islamic financial products and practices, and the impracticality/inefficiency of the Islamic products and practices proposed by Islamic finance evangelists, resolved by use of highly paid (but scarce) scholars "willing to certify conventional instruments as being Shariah-compliant", and the adding of an additional layer of transaction costs on those products (Feisal Khan).{{sfn|Khan|2015|p=114}}
*The lack of training of Sharia experts in the deeper meaning of the Sharia, and in the long-term economic consequences of the widespread use of complex financial transactions (Farooq quoting Mohammad Nejatullah Siddiqi).<ref>{{cite web |url=http://www.siddiqi.com/mns/Role_of_Shariah_Experts.htm |title=Shariah, Economics and the Progress of Islamic Finance: The Role of Shariah Experts |last1=Siddiqi |first1=Mohammad Nejatullah |date= 21 April 2006 |access-date=28 November 2017 |publisher=SEVENTH HARVARD FORUM ON ISLAMIC FINANCE }}</ref>
*The motivation of the evangelists of Islamic banking, which is to reassert "the primacy of Islam" rather than advance fundamental "economic change".<ref name="IMEPITK2004:5">Kuran, ''Islam and Mammon'', 2004: p.5</ref>{{sfn|Khan|2015|p=113}}

====Social responsibility and emphasis====
Following Islamic principles, "Islamic banks were supposed to adopt new financing policies and to explore new channels of investments" to encourage development and raise the standard of living of "small scale traders", but Taqi Usmani complains "very few Islamic banks and financial institutions have paid attention to this aspect".<ref name="IIFTU1998:167-8"/> 
Islamic scholar [[Mohammad Hashim Kamali]] laments the focus on short-term financing by Islamic banks, this financing being "largely concerned with the financing of goods already produced, and not with the creation or increase of production capital or with facilities like factories and plants, infrastructure etc."<ref>Mohammad Hashim Kamali. Equity and Fairness in Islam [Cambridge, UK: The Islamic Texts Society, 2005], [p. 104]</ref>{{sfn|Farooq|2005|p=22}} Islamic bonds, also known as sukuk, have emerged as a new financial instrument to fund ethical transactions such as the project for the Global Alliance for Vaccines and Immunisation. To support the growth of Islamic financing, governments must establish measures to create a level playing field with regards to liquid secondary markets and equal regulation and taxes that match conventional banking.<ref>{{Cite web|last=Jaffer|first=Sohail|date=22 June 2016 |url=https://www.europeanfinancialreview.com/rejuvenating-the-european-economy-the-role-of-islamic-finance/ |title=Rejuvenating the European Economy: The Role of Islamic Finance |website=European Financial Review |archive-url=https://web.archive.org/web/20190409075340/http://www.europeanfinancialreview.com/rejuvenating-the-european-economy-the-role-of-islamic-finance/|archive-date=2019-04-09 |url-status=dead}}</ref>

Others:
*protest the lack of "a different type of banking which was aligned to fairness, equitable income distribution, and ethical modes of investment" (Muhammad Akram Khan).{{sfn|Khan|2013|p=303}}
*propose emphasizing "community banking, microfinance, socially responsible investment and the like." (Mahmoud El-Gamal).<ref name="MeGIFLEP2006:xii">[[#MeGIFLEP2006|El-Gamal, ''Islamic Finance'', 2006]]: p.xii</ref>
*complain that while use of profit and loss sharing by Islamic banks is in decline, in the non-Muslim West [[venture capital]] – which operates under the same principles as ''darabah'' (minus the prohibition on haram products) – has "financed the global high-tech industry" and could potentially "bring major benefits" to poor Muslim countries seeking economic development ([[Timur Kuran]]).<ref name="Worstall-Forbes-2013">{{cite news|last1=Worstall|first1=Tim|title=There's Nothing Wrong With Islamic Finance As Long As It Really Is Islamic Finance|url=https://www.forbes.com/sites/timworstall/2013/03/16/theres-nothing-wrong-with-islamic-finance-as-long-as-it-really-is-islamic-finance/#609a0f446939|access-date=29 July 2016|agency=Forbes|date=16 March 2013}}</ref>
*challenge the basic premise of Islamic banking, arguing that "greed and profit" are more serious and widespread causes of exploitation than interest on loans, which may not truly constitute forbidden ''[[riba]]'' in a competitive, regulated market (Muhammad O. Farooq).{{sfn|Farooq|2005|pp=30-32}}
<blockquote>The world in reality is full of exploitation: child exploitation, sexual exploitation, labor exploitation, etc. Interest is probably, if any, a small component in accounting for global exploitation. Yet, the proponents of Islamic economics and finance are fixated with interest.{{sfn|Farooq|2005|pp=34-35}}</blockquote>
Farooq cites as an example the profit (not interest) motive of the [[East India Company]] that colonized and ruled India at the expense of the Muslim [[Mughal Empire]] until 1858.{{sfn|Farooq|2005|pp=30-32}} He notes a lack of empirical or focused ''studies'' (as opposed to polemical fulminating) in Islamic economics on the subject of exploitation or injustice.{{sfn|Farooq|2005|pp=30-32}}{{#tag:ref|(For example, Farooq complains there is "not a single citation for exploitation or injustice"{{sfn|Farooq|2005|p=30}} in two substantial bibliographies on (orthodox) Islamic economics – ''Muslim Economic Thinking: A Survey of Contemporary Literature'', with "700 entries under 51 subcategories over 115 pages", and ''Islamic Economics: Annotated Sources in English and Urdu'' by Muhammad Akram Khan. [Leicester, UK; Islamic Foundation, 1983]|group=Note}}

====Profit and loss sharing and its problems====
{{main|Profit and loss sharing#Promises and challenges}}

While profit-loss-sharing modes (or at least ''mudarabah''), were originally envisioned as "the basis of a ''riba''-free banking"<ref name=CMPCM/> – with fixed-return financial models only filling in as supplements – a number of studies (of banks in Saudi Arabia and Egypt,{{#tag:ref|Saudi Arabia and Egypt Islamic banking by Suliman Hamdan Albalawi, publishing in 2006,<ref name=BSiICSAE>{{cite web|last1=Albalawi|first1=Suliman Hamdan|title=Banking System in Islamic Countries: Saudi Arabia and Egypt. A Dissertation Submitted to the School of Law and the Committee on Graduate Studies of Stanford University |url=https://www.law.stanford.edu/sites/default/files/biblio/108/144947/doc/slspublic/AlbalawiSuliman2006JSD.pdf |website=law.stanford.edu |access-date=10 April 2015 |date=September 2006}}</ref>|group=Note}} Malaysia,{{#tag:ref|In Malaysia, another study found the share of musharaka financing declined from 1.4% in 2000 to 0.2% in 2006,<ref>Z. Hasan, "Fifty years of Malaysian economic development: Policies and achievements", ''Review of Islamic Economics'', 11 (2) (2007))</ref><ref name=Asutay_2007:173/>|group=Note}} and of large Islamic banks in general){{#tag:ref| a study from 2000 to 2006 by Khan M. Mansoor and M. Ishaq Bhatti,<ref name=Khan_Bhatti_2008:49>Khan M. Mansoor and M. Ishaq Bhatti. 2008. ''[http://iugc.yolasite.com/resources/Reference%20Book%20HA%20-%20Developments%20in%20Islamic%20Banking.pdf Developments in Islamic banking: The case of Pakistan] {{Webarchive|url=https://web.archive.org/web/20181222165032/http://iugc.yolasite.com/resources/Reference%20Book%20HA%20-%20Developments%20in%20Islamic%20Banking.pdf |date=22 December 2018 }}''. Houndsmills, Basingstoke: Palgrave Macmillan, p.49</ref>{{sfn|Khan|2013|pp=322-323}} survey by F. Khan of the largest Islamic banks published in 2010 found PLS use ranging from between 0.5% and 21.6%.<ref name="Khan 2010b 811">{{cite journal |last1=Khan |first1=F. |title=How "Islamic" is Islamic Banking? |journal=Journal of Economic Behavior & Organization |volume=76 |issue=3 |year=2010b |page=811|doi=10.1016/j.jebo.2010.09.015 }}</ref>|group=Note}} have shown fixed-return products now far exceed profit-loss-sharing (PLS) modes in [[assets under management]].{{sfn|Khan|2013|p=275}}

Explanations (offered by two authors, Humayon A. Dar and J.R. Presley), for why PLS instruments – namely ''mudaraba'' and ''musharaka'' financing – have declined to almost negligible proportions include:
# There is an inherent disincentive for the bank's client to report profit, because the more it declares, the more of the client's money will go to the financing bank, and the less it will get to keep.<ref name=Darand_Presley_2000-01_5-6/>
# Property rights in most Muslim countries are not properly defined, creating more difficulties for profit-loss sharing financing than for the fixed payment kind.<ref name=Darand_Presley_2000-01_5-6/>
# The competitors of Islamic banks – conventional banks – are firmly established and have centuries of experience. Islamic banks are not yet sure of their policies and practices and feel restrained in taking unforeseen risks.<ref name=Darand_Presley_2000-01_5-6/> 
# PLS is not suitable or feasible in many cases such as short-term resource requirement, working capital needs, or non-profit-generating projects such as in the education and health sectors.<ref name=Darand_Presley_2000-01_5-6/>
# Conventional finance has tax advantages over the Sharia compliant sort in some countries where interest is considered a business expenditure and given tax exemption, while profit (the return of PLS investment) is taxed as income.<ref name=Darand_Presley_2000-01_5-6/>
# There were no secondary markets for Islamic financial products based on PLS (at least as of 2001).<ref name=Darand_Presley_2000-01_5-6/> 
# ''Mudaraba'', one of the forms of PLS, provides limited control rights to shareholders of the bank and "creates an imbalance in the governance structure" of PLS. "Shareholders like to have consistent and complementary control system, which is missing in the case of mudaraba financing."<ref name="Darand_Presley_2000-01_5-6">Dar, Humayon A. and J.R. Presley (2000–01. ''[http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.196.5571&rep=rep1&type=pdf Lack of profit loss sharing in Islamic banking: Management and control imbalance].'', Economics research paper 024. Leicester: Loughborough University. 5–6)</ref>{{sfn|Khan|2013|pp=323-324}}
# Depositors/investors of banks have proven highly resistant to accepting the periodic losses that inevitably arise in investment.<ref name=imf-2015/> (The sharing of banking losses with bank customer/investors had been advanced as a reason why Islamic financial institutions would be more stable than conventional banks.){{sfn|Khan|2013|p=330}}<ref name="Bahru-5-5-15"/> As of at least 2004, no bad debt has translated into losses for depositors in an Islamic bank, and "no Islamic bank has ever written-down the value of its depositor's accounts when it has written-down the value of its non-performing assets"<ref name="El-Hawary et al 2004 16-7">{{cite book |last1=El-Hawary |first1=D. |last2=Grais |first2=Wafik |last3=Iqbal |first3=Zamir |year=2004 |title=Regulating Islamic Financial Institutions: The Nature of the Regulated |publisher=World Bank |series=World Bank Policy Research Working Paper #3227 |location=Washington DC |pages=16–7 |url=http://documents.worldbank.org/curated/en/918931468761945251/pdf/wps3227islamic.pdf |access-date=7 June 2017}}</ref> for fear of losing depositors.

Aside from disadvantages to lenders, one critic of Islamic banking, Feisal Khan, argues that widespread use of PLS could have severe harm to economies by preventing [[central bank]]s from expanding credit – buying bonds, commercial paper, etc. – to prevent [[liquidity crisis|liquidity crises]] that arise from time to time in modern economies.{{sfn|Khan|2015|pp=160–161}}

====Murabaha and ignoring required commodities====
In addition to ignoring profit and loss sharing in favor of ''murâbaḥah'', the industry has been accused of not properly following Shariah regulations of ''murabahah'' (mentioned above), by not buying and selling the commodities/inventory that are "a key condition"<ref name="Vogel and Hayes, pp.8-9"/> of Shariah compliance (done when the bank wants to borrow cash rather than finance a purchase, though they are an added cost and serve no other function). In 2008 Arabianbusiness.com complained that there are<ref name="Irfan-2015-139"/> sometimes "no commodities at all, merely cash-flows between banks, brokers and borrowers". Often the commodity is completely irrelevant to the borrower's business and not even enough of the relevant commodities "in existence" in the world "to account for all the transactions taking place".<ref name="mmhi-2008"/> Two other researchers report that for many years multibillion-dollar 'synthetic' ''murabaha'' transactions in London took place, where "many doubt the banks truly assume possession, even constructively, of inventory".<ref name="Vogel and Hayes, pp.8-9"/>{{sfn|Farooq|2005|p=19}}

====Fund mingling====
The original proponents of Islamic banking proponents for "keeping distinct accounts for various types of deposits so that return can be assigned to each type". "In practice", according to critic Muhammad Akram Khan, "Islamic financial institutions pool all types of deposits".{{sfn|Khan|2013|p=322}}

==== Falsification ====
Critics complain that the compliance with Sharia regulations by banks often is nothing more than taking the word of bank or borrower that they have followed compliance rules, with no effective auditing to see if this is true.{{sfn|Khan|2015|p=95}} One observer (L. Al Nasser) complains that "Shariah authorities demonstrate excessive confidence in their subjects when it comes to dealing with parities in the industry", and Shariah audits are needed "to bring about transparency and ensure" that the institutions "deliver what they have committed to their customers". Furthermore, when external Shariah audits are carried out, "many of these auditors frequently complain about the amount of violations that they witness and cannot discuss" because the records they have examined "have been tampered with".<ref name="Nasser-2008">{{Cite journal |last=Al Nasser|first=L.|date=16 February 2008|title=Islamic banking and external auditing|journal=Ashraq Alawast (English Edition)}}</ref><ref name="Zaman-2008">see also {{Cite journal |url=http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1009&context=ijbf |title=Usury (riba) and the place of bank interest in Islamic banking and finance |last=Zaman |first=M.R. |journal=International Journal of Banking and Finance |volume=6 |page=9 |year=2008 |access-date=2 June 2017 |archive-url=https://web.archive.org/web/20161213190200/http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1009&context=ijbf |archive-date=13 December 2016 |url-status=dead }}</ref>

====Following conventional (''haram'') returns====
Although Islamic banking forbids interest, its "profit rates" often are benchmarked to interest rates. Islamic banker Harris Irfan states "there is no question" that benchmarks such as LIBOR "continue to be a necessary metric" for Islamic banks, and that the "overwhelming majority of scholars have come to accept this, however imperfect a solution this may seem",<ref name="HIHB2015:168">[[#HIHB2015|Irfan, ''Heaven's Bankers'', 2015]]: p.168</ref> but Muhammad Akram Khan writes that following the conventional banking benchmark LIBOR "defeats the very purpose for which the Islamic financial products were designed and offered" in the first place.{{sfn|Khan|2013|p=271}}

In addition, skeptics have complained that the rates of return on accounts in Islamic banks are suspiciously close to those of conventional banks, when (in theory) their different mechanisms should lead to different numbers. A 2014 study in Turkey found the long-term relationship between term-deposit rates at three of four "[[participation banking|participation banks]]" (i.e. Islamic banks) "significantly cointegrated" with those of the conventional banks.<ref name="Saraç-15">{{cite journal|last1=Zeren|first1=Feyyaz |last2=Saraç|first2=Mehmet|title=The dependency of Islamic bank rates on conventional bank interest rates: further evidence from Turkey|journal=Applied Economics |date=2015|volume=47|issue=7|pages=669–679 |doi=10.1080/00036846.2014.978076 |s2cid=154962925}}</ref>
According to skeptics this nearness suggests a manipulation of returns by Islamic banks to reassure customers of their financial competitiveness and stability.

====Liquidity====
Islamic banking and finance lacks a way to earn a return on funds "parked" for the short term, waiting to be invested, which puts those banks at a disadvantage to conventional banks.{{sfn|Khan|2013|pp=326-327}}
 
Banks/financial institutions must balance [[Market liquidity|liquidity]] – the ability to convert assets into cash or a cash equivalent quickly in an emergency when their depositors need them without
incurring large losses<ref name="ali-SLMIFI">{{cite journal|last1=ALI|first1=SALMAN SYED|title=State of Liquidity Management in Islamic Financial Institutions|journal=Islamic Economic Studies|date=June 2013|volume=21|issue=1|pages=63–98|url=http://www.irti.org/English/Research/Documents/IES/026.pdf|access-date=19 August 2015|doi=10.12816/0000240|s2cid=17621848|archive-date=5 March 2016|archive-url=https://web.archive.org/web/20160305185348/http://www.irti.org/English/Research/Documents/IES/026.pdf|url-status=dead}}</ref> – with a competitive rate of return on funds. Conventional banks are able to borrow and lend by using the [[interbank lending market]] – borrowing to meet liquidity requirements and investing for any duration including very short periods, and thereby optimize their earnings.{{sfn|Khan|2013|pp=326-327}} Calculating the return for any period of time is straightforward{{sfn|Khan|2013|pp=326-327}} – multiplying the loan's length by the interest rate.

While Muslim countries such as Bahrain, Iran, Malaysia<ref name="IIMM">{{cite web|title=Islamic Interbank Money Market|url=http://iimm.bnm.gov.my/index.php?ch=4&pg=4&ac=22|publisher=Bank Negara Malaysia|access-date=19 August 2015|archive-date=15 September 2015|archive-url=https://web.archive.org/web/20150915152317/http://iimm.bnm.gov.my/index.php?ch=4&pg=4&ac=22|url-status=dead}}</ref><ref>{{cite web|title=International Islamic Liquidity Management Corporation (IILM)|url=http://iilm.com/about-us-p-3804-en/|website=IILM|access-date=19 August 2015|archive-date=3 March 2016|archive-url=https://web.archive.org/web/20160303234719/http://www.iilm.com/about-us-p-3804-en/|url-status=dead}}</ref> 
and Sudan have started to develop an Islamic money market, and have been "issuing securitized papers on the basis of ''musharaka'', ''mudaraba'' and ''ijarah''", at least as of 2013, the "lack of an appropriate and efficient secondary market" has meant the relative volume of these securities is "much smaller" than on the conventional capital market.{{sfn|Khan|2013|pp=326-327}}

Regarding non-PLS "debt-based contracts", one study found that "the business model of Islamic banking is changing over the time and moving in a direction where it is acquiring more liquidity risk."<ref name=ali-SLMIFI/>

To deal with the problem of earning no return on funds held for the sake of liquidity or because of a lack of investment opportunity, many Islamic financial institutions (such as [[Islamic Development Bank]] and the [[Faisal Islamic Bank of Egypt]])<ref name="Warde, p. 50, 144">Ibrahim WARDE. Islamic Finance in the Global Economy [Edinburgh
University Press, 2000]</ref> have "been explicitly and openly earning interest on their excess funds, often invested in safer, debt-like or debt instruments overseas".{{sfn|Farooq|2005|p=21}} Rather than forbidding this, "Shariah-experts have provided the necessary [[fatwa]] of Shari'ah-compliance based on the rules of necessities (''darurah'')", though they require the interest be used for "religiously meritorious purposes".{{sfn|Farooq|2005|p=21}}
<blockquote>Scholars in Islamic finance and banking have invoked necessity to permit exceptional relaxations of rules. They have issued [[fatwa]]s
(opinions) allowing Islamic banks to deposit funds in interest-bearing accounts.<ref name="[Vogel and Hayes, pp. 38-39]">Frank VOGEL and Frank Hayes, III. ''Islamic Law and Finance: Religion, Risk and Return''. [The Hague: Kluwer Law International, 1998], pp. 38–39</ref>{{sfn|Farooq|2005|p=21}}</blockquote>

===Other challenges and issues===
Most Islamic banks have their own Shariah boards ruling on their bank's policies.

'''Management and Islamic banking'''

Recently, scholars have engaged with questions around leading and managing Islamic banks. This field conceptualizes Islamic banks as hybrid organizations that combine business and religious pursuits with distinct challenges for leadership to bring together diverse beliefs, values, and views.<ref>{{Cite journal |last1=Gümüsay |first1=Ali Aslan |last2=Smets |first2=Michael |last3=Morris |first3=Timothy |date=2020-02-01 |title="God at Work": Engaging Central and Incompatible Institutional Logics through Elastic Hybridity |url=https://journals.aom.org/doi/abs/10.5465/amj.2016.0481 |journal=Academy of Management Journal |volume=63 |issue=1 |pages=124–154 |doi=10.5465/amj.2016.0481 |s2cid=169977517 |issn=0001-4273}}</ref>

'''Behavioural Islamic finance'''<ref>{{Cite journal|last1=Khatib|first1=Ahmed Sameer El|last2=Lisboa|first2=Nahor Plácido|title=Religion and Finance|date=2019-07-16|journal=REUNIR Revista de Administração Contabilidade e Sustentabilidade|language=pt|volume=9|issue=1|pages=73–84|doi=10.18696/reunir.v9i1.900|issn=2237-3667|doi-access=free}}</ref>

Behavioural economists typically argue that stock prices can be substantially influenced by the mood of investors. For instance, researchers have found stock prices to be positively affected by positive events such as sunshine and upcoming holidays (Kim and Park, 1994). Ramadan is one of the five pillars of Islam, which is the religious practice of fasting from dawn to sunset during the ninth month of the Islamic calendar. Several studies, such as (Białkowski et al. (2012), Al-Hajieh et al. (2011) and Al-Khazali (2014), have found stocks in Muslim countries to yield higher returns during Ramadan compared to the rest of the year. Their results were explained by the fact that Ramadan encourages Muslims' optimism, which has a positive effect on stock price.

====Lack of Sharia uniformity====
The four schools (''[[Madhhab#Sunni|Madhhab]]'') of Sunni [[fiqh]] (Islamic jurisprudence) apply "Islamic teachings to business and finance in different ways", and have not come closer to agreement. Furthermore, Shari'a boards sometimes change their minds, reversing earlier decisions."<ref name="[Vogel and Hayes, p. 10]">Frank VOGEL and Frank Hayes, III. ''Islamic Law and Finance: Religion, Risk and Return''. [The Hague: Kluwer Law International, 1998], p.10</ref>{{sfn|Farooq|2005|p=25}}

Differences between boards as to what constitutes Sharia-compliance may raise "doubts in the minds of clients" over whether a given bank is truly Sharia-compliant, and should be given their business.<ref name="[Iqbal and Molyneux. p. 109]">Munawar IQBAL and Philip Molyneux. ''Thirty Years of Islamic Banking: History, Performance and Prospects''. [Palgrave, 2005], p.109</ref>

'''Judicial treatment under secular legal systems'''

In non-Islamic common law jurisdictions, the courts may treat Islamic finance contracts as ordinary contracts without regard to their Shariah substance. Legal scholars have also pointed to structural challenges in enforcing Islamic finance contracts within secular legal systems. Building on concerns around form-over-substance practices and Shariah non-compliance, El Daouk (2021) further contends that English courts tend to separate the contractual obligations from the Shariah-based commercial intentions of Islamic finance arrangements.<ref>{{Cite journal |last=Mohamad El Daouk |date=2021-12-31 |title=English Case Law on Islamic Finance: Interpretation and Application of Shariah Principles |url=https://journals.iium.edu.my/iiibf-journal/index.php/jif/article/view/596 |journal=Journal of Islamic Finance |volume=10 |issue=2 |pages=53–66 |doi=10.31436/jif.v10i2.596 |issn=2289-2109|url-access=subscription }}</ref> This means that even if a contract is disputed on religious compliance grounds, it will typically be treated and enforced as a standard contract unless specific Shariah terms are expressly and legally incorporated. This leads to accusations that Islamic banking is 'Islamic' in name only, and that its products are effectively copies of conventional banking products.

====Late payments and defaults====
While in conventional finance late payments/delinquent loans are discouraged by interest continuing to accumulate,{{sfn|Khan|2013|pp=207-208}} according to Ibrahim Warde, 
<blockquote>Islamic banks face a serious problem with late payments, not to speak of outright defaults, since some people take advantage of every dilatory legal and religious device ... In most Islamic countries, various forms of penalties and late fees have been established, only to be outlawed or considered unenforceable. Late fees in particular have been assimilated to riba. As a result, 'debtors know that they can pay Islamic banks last since doing so involves no cost'.<ref name="IFGE2010:163">[[#IFGE2010|Warde, ''Islamic finance in the global economy'', 2000]]: p.163</ref>{{sfn|Khan|2013|pp=207-208}}</blockquote> 
A number of suggestions have been made to deal with the problem.{{#tag:ref|At least in theory late fees may be Islamically justified if they are donated to charity.<ref name="Edward Elgar"/><ref name="kettell-38"/><ref name="al-yusr"/> Some scholars suggest that 'the problem of bad debts be solved by a "cooperative insurance" to which borrowers contribute'.<ref>Siddiqi, Mohammad Nejatullah, ''Muslim Economic Thinking: A Survey of Contemporary Literature'', The Islamic Foundation, Leicester, 2007, p.36</ref>|group=Note}}

====Inflation====
Inflation is also a problem for financing where Islamic banks have not imitated conventional banking and are truly lending without interest or any other charges. Whether and how to compensate lenders for the erosion of the value of their funds from inflation has also been called a problem "vexing" Islamic scholars,{{sfn|Khan|2013|p=204}} since finance for businesses will not be forthcoming if a lender loses money by lending. Suggestions include indexing loans (opposed by many scholars as a type of ''[[riba]]'' and encouraging inflation),<ref>WM-Khan-2002-104>{{cite book | last1=Khan |first1=Waqar Masood |year=2002 |title=Transition to a riba-free economy |location=Islamabad |publisher=International Institute of Islamic Thought and Islamic Research Institute|page=104 |url=https://books.google.com/books?id=ZgDsAAAAMAAJ |isbn=9781565640993}}</ref> denominating loans "in terms of a commodity" such as gold, and further research to find an answer.<ref name="Uthmani-1999-b:48">[http://www.albalagh.net/Islamic_economics/riba_judgement.shtml#Expansion of Artificial Money and Inflation Text of the Supreme Court Shari'ah Appellate Branch decision on riba written] – Expansion of Artificial Money and Inflation by Taqi Uthmani, 1999</ref>{{sfn|Khan|2013|pp=204-206}}

====Non-Muslim influence====
Islamic banking and finance customers, are almost all, if not entirely, Muslims, but the majority of financial institutions that offer Islamic banking services are Western financial institutions not owned by Muslims. Supporters of Islamic banking have cited this interest of Western banks in Islamic banking as evidence of the strong demand for Islamic banking and thus an "achievement of the movement".{{#tag:ref|"Another achievement of Islamic banking may be gauged from the fact that many conventional banks have also started using Islamic banking techniques in the conduct of their business, particularly in dealing either with Muslim clients or in dominantly Muslim regions."<ref name="Iqbal and Molyneux, p.58">Munawar IQBAL and Philip Molyneux. Thirty Years of Islamic Banking: History, Performance and Prospects [Palgrave, 2005] p.58</ref>|group=Note}}

However, critics complain these banks lack a deep faith-based commitment to Islamic banking which means:
#that Muslims employed within these organizations have little input into their actual management, resulting in sometimes suspicion among the Muslim populace as to the diligence of Sharia compliance at these institutions.<ref name="dawn.com"/> 
#that rather than a reflection of the growing strength of Islamic banking, the interest of conventional banks reflects how similar Islamic banking has become to the conventional sort,{{sfn|Farooq|2005|pp=13–14}} so that the latter can enter Islamic banking without making substantive changes to its practices.{{sfn|Farooq|2005|pp=13-14}}
#and that these banks will be more likely to withdraw from the industry when the market takes a downturn.<ref name="HIHB2015:237">[[#HIHB2015|Irfan, ''Heaven's Bankers'', 2015]]: p.237</ref> Harris Irfan argues that the lack of ideological commitment to Islamic banking by non-Muslim banks such as [[Deutsche Bank]] will lead to their withdrawing from the industry when the market takes a downturn. In early 2011 during the housing bubble collapse, "not a single dedicated Islamic structurer or salesperson remained at Deutsche. Islamic finance had become 'a luxury the bank can't afford'".<ref name="HIHB2015:237"/>

====Stability and risk====
Sources differ over whether Islamic banking is more stable and less risky than conventional banking.

Proponents (such as Zeti Akhtar Aziz, the head of the central bank of Malaysia) have argued that Islamic financial institutions are more stable than conventional banks because they forbid speculation<ref name="Bahru-5-5-15"/> and the two main types (in theory) of Islamic banking accounts – "current accounts" and ''mudarabah'' accounts – carry less risk to the bank.{{sfn|Khan|2013|p=330}}
#In a current account the customer earns no return and (in theory) there is no risk of loss because the bank does not invest the account funds. 
#In a ''mudarabah'' account the Islamic bank carries less risk of loan defaults because it shares that risk with the depositor. If the borrower cannot pay back part or all of the money lent to them by the bank, the amount going to the depositor is cut by an equivalent amount, whereas in a conventional bank the depositor is given fixed interest payments whether or not the bank's earnings decline from loan defaults.{{sfn|Khan|2013|p=330}}

This means that while the bank itself may be more stable, the depositors/"partners" of Islamic profit and loss sharing accounts (Islamic banks often use the term "partner" instead of "customer" or "depositor") are exposed to risks they would not be subject to in conventional banks.
Furthermore, 
<blockquote>In these institutions, investment-account holders neither have the protection of being creditors of the Islamic financial institution, nor do they have the protection of being equity holders with representation on those institutions' boards of directors. This introduces a host of other well-documented risk factors for the institution ...<ref>{{cite web|url=http://www.nubank.com/stories/islam/mutualize.pdf|title=A Simple Fiqh-and-Economics Rationale for Mutualization in Islamic Financial Intermediation|date=June 2006|website=nubank.com|last1=El-Gamal|first1=Mahmoud A.|access-date=22 January 2015|archive-date=22 January 2015|archive-url=https://web.archive.org/web/20150122191237/http://www.nubank.com/stories/islam/mutualize.pdf|url-status=dead}}</ref></blockquote>

On the other hand, Habib Ahmed — writing in 2009 shortly after the [[2008 financial crisis]] – argues that the practices of Islamic finance have gradually moved closer to conventional finance, exposing them to the same dangers of instability.<ref name="2009:18">{{cite journal|title=Financial crisis: Risks and lessons for Islamic finance|url=http://www.kantakji.com/media/7513/c47.pdf|journal=ISRA International Journal of Islamic Finance|volume=1|issue=1|page=18|access-date=18 January 2018|archive-date=30 March 2016|archive-url=https://web.archive.org/web/20160330032958/http://kantakji.com/media/7513/c47.pdf|url-status=dead}}</ref>
<blockquote>When the practice of Islamic finance and the environment under which it operates are examined, one can identify trends that are similar to the ones that caused the current crisis.... In the recent past, the Gulf region has witnessed its own episodes of speculation in their stock and real estate markets. Finally, the Islamic financial industry has witnessed rapid growth with innovations of complex ''Shari'ah'' compliant financial products. Risks in these new Islamic financial products are complex, as the instruments have multiple types of risks ...<ref name="2009:19">{{cite journal|title=Financial crisis: Risks and lessons for Islamic finance|url=http://www.kantakji.com/media/7513/c47.pdf|journal=ISRA International Journal of Islamic Finance|volume=1|issue=1|page=19|access-date=18 January 2018|archive-date=30 March 2016|archive-url=https://web.archive.org/web/20160330032958/http://kantakji.com/media/7513/c47.pdf|url-status=dead}}</ref></blockquote>

In practice, a few Islamic banks have failed over the decades. In 1988 the Islamic investment house Ar-Ryan collapsed, causing thousands of small investors to lose their savings (they were later reimbursed for their losses by an anonymous Gulf state donor)<ref>{{cite book|url=https://books.google.com/books?id=pP315Mw3S9EC&q=Ar-Rayan+bank+egypt&pg=PA144|title=The Middle East and North Africa 2004|publisher=Psychology Press|year=2004|page=144|author=Taylor & Francis Group|isbn=9781857431841}}</ref> and dealing a blow to Islamic finance at the time. 
In 1998 the management of Bank al Taqwa's failed, with its annual report reporting a "loss of over 23 per cent of principal to both mudaraba depositors and shareholders". (It was later revealed that management had violated banking rules and "invested in one single project more than 60 per cent bank's assets.")<ref name="[Kahf in Henry and Wilson, note #18, p.35]">Monzer KAHF. "Islamic Banks: The Rise of a New Power Alliance of Wealth and Shari'ah Scholarship," in Clement HENRY and Rodney WILSON (eds.). The Politics of Islamic Finance [Edinburgh University Press, 2004], p35</ref>{{sfn|Farooq|2005|p=27}}

The Ihlas Finance House in Turkey closed in 2001 due to "liquidity problems and financial distress".<ref name="SYED-ALI-2007-2">{{cite journal|orig-date=August 2006|date=January 2007|title=FINANCIAL DISTRESS AND BANK FAILURE: LESSONS FROM CLOSURE OF IHLAS FINANS IN TURKEY|url=http://www.irti.org/English/Research/Documents/IES/086.pdf|journal=Islamic Economic Studies|volume=14|issue=1 & 2|page=2|last1=SYED ALI|first1=SALMAN|access-date=10 July 2016|archive-date=8 August 2017|archive-url=https://web.archive.org/web/20170808044343/http://www.irti.org/English/Research/Documents/IES/086.pdf|url-status=dead}}</ref> Faisal Islamic Bank had difficulties and closed its operations in the UK for regulatory reasons.{{when|date=October 2025}}<ref name="faisal-reuters">{{cite news|url=http://uk.reuters.com/article/uk-faisal-idUKBRE84216320120503|archive-url=https://web.archive.org/web/20190415220448/https://uk.reuters.com/article/uk-faisal-idUKBRE84216320120503|url-status=dead|archive-date=15 April 2019|title=Troubled Faisal Bank up for sale|date=3 May 2012|work=Reuters|last1=DE SA'PINTO|first1=MARTIN}}</ref><ref name="SYED-ALI-2007" /><ref name=GKJTPI2002:280-1/>
According to [[The Economist]], "Dubai's debt crisis in 2009 showed that ''[[sukuk]]'' [Islamic bonds] can help to inflate debt to unsustainable levels."<ref name="Bahru-5-5-15" />

=====Recessions=====
During the [[Great Recession]], Islamic banks "on average, showed stronger resilience" than conventional banks, but "faced larger losses" when the crisis hit "the real economy," according to a 2010 [[International Monetary Fund|IMF]] survey.<ref>{{cite web|url=https://www.imf.org/en/News/Articles/2015/09/28/04/53/sores100410a|title=IMF Survey: Islamic Banks: More Resilient to Crisis?|date=4 October 2010|website=imf.org|access-date=10 January 2017}}</ref>

At the beginning of the [[Great Recession]], Islamic banks were "unscathed", leading to one Islamic banking supporter to write that the collapse of leading Wall Street institutions, particularly Lehman Brothers, "should encourage economists world-wide to focus on Islamic banking and finance as an alternative model."<ref name="PSIBAWEC">{{cite book|last1=Amran|first1=Muhamad Nur Adzim|title=Prospects for Islamic Banking after the World Economic Crisis|url=https://www5.cuhk.edu.hk/wylf/wylf_media/paper_poster/Economic_07_Muhamad_Nur_Adzim_AMRAN.pdf|access-date=19 August 2015}}{{Dead link|date=January 2019 |bot=InternetArchiveBot |fix-attempted=yes }}</ref> However, gradually the effect of the financial downturn moved to the real sector, affecting Islamic banking. According to Ibrahim Warde, "this showed that Islamic finance was not all a panaceas, and that a faith-based system is not automatically immune to the vagaries of the Financial system."<ref name="IFGE2010:89">[[#IFGE2010|Warde, ''Islamic finance in the global economy'', 2000]]: p.89</ref>{{sfn|Khan|2013|p=330}}

=====Concentration of ownership=====
Concentrated ownership is another danger to the stability of Islamic banking and finance. Munawar Iqbal and Philip Molyneux write that only 
<blockquote>"three or four families own a large percentage of the industry. ... This concentration of ownership could result in substantial financial instability and possible collapse of the industry if anything happens to those families, or the next generation of these families change their priorities. Similarly, the experience of country-wide experiments has also been mostly on the initiatives of rulers not elected through popular votes."<ref name="Iqbal and Molyneux, p. 122">Munawar IQBAL and Philip Molyneux. ''Thirty Years of Islamic Banking: History, Performance and Prospects'' [Palgrave, 2005] p.122</ref></blockquote>

=====Macroeconomic exposures=====
Harris Irafan warns that the "macroeconomic exposures" of Islamic banks constitute a "ticking time bomb" of "billions of dollars" in "unhedged currencies and rates". The difficulty, complexity and expense of hedging these in the correct Islamic manner is such that as of 2015, the [[Islamic Development Bank]] "was hemorrhaging cash as if it were funding a war. It simply couldn't swap dollars for euros or vice versa on an ongoing basis without resorting to the conventional markets." Regional Islamic banks in the Middle East and Malaysia did not have "specialized personnel trained to understand and negotiate Sharia-compliant treasury swaps" and were not willing to hire consultants who did.<ref name="HIHB2015:163-4">[[#HIHB2015|Irfan, ''Heaven's Bankers'', 2015]]: p.163-4</ref>

====Customers and the industry====
The majority of Islamic banking clients are found in the Gulf states and in developed countries.<ref name="Iqbal and Molyneux, p.58"/>
Studies of Islamic banking customers in Malaysia{{citation needed|date=February 2020}} and Pakistan{{citation needed|date=March 2020}} found customer satisfaction was connected to service quality. 
A study of Islamic banking customers in Bangladesh found "most customers" were between 25 and 35 years old, "highly educated" and having a "durable relationship" with the bank, and more knowledgeable about account than financing products.<ref name="Saif-2015">{{cite web|last1=Saif|first1=Mohammad|last2=Khan|first2=Noman |last3=Hassan|first3=M. Kabir|last4=Ibneyy|first4=Abdullah|title=Banking Behavior of Islamic Bank Customers in Bangladesh |url=https://www.researchgate.net/publication/265427492|website=researchgate.net|access-date=9 November 2017|date=10 February 2015}}</ref>

In a series of interviews conducted in 2008 and 2010 with Pakistani banking professionals (conventional and Islamic bankers, Shariah banking advisors, finance-using businessmen, and management consultants), economist Feisal Khan noted many Islamic bankers expressed "cynicism" over the difference or lack thereof between conventional and Islamic bank products,{{sfn|Khan|2015|pp=138, 142}} the lack of requirements for external Shariah-compliance audits of Islamic banks in Pakistan,{{sfn|Khan|2015|p=144}} and Shariah boards' lack of awareness of their banks' failure to follow Shariah compliant practices or their power to stop these practices.{{sfn|Khan|2015|pp=138-139}} However this did not deter patronage of the banks by the pious (one of whom explained that if his Islamic bank was not truly Shariah compliant, 'The sin is on their head now, not on mine! What I could do, I've done.'){{sfn|Khan|2015|p=146}}

The [[Bank of London and the Middle East]] (BLME) have majority non-Muslim customers that receive a fixed percentage of profits, rather than an interest rate. However, critics say that Sharia deposits and products are too similar to interest-rate related products, in contrast to the share of profits earned. Other explanations for the rise of non-Muslim customers in Islamic banking have been pointed towards ethical reasons in negative screening of investments like tobacco, alcohol, and arms.<ref>{{Cite news|url=https://www.economist.com/britain/2018/10/20/why-non-muslims-are-converting-to-sharia-finance|title=Why non-Muslims are converting to sharia finance|date=2018-10-20|newspaper=The Economist|access-date=2019-11-09|issn=0013-0613}}</ref>

One estimate of customer preference (given by a Pakistani banker) in the Pakistani banking industry was that about 10% of customers were "strictly conventional banking clients", 20% were strictly Shariah-compliant banking clients, and 70% would prefer Shariah-compliant banking but would use conventional banking if "there was a significant pricing difference".{{sfn|Khan|2015|p=138}} A survey of Islamic and conventional banking customers found that Islamic banking customers were more observant (having attended [[hajj]], observing [[salat]], growing a beard, etc.), but also had higher savings account balances than conventional bank customers, were older, better educated, had traveled more overseas, and tended to have a second account at a conventional bank.{{#tag:ref|Survey of 5133 bank customers of 30 branches of an Islamic and a conventional bank led by Ayesha Khalid Khan.{{sfn|Khan|2015|pp=147-149}}|group=Note}} Another study, using "official data" reported to State Bank of Pakistan, found that for lenders who had taken out both Islamic (''[[murabaha]]'') financing and conventional loans, the default rate was more than twice as high on the conventional loans. Borrowers were "less likely to default during [[Ramadan]] and in big cities if the share of votes to religious-political parties increases, suggesting that religion – either through individual piousness or network effects – may play a role in determining loan default."{{sfn|Khan|2015|pp=149-150}}{{#tag:ref|A study of "conventional and Islamic loans using a comprehensive monthly dataset from Pakistan that follows more than 150,000 loans over the period 2006:04 to 2008:12".<ref>{{cite journal |ssrn=1740452 |title=Of Religion and Redemption: Evidence from Default on Islamic Loans |journal=CentER Discussion Paper Series No. 2012-014 European Banking Center Discussion Paper No. 2012-008 |date= 19 February 2014 |last1=Baele |first1=Lieven  |last2=Farooq |first2=Moazzam  |last3=Ongena |first3=Steven  }}</ref>|group=Note}}

====Costs====
Muhammad El-Gamal argues that because Islamic financial products imitate conventional financial products but operate in accordance with the rules of Shariah, different products will require additional jurist and lawyer fees, "multiple sales, [[Special-purpose entity|special-purpose vehicle]]s, and documentations of [[Title (property)|title]]". In addition there will be costs associated with "the peculiar structure that Islamic banks use for late payment penalties". Consequently, their financing tends to cost more than, and/or accounts pay less return than conventional products.<ref name="MeGIFLEP2006:1,5,25">[[#MeGIFLEP2006|El-Gamal, ''Islamic Finance'', 2006]]: p.1,5,25</ref>
 
El-Gama also argues that another source of inefficiency/greater expense in Islamic banking and a reason its replications of conventional finance are "always one step behind" new financial products in the conventional industry is the industry's dependence on "classical "[[nominate contract]]s" (''murabahah'' credit sales, ''ijarah'' leases, etc.). These contracts follow classical texts and were created in a time when financial markets were very limited. They are not equipped to "disentangle various risks" that "modern" financial markets and institutions (such as "[[money market]]s, [[capital market]]s, [[Option (finance)|options markets]], etc.") are so designed. On the other hand, making their contracts/products more efficient will alienate the pious customer base that wants contracts/products to follow classical forms.<ref name="MeGIFLEP2006:24-5">[[Murabaha#MeGIFLEP2006|El-Gamal, ''Islamic Finance'', 2006]]: p.24-5</ref>

Most studies have found Islamic banks less efficient on average than conventional ones.
*According to a 2006 report by [[M. Kabir Hassan]] of 43 bank in 21 Muslim countries from 1996 to 2001, "on average, the Islamic banking industry is relatively less efficient compared to their conventional counterparts in other parts of the world";<ref name="Hassan_(2006:63)">{{cite journal |first1=Muhammad Kabir |last1=Hassan |title=The X-efficiency in Islamic Banks |journal=Islamic Economic Studies |volume=13 |issue=2 |date=February 2006 |page=49}}</ref>{{sfn|Khan|2013|p=329}}
*A study of banks in Malaysia from 1997 to 2003 found Islamic banks somewhat less efficient, on average, than their conventional counterparts,<ref name="Mokhtar_et_al_(2007:5)">Mokhtar, Hamim S.A., Naziruddin Abdullah and S. Musa al-Habshi. 2007. Technical and cost efficiency of Islamic banking in Malaysia. ''Review of Islamic Economics'' 11 (1):5–40</ref> as did a study of Islamic banks in Turkey from 1999 to 2001.<ref name="SYED-ALI-2007">{{cite journal|last1=SYED ALI|first1=SALMAN|title=FINANCIAL DISTRESS AND BANK FAILURE: LESSONS FROM CLOSURE OF IHLAS FINANS IN TURKEY|journal=Islamic Economic Studies|orig-date=August 2006|date=January 2007|volume=14|issue=1 & 2|pages=1–52|url=http://www.irti.org/English/Research/Documents/IES/086.pdf|access-date=10 July 2016|archive-date=8 August 2017|archive-url=https://web.archive.org/web/20170808044343/http://www.irti.org/English/Research/Documents/IES/086.pdf|url-status=dead}}</ref>
*In contrast, one multi-country study (43 Islamic and 37 conventional banks in 21 countries), covering a similar time period (1999–2005) as the studies above, found no "significant differences" in overall efficiency.<ref name="Bader_(2008)">Bader, M.K.I., Shamsher Mohamad, Mohamed Ariff and Tufiq Hassan. 2008. Cost, revenue and profit efficiency of Islamic vs. conventional banks: International evidence using data envelopment analysis. ''Islamic Economic Studies'' 15 (2) (January): 23–77</ref>

In one important part of the finance market, home buying, Islamic finance has not been able to compete with conventional finance in at least some countries (the UK as of 2002, and the US and Canada as of 2009). According to Humayon Dar, the monthly payments for a Shariah compliant "Lease Contract" used by Islamic Investment Banking Unit of [[Ahli United Bank Kuwait]] in Britain "are much higher" than equivalent conventional mortgages.<ref name="Dar_(2002:65-6)">Dar, Humayon A. 2002. Islamic home financing in the United Kingdom: Problems, challenges and prospects. ''Review of Islamic Economics'' 12: 65–6</ref> 
In Canada the cost of Islamic home finance was 100 to 300 [[basis points]] higher than conventional home finance, and in the U.S. 40 to 100 basis points higher, according to Hans Visser. (Visser credits the higher cost of Islamic ''ijarah'' financing to its higher risk weighting compared to conventional mortgages under the [[Basel I]] and [[Basel II]] international standards of minimum capital requirements for banks.){{sfn|Visser|2009|p={{page needed|date=September 2022}}}}

====Maturity====
According to M. O. Farooq, "common explanations offered by" the Islamic finance movement for the Islamic banking industry shortcomings are that 
#industry problems and challenges are part of a "[[learning curve]]" and will be solved over time; 
#and that unless and until the industry operates in an Islamic society and environment it will be hindered by non-Islamic influences and won't "operate in its essence".{{sfn|Farooq|2005|p=36}}

While the veracity of the second explanation can not be verified before a complete Islamic society is established, Feisal Khan points out in regard to the first defense that it has been over twenty years (1993) since one critic (Timur Kuran)<ref name="Kuran_1993">The economic impact on Islamic fundamentalism in M. Marty and S. Appleby (eds) ''Fundamentalism and the State: Remaking Polities, Economies, and Militance,'' Chicago IL, Chicago University Press, pp. 302–341</ref> first highlighted the industry's problems (the basic similarity of Islamic banking in practice to the conventional, the marginalizing of the equity-based, risk-sharing modes and embrace of short-term products and debt-like instruments), and since a supporter (Ausaf Ahmad) defended the industry as early in its transition from conventional banking.<ref name="auto"/>

Seventeen years later, Ibrahim Warde, an Islamic finance proponent, lamented that "rather than disappearing, murabaha and comparable sale-based products grew significantly and today they constitute the bulk of the activity of most Islamic Banks..."<ref name="IFGE2010:141">[[#IFGE2010|Warde, ''Islamic finance in the global economy'', 2010]]: p.141</ref>{{sfn|Khan|2015|p=95}}

Most critics of the Islamic banking industry call for further orthodoxy and a redoubling of effort to strictly enforce Sharia.{{#tag:ref|such as Muhammad Taqi Usmani,<ref name=IIFTU1998:161-9>[[#IIFTU1998|Usmani, ''Introduction to Islamic Finance'', 1998]]: p.161-9</ref> Saleh Abdullah Kamel and Harris Irfan<ref name=HIHB2015:271>[[#HIHB2015|Irfan, ''Heaven's Bankers'', 2015]]: p.271</ref>|group=Note}} Some (M. O. Farooq and M. A. Khan), have blamed the industry problems on its condemnation of any and all interest on loans as forbidden ''riba'', and the impracticality of attempting to enforce this prohibition.{{sfn|Farooq|2005|p=96}}

====Lack of conformance with Islamic financial principles====

Critic Feisal Khan argues that in many ways Islamic finance has not lived up to its defining characteristics. Risk-sharing is lacking because [[profit and loss sharing]] modes are so infrequently used. Underlying material transactions are also missing in such transactions as "''tawarruq'', commodity ''murabahas'', Malaysian Islamic private debt securities, and Islamic short-sales". Exploitation is involved when high fees are charged for "doing nothing more substantial than mimicking conventional banking /finance products". [[Haram]] activities are not avoided when banks (following the customary practice) simply take the word of clients/financees/borrowers that they will not use funds for un-Islamic activities.{{sfn|Khan|2015|p=112}}

==Etic (from outside) and universal issues ==
{{anchor | FATF | FATF issues | Etic issues | Compliance issues | Universal issues }}
{{see also|Emic and etic}}

===Lack of compliance with global standards ===
{{see also|Financial Action Task Force on Money Laundering|l2=FATF|FATF blacklist}}

The [[International Monetary Fund]] (IMF) has highlighted the risk of Islamic banking and finance's lack of common understanding of [[money laundering]] (ML) and [[terrorism financing]] (TF) and resultant noncompliance such as with [[Financial Action Task Force on Money Laundering]] (FATF) recommendations. Some of the ML/TF risks related to Islamic finance are similar to conventional financing, but there is an unknown and large number of unknown risks and issues. These risks are caused by the complexity of Islamic finance products as well as the nature of the relationship between the Islamic banks and stakeholders. Since there is limited experience and capability within the Islamic banking and finance system for the risk mitigation and compliance with global ML/TF standards, the risks are magnified. These risks become critical in case of vulnerable, non-compliant or rogue nations and organisations. "The FATF standards are implemented without any form of tailoring to the specificities of Islamic finance. The FATF, the Islamic finance standard-setters, and the national regulators should seek a greater understanding of the specific ML/TF risks that may arise in Islamic finance and develop an appropriate response."<ref name=tfIMF1>Nadim Kyriakos-Saad, Manuel Vasquez, et el, 2016, [https://www.imf.org/external/pubs/ft/wp/2016/wp1642.pdf Islamic Finance and Anti-Money Laundering andCombating the Financing of Terrorism (AML/CFT)], [[International Monetary Fund]].</ref>

===Terrorism financing ===

According to [[Alex P. Schmid]],{{#tag:ref|in Forum on Crime in Society, Terrorism, Volume 4 of the [[United Nations Office on Drugs and Crime]]|group=Note}} a network of Islamic banks has "proved to be an ideal instrument for money manipulation" to channel funds to terrorist organizations, one reason being that the banks are used for zakat donations, and "the code of practice of Islamic banks requires the destruction of all documents as soon as the [[zakat]] money transfer has taken place." Thus, zakat charitable donations may end up financing "the purchase of arms and the sponsorship of terror attacks", as well as food for the needy, and educational and job training programs.<ref name=ZakatForTerror-35>{{cite book |last= Schmid |first=  Alex P | author-link= Wael B. Hallaq | title = Terrorism, Volume 4 | publisher = [[United Nations Office on Drugs and Crime]]| location = New York | year = 2004 | page = 35}}</ref>

==See also==
{{Portal|Banks}}

; Related Islamic topics
* [[Economy of the OIC]]
* [[Islamic economics]]
* [[Islamic finance products, services and contracts]]
* [[Muamalat]]
* [[Riba]]
* [[Murabaha]]
* [[Sharia and securities trading]]

; Non-Islamic topics
* [[Fractional-reserve banking]]
* [[UIF Corporation]]
* [[History of banking]]
* [[Micro venture capital]]
* [[Mont de Piété]]
* [[Profit and loss sharing]]
* [[Credit union]]

==References==
===Notes===
{{reflist|group=Note}}

===Citations===
<ref>{{Cite web |date=2025-10-26 |title=What Is Riba In Islam? - Financelish |url=https://financelish.com/what-is-riba-in-islam-and-why-it-matters-more-than-you-think/ |access-date=2025-10-31 |language=en-US}}</ref>

===Books and journal articles===
*{{Cite journal |last1=Abras |first1=A |title=The Rise and Fall of Institutional Entrepreneurship in Islamic Financial Reporting Standardisation Projects |year=2022 |last2=Al Mahameed |first2=M |doi=10.1080/01559982.2022.2051684 |journal=Accounting Forum |volume=47 |issue=3 |pages=470–495 |doi-access=free}}
* {{Cite journal|last1=Hassan|first1=M. K.|title=A systematic literature review of risks in Islamic banking system: research agenda and future research directions|year=2024|last2=Sohel|first2=M. N. I.|last3=Choudhury, T.|journal=Risk Management|volume=26|issue=3|article-number=3 |doi=10.1057/s41283-023-00135-z}}
* {{cite book |last1=Aḥmad |first1=Maḥmūd |title=Economics of Islam: A Comparative Study |date=1958 |publisher=Ashraf |url=https://books.google.com/books?id=fCk7AAAAMAAJ |language=en}}
* {{cite book |last1=al Bushi |first1=Abdullah bin Mubarak |title=Ensiklopedi Ijma' Syaikhul Islam Ibnu Taimiyah |date=2019 |publisher=Darul Falah |isbn=9786029208078 |url=https://books.google.com/books?id=YTq2DwAAQBAJ |access-date=20 November 2021 }}
* {{cite journal |last1=Alharbi |first1=A. T. |title=Determinants of Islamic banks' profitability: international evidence |journal=International Journal of Islamic and Middle Eastern Finance and Management |date=2017 |volume=10 |issue=3 |pages=331–350 |url=https://www.emerald.com/insight/content/doi/10.1108/IMEFM-12-2015-0161/full/html |doi=10.1108/IMEFM-12-2015-0161 |access-date=6 November 2021 |url-access=subscription }}
* Balala, Maha-Hanaan. ''Islamic finance and law: theory and practice in a globalized world''. London: I.B. Tauris, 2011.
* {{cite journal|ssrn=1579324|title=The Riba-Interest Equation and Islam: Reexamination of the Traditional Arguments|date=September 2009|last1=Farooq|first1=Mohammad Omar |journal=Global Journal of Finance and Economics |volume=6 |issue=2 |pages=99–111 |ref=MOFRIEI2009}}
** {{cite web|last1=Farooq|first1=Muhammad Omar|date=November 2005|title=The Riba-Interest Equation and Islam: Reexamination of the Traditional Arguments |type=Draft |access-date=11 August 2015 |archive-date=24 September 2015 |url=http://www.globalwebpost.com/farooqm/writings/islamic/riba_interest.doc|archive-url=https://web.archive.org/web/20150924022556/http://www.globalwebpost.com/farooqm/writings/islamic/riba_interest.doc|url-status=dead}}
* {{Cite book|last=el-Gamal|first=Mahmoud A.|year=2006|title=Islamic Finance : Law, Economics, and Practice |publisher=Cambridge|location=New York|url=http://iugc.yolasite.com/resources/Reference%20Book%2004%20-%20Islamic%20finance,%20law%20economics%20and%20practice,%20M.%20El%20Gamal.pdf|access-date=16 May 2017 |isbn=9780521864145|ref=MeGIFLEP2006|url-status=dead|archive-url=https://web.archive.org/web/20180403160351/http://iugc.yolasite.com/resources/Reference%20Book%2004%20-%20Islamic%20finance,%20law%20economics%20and%20practice,%20M.%20El%20Gamal.pdf|archive-date=3 April 2018}}
* {{cite book|url=https://books.google.com/books?id=uJ3ABAAAQBAJ&q=nizam|title=Heaven's Bankers: Inside the Hidden World of Islamic Finance|date=2015|publisher=Little, Brown Book Group.|ref=HIHB2015|last1=Irfan|first1=Harris|access-date=28 October 2015|isbn=9781472105066}}
* {{Cite book|url=https://books.google.com/books?id=T7ImTjBd1gQC&q=islamic+finance+for+dummies|title=Islamic Finance For Dummies|last=Jamaldeen|first=Faleel|date=2012|publisher=John Wiley & Sons|isbn=9781118233900|language=en|ref=FJIFD2012|access-date=15 March 2017}}
* {{cite journal|last2=Tarazi|first2=Michael|last3=Reilli|first3=Zavier|date=August 2008|title=Islamic microfinance: An emerging market niche.|url=http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2008/12/30/000333038_20081230222905/Rendered/PDF/470010ENGLISH01PUBLIC10FocusNote149.pdf|journal=CGAP Focus Notes|publisher=Consultative Group to Assist the Poor|volume=49|page=1|ref=NKIM2008|last1=Karim|first1=Nimrah}}
* {{cite book|last1=Kepel|first1=Gilles|title=Jihad: The Trail of Political Islam|url=https://archive.org/details/jihad00gill_0 |url-access=registration|quote=Jihad: The Trail of Political Islam.|date=2002|publisher=Harvard University Press.|ref=GKJTPI2002|isbn=9780674010901}}
* {{Cite book|url=https://books.google.com/books?id=dqlACwAAQBAJ&q=islamic+modernism+and+financial+interest&pg=PA80|title=Islamic Banking in Pakistan: Shariah-Compliant Finance and the Quest to Make Pakistan More Islamic |last=Khan|first=Feisal|date=22 December 2015|publisher=Routledge|isbn=9781317366539|language=en|access-date=9 February 2017}}
* {{cite book|last1=Khan|first1=Muhammad Akram|title=What Is Wrong with Islamic Economics?: Analysing the Present State and Future Agenda |date=2013|publisher=Edward Elgar Publishing|isbn=9781782544159 |url=https://books.google.com/books?id=Fr36Gd1X_rcC&q=khan+sum+up+the+modernist+interpretation&pg=PA178 |access-date=26 March 2015}}
* Nethercott, Craig & David Eisenberg. ''Islamic finance: law and practice'', 2nd edn. Oxford: Oxford University Press USA, 2020.
* {{cite book|last=Rothbard|first=Murray N.|title=An Austrian Perspective on the History of Economic Thought, Volume&nbsp;I (Economic Thought Before Adam Smith)|url=https://mises.org/books/histofthought1.pdf |publisher=Ludwig von Mises Institute|year=1995|location=Auburn, Alabama|isbn=978-0-945466-48-2}}
* {{Cite book|last1=Roy |first1=Olivier |title=The Failure of Political Islam |publisher=[[Harvard University Press]] |year=1994 |url=https://archive.org/details/failureofpolitic00royo| url-access=registration |quote=Failure of Political Islam roy. |pages=[https://archive.org/details/failureofpolitic00royo/page/132 132]–47|isbn=9780674291416 }}
* {{cite book |last1=Ibn Sa'd |first1=Muhammad |title=Kitab At-Tabaqat Al-Kabir Volume III: The Companions of Badr |date=2013 |publisher=Ta-ha publisher |isbn=978-1-84200-133-2 |page=81 |url=https://www.tahapublishers.com/kitab-at-tabaqat-al-kabir-volume-iii%3A-the-companions-of-badr~262 |translator=Aisha Bewley |access-date=10 November 2021 |archive-date=6 June 2023 |archive-url=https://web.archive.org/web/20230606163044/https://www.tahapublishers.com/kitab-at-tabaqat-al-kabir-volume-iii:-the-companions-of-badr~262 |url-status=dead }}
* {{Cite journal|last2=Salah|first2=O.|year=2014|orig-year=2013|title=Development of Sukuk: Pragmatic and Idealist Approaches to Sukuk Structures|url=http://www.debrauw.com/wp-content/uploads/NEWS%20-%20PUBLICATIONS/Development-Sukuk-Pragmatic-and-Idealist-Approaches-to-20-Sukuk-20Structures.pdf|journal=Journal of International Banking Law and Regulation|issue=1|pages=41–52|ref=SSDoS2014|last1=Saeed|first1=A.|access-date=18 March 2017}}
* {{cite book|chapter-url=http://ues.ac.ir/files/takmili/islamic_econ./raveshshenasi_islam./230.pdf |title=Advances in Islamic economics and finance: Proceedings of 6th International Conference on Islamic Economics and Finance |volume=1|last=Sairally|first=Salma|publisher=Islamic Research and Training Institute, Islamic Development Bank|year=2007|location=Jeddah|pages=279–320|chapter=Evaluating the 'social responsibility' of Islamic finance: Learning from the experiences of socially responsible investment funds|ref=ESRIF2007|editor1=Munawar Iqbal|editor2=Salman Syed Ali|editor3=Dadang Muljawan|access-date=16 May 2017|url-status=dead|archive-date=4 March 2016|archive-url=https://web.archive.org/web/20160304073521/http://ues.ac.ir/files/takmili/islamic_econ./raveshshenasi_islam./230.pdf}}
* {{cite book|url=http://www.startupbusiness.it/wp-content/uploads/2016/10/SALAAM03102016111130.pdf|title=State of the Global Islamic Economy Report 2015/16|publisher=Thomson Reuters & Dinar Standard|ref=SGIER2015-6|access-date=19 March 2017|archive-date=14 March 2023|archive-url=https://web.archive.org/web/20230314155047/https://www.startupbusiness.it/wp-content/uploads/2016/10/SALAAM03102016111130.pdf|url-status=dead}}
* {{cite book |last1=Tarmizi |first1=Erwandi |title=Haram Wealth in Contemporary Muamalah |date=2017 |publisher=PT Erwandi Tarmizi Konsultan |location=Indonesia |isbn=9786021974209 |edition=English |url=https://books.google.com/books?id=ylRhDgAAQBAJ |access-date=24 October 2021 }}
* {{cite book|url=http://www.albalagh.net/Islamic_economics/riba_judgement.pdf|title=The Historic Judgment on Interest Delivered in the Supreme Court of Pakistan|date=December 1999|publisher=albalagh.net|location=Karachi, Pakistan|ref=MTUHJI1999|last1=Usmani|first1=Muhammad Taqi}}
* {{cite book|url=http://apsk.kz/en/images/economics/An%20Introduction%20to%20Islamic%20Finance.pdf |title=An Introduction to Islamic Finance|date=1998|location=Kazakhstan|last1=Usmani|first1=Taqi|access-date=2 October 2017 |ref=IIFTU1998|archive-url=https://web.archive.org/web/20150807040308/http://apsk.kz/en/images/economics/An%20Introduction%20to%20Islamic%20Finance.pdf|archive-date=7 August 2015|url-status=dead}}
* {{cite book|last=Visser|first=Hans|year=2009|title=Islamic Finance: Principles and Practice |location=Cheltenham, UK; Northampton, MA, USA |publisher=Edward Elgar|isbn=9781848449473 |url=https://books.google.com/books?id=KIXe3rY_OkgC|access-date=9 July 2016}}
* {{cite book|url=https://books.google.com/books?id=Y30tAgAAQBAJ&q=difference+between+Bai-muajjal+and+Murabaha&pg=PA66|title=Islamic Finance: Principles and Practice|date=2013|publisher=Elgar Publishing|edition=Second |last1=Visser|first1=Hans|access-date=7 December 2016|isbn=9781781001745}}
* {{Cite book |last1=Warde|first1=Ibrahim |title=Islamic finance in the global economy |location=Edinburgh |publisher=Edinburgh University Press |orig-year=2000|year=2010 |url=https://books.google.com/books?id=diSlBgAAQBAJ&q=Warde%2C+Ibrahim.+2000%2C+2010.+Islamic+finance+in+the+global+economy%2C&pg=PR4 |ref=IFGE2010|isbn=9780748627769 }}

==External links==
* {{URL|https://www.ifsb.org|Islamic Financial Services Board (IFSB)}}
* {{URL|https://www.aaoifi.com|Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)}}
*{{URL|https://www.cibafi.org|General Council for Islamic Banks and Financial Institutions (CIBAFI)}}
*{{URL|https://mymortgage.ae|Mortgage Institutions (MYMORTGAGE)}}
{{Islamic banking and finance}}
{{Islam topics|state=collapsed}}
{{Subject bar|auto=y|d=y|Banks}}

[[Category:Islamic banking| ]]
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