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The basic premise of Islamic banking is the promotion of ethical financing in accordance with Islamic norms , or as it is sometimes referred to as the “ moral economy ” ( Tripp , 2006 ). For Siddiqi ( 2006 ), “… by far the most impressive argument in favour of Islamic finance has been that it integrates the financial sector with the real sector ” ( p . 6 ). In justifying its ethical nature , El Hawary and others draw attention to four general areas , which although are not exclusive , are adhered to , by Islamic banks to varying degrees . They are :
1 . Risk-sharing ( shared responsibility and returns ). 2 . Materiality ( ventures must consist of a material ends and not speculative financing ). 5 3 . No exploitation ( equality in input and output ). 4 . Financing of sinful activities ( ����� activities such as alcohol and other non ethical business investments ) ( El-Hawary , Grais , & Iqbal , 2004 , p . 5 ).
Based on these principles , Islamic banks offer deposit accounts , credit facilities , and even bonds ( ����� ). They will also pay a percentage of profit as ����� to charitable organizations .
However , Islamic banking is more synonymous for its promotion of interest free financing and its provision of credit based on principles of ������� . Interest is considered as usury ( ���� ) in Islamic discourse , centred on the premise that money should not be used to generate more money , but be invested in products and services . The Islamic finance sector in theory therefore should avoid loaning money based on time-related mechanisms as it also places an unfair burden on the borrower . Although there is a general consensus amongst the ����� ( Islamic scholars ) regarding this , some have suggested it to be negligent of current practice and therefore detrimental to societal development ( Kuran , 2004 ). That is to say , in a conventional financial system if loan demands exceed what is in supply interest rates will be increased in order to raise more capital at the suppliers ’ end thus balancing the flow . From a certain Islamic perspective , this process is based on macroeconomic principles of supply and demand , which ultimately gives power to the financier and places the risk upon the credit seeker at the micro level , as even before knowing the success of a particular enterprise a price has been predetermined by the loaning bank or institute ( Siddiqi , 2006 ). As a response to this , some Islamic scholars have suggested separating the macro from the micro in order to control the financial flow and prioritize welfare over cash supply ( Wilson , 1995 , pp . 111-119 ).
Nevertheless , a general acceptance of conventional mechanisms such as interest charges remains . To this end , Islamic banks and institutions have designed products that intend to avoid the label of “ interest ” by administering charges similar to that of interest rates . This shows a degree of adaption to the economic landscape , considering that survival of the sector must be of equal importance to ethical exchange . In order to maintain this balance the charge is related to work or the principle of risk sharing , which in banking terms is equated to profit and loss sharing ( PLS ). Taking into account the ethical methods identified by El Hawary et al ., ( 2004 ) a PLS is a pre-arranged agreement between the borrower and financial investor that sees a return in money linked to profit rather than interest , an equity model as such . The most common example of this in credit supply is �������� , where the financier provides the capital and the customer manages the project with profits being pre-agreed upon . The fixed charge , which is often higher than conventional interest , is justified due to
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