Islamic banking operates in accordance with Sharia law, adhering to principles that govern financial transactions. The key features of Islamic banking include:- A ban on investments involving items or substances prohibited in the Quran- A prohibition on usury, or the charging of interest. Instead of interest-based loans or bonds, Islamic banks engage in equity participation through financial instruments like Sukuk. This involves partial ownership in an underlying asset, with profits shared between the bank and the business. There are 2 models: Individual model (eg. Saudi Arabia)
- Each bank has its own Sharia board, which approves decisions made by the bank's corporate arm
- The Sharia board may consult with Islamic scholars for religious compliance. Centralized System: (eg. Malaysia)
- A central board oversees the compliance of all Islamic banks with Sharia law
- The central board follows guidelines set by the central government and aims to ensure that all banks adhere to these guidelines"""