Islamic banking refers to a system of banking that complies with Islamic law (Shariah). The underlying principles that govern Islamic banking are mutual risk and profit sharing between parties, the assurance of fairness for all and that transactions are based on an underlying business activity or asset.
These principles are supported by Islamic banking's core values whereby activities that cultivate entrepreneurship, trade and commerce and bring societal development or benefit is encouraged. Through the use of various Islamic finance concepts, financial institutions have a great deal of flexibility, creativity and choice in the creation of Islamic finance products.
Activities that involve interest (riba), gambling (maisir) and speculative trading (gharar) are prohibited. Therefore, by emphasizing the need for transactions to be supported by genuine trade or business related activities, Islamic banking sets a higher standard for investments and promotes greater accountability and risk mitigation.
Islamic banking is not meant for Muslims only but for all individuals regardless of their religious beliefs. The most significant difference between Islamic and conventional banking is that Islamic banking must follow the Shariah. For example, in a deposit product, profits from a deposit arrangement will be shared between a bank and its depositors based on an agreed ratio and paid as dividends. A bank is also allowed to give hibah to its depositors as deemed fit by Shariah.