Know how Islamic Banking operate.

A. INTRODUCTION
With the rapid growth of the world-wide economy along with the expanding economy in the Islamic countries, Islamic banking isevolving to play a vital role in the world. The principlesof Islamic banking differ substantially from those of conventional financing by traditional financial institutions. Islamic principles prohibit usury, the conducting any business involving Riba (interest), i.e. collection or payment of interest, under the Syariah law (Islamic law). Therefore Islamic banks were, during the Middle Ages, functioning essentially as savings institutions rather than commercial banks.
B. LAW AND PRINCIPLE
The principles of Islamic banking were derived fromthe Quran (the revealed book of Muslims) and the Prophet Muhammad (pbuh)and are governed by Shariah law (Islamic law). Islamic law besides prohibiting the payment and/or collection of interests, regardless of the purpose for which loans aremade and the rates at which interests are charged,also prohibits activities dealing with liquor, pork, gambling, pornography and anything which Islamiclaw deems Haram (unlawful).
Islamic banking is instrumental to the development of an Islamic economic order which ensures social justice, such as forbidding all forms of economic activities which are morally or socially injurious, ensuring ownership of wealth legitimately acquired, allowing an individual to retain any surplus wealth and seeking to prevent the accumulation of wealth in a few hands to the detriment of society as a whole through its laws of inheritance.
C. STRUCTURING ISLAMIC PRODUCTS
The commercial purpose of Islamic banking is the same as conventional banking butit needs to operate within the principles stated above. Due to the rules of Shariah, Islamic finance products areoften based on the principles of risk-sharing and profit-sharing. Commonconcepts used are profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah) and leasing (ljarah). Such sharing principles can provide acceptable financialreturns to investors by providing potential profit inproportion to the risk assumed. This type of structured products can satisfy the demands of investors in the contemporary environment within the guidelines of theIslamic Law. The most activefinancing provided are in the areas of trade, commodity finance, property and leasing.
Also, Islamic financing is only permissible to acceptable deals which exclude those involving alcohol, pork, gambling, etc.Therefore ethical investing is the only acceptable form of investment for Muslims.