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Islamic Finance - Banking Industry

In traditional banking the bank as a financial intermediary collects the deposits and makes loans to on interest.  It makes it’s profit by offering lower interest rates to depositors and charging a higher rate to borrowers.

 

In an Islamic Institution the bank is more like a fund or asset manager responsible for identifying projects to invest the monies from investors and share the profits.  The depositors are effectively investors and their capital is potentially at risk from any loses the bank my incur. 

 

The contract between the bank and the customer is essentially a mudaraba contract, thus the bank is the Mudarib and the customer is the Rab al-Mal  (pl is Arbab al-Mal).

 

The bank uses the funds in three key types of contracts namely, murabaha, ijara and salem.

 

 

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