Interest Free Banking

Topics: Bank, Debt, Islam Pages: 2 (705 words) Published: May 22, 2012
“Interest Free Banking” is a fundamental concept derived from the Islamic form of banking. It operates with the primitive professional and ethical standards that exclude the “Muslims” from paying or receiving any kind of interest. This certainly does not mean that the revenue generating activities or money raving businesses are not encouraged. All of these business forms are greatly appreciated as far as they do not involve interest in any kind. There are a lot of financial tools introduced by the Islamic financial bodies to fulfill these business or profit making requirements. For a clear understanding, they deal with equity financing rather then reflecting on debt financing. In addition, as a replacement of fixed interest rates on the savings account, these interest free banks give a small percentage of return on deposits on an annual basis. Now looking at the inception of interest free banking, it all started around the later part of the nineteenth century when the Muslim countries were doing well, both politically as well as economically. These banks started establishing their centers in the major cities of Islamic as well as non-Islamic countries to cater their comprehensive business needs. Conversely, the branches of such interest free banks turned out to be scarce and the regions apart from the major cities were totally ignored by such a banking system. But however, a lot of local businesses engaged with these financial entities rather than other commercial banks only due to religious reasons. The only reason behind this is, Islam completely forbids the concept of paying or receiving interest. With increasing time and business, it also became exigent to stay away from commercial banks. The commercial banks evolved with the most convenient user-friendly practices like faster money transfer and effortless current accounts but even then, lending money and starting deposit accounts were outlawed due to the forbidden interest banking. Coming to the present...
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