Islamic banking or Islamic finance (Arabic: مصرفية إسلامية) or sharia-compliant finance is banking or financing activity that complies with sharia (Islamic law) and its practical application through the development of Islamic economics. Some of the modes of Islamic banking/finance include Mudarabah (Profit and loss sharing), Wadiah (safekeeping), Musharaka (joint venture), Murabahah (cost plus), and Ijar (leasing).
Sharia prohibits riba, or usury, defined as interest paid on all loans of money (although some Muslims dispute whether there is a consensus that interest is equivalent to riba). Investment in businesses that provide goods or services considered contrary to Islamic principles (e.g. pork or alcohol) is also haraam (“sinful and prohibited”).
These prohibitions have been applied historically in varying degrees in Muslim countries/communities to prevent un-Islamic practices. In the late 20th century, as part of the revival of Islamic identity,[Note 1] a number of Islamic banks formed to apply these principles to private or semi-private commercial institutions within the Muslim community. Their number and size has grown so that by 2009, there were over 300 banks and 250 mutual funds around the world complying with Islamic principles, and around $2 trillion were sharia-compliant by 2014. Sharia-compliant financial institutions represented approximately 1% of total world assets, concentrated in the Gulf Cooperation Council (GCC) countries, Iran, and Malaysia. Although Islamic Banking still makes up only a fraction of the banking assets of Muslims, since its inception it has been growing faster than banking assets as a whole, and is projected to continue to do so.
The industry has been lauded for returning to the path of “divine guidance” in rejecting the “political and economic dominance” of the West, and noted as the “most visible mark” of Islamic revivalism. Its most enthusiastic advocates promising “no inflation, no unemployment, no exploitation and no poverty” once it is fully implemented. But it has also been criticized for failing to develop profit and loss sharing or more ethical modes of investment promised by early promoters, and instead selling banking products that “comply with the formal requirements of Islamic law”, but use “ruses and subterfuges to conceal interest”, and entail “higher costs, bigger risks” than conventional (ribawi) banks.