Here Is What You Did Not Know About Islamic Banking

Kenya’s financial sector has been rising with each passing year. Thanks to the vibrant mobile banking platforms, the banking sector has really been revolutionized with more products that resonate with the people who were categorized as “unbanked” before.

The coming of Islamic Banking in Kenya was another turning point in Kenya’s banking sector. According to the Kenya Bankers Association (KBA), Kenya is among 18 African countries with a huge potential of growth in Islamic Banking and debt securities.

What is Islamic Banking? Is it a banking system that is only for Muslims? Are non-muslims allowed to participate in Islamic Banking?

According to Gulf  African Bank, Islamic banking is a system of conducting trade and banking activities in line with the principles of Islamic Shari’ah while avoiding all the prohibited activities such as interest or Riba, Gharar, financing of haram trade and businesses.

It is not banking which is based on pricing money and earning interest as conventional interest-based banks do but it is a system of trade where goods and services are sold and capital is invested by taking the risk to earn halal profits.

Islamic Banking is also not just a change of name as many misunderstand but it is based on the Quranic injunction of ‘Allah has permitted trade and forbidden riba’. Interest-free banking is a subset of the Islamic banking concept.

Islamic Banking thrives on three main principles:

The Prohibition of Riba which is the taking or receiving of interest.

Risk in any transaction must be shared. The capital provider and the entrepreneur must share the business risk for a share in the profit.

The prohibition of speculative behavior (Gharar), which means that gambling (Maysir) and extreme uncertainty is prohibited and consequently, contractual obligations and disclosure of information are central obligations to financial business transactions.

Now, many people ask, is Islamic Banking only available for Muslims? No. Islamic finance is available to anyone who may wish to use interest free banking. Anyone of any religious background is welcome to apply for products from Islamic.

Why do Islamic Banks in Kenya avoid charging interest (Riba)? During the time of the Prophet Muhammed, many people gained from lending money at exorbitant rates, thereby gaining from the misfortune of others. As a result, the payment of interest was forbidden in Islam because it was unjust.

Islam teaches that money should be used in a useful way. You cannot make money from money, but you can generate wealth through legitimate trade in goods and items. The risks and rewards must, however, be shared.

Do you have any questions on Islamic Banking? Leave me a comment.