Non-interest banking and finance: principles and operations explained

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Non-interest banking and finance, also known as Islamic banking, is an alternative banking system that operates according to principles that differ from the conventional system to a large extent. The system has gained popularity in recent years and is being embraced by individuals and institutions who seek to align their financial transactions with their ethical and moral values.

At the heart of non-interest banking and finance is the concept of risk-sharing. In contrast to conventional banking where banks act as lenders and borrowers bear the risk, non-interest banks operate as partners with their clients. The bank and the client share the profits or losses of an investment, thus providing an incentive for responsible lending and borrowing.

One of the key principles of non-interest banking and finance is the prohibition of interest or usury. According to Islamic law, interest is considered exploitative and unjust, and is therefore prohibited. Instead, non-interest banks rely on profit-sharing arrangements, where the bank and the client share the profits from an investment based on a pre-agreed ratio.

Another principle of non-interest banking and finance is the emphasis on ethical investing. Non-interest banks invest in projects that are beneficial to society and the environment, such as renewable energy, education, healthcare, and infrastructure development. This approach is in line with the concept of social responsibility, which encourages businesses to act in ways that are beneficial to society.

Non-interest banking and finance also places a strong emphasis on financial inclusion. The system seeks to provide access to financial services to everyone, regardless of their socio-economic status. This is achieved through various products and services that cater to the needs of different segments of the population.

To facilitate non-interest banking and finance, several regulatory bodies have been established in different countries. These bodies oversee the operations of non-interest banks and ensure that they comply with the principles established in their special framework. In addition, several institutions offer professional training and certification programs to individuals who wish to work in the non-interest banking and finance industry.

In conclusion, non-interest banking and finance is a rapidly growing sector around the world that operates, in most areas, according to the principles of Islamic law. Its emphasis on ethical investing, financial inclusion, and risk-sharing make it an attractive alternative to conventional banking. By promoting responsible lending and borrowing, non-interest banking and finance can help to promote sustainable development and contribute to the overall well-being of society.

AUTHOR: Islamic Finance Research Institute of Ghana (IFRIG), is a registered Non-governmental organization, that is into research, advocacy, training, education, in the field of non-interest banking and finance and financial inclusion in Ghana. You can reach us via [email protected]

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