Definition of 'Islamic Banking'A banking system that is based on the principles of Islamic law (also known Shariah) and guided by Islamic economics. Two basic principles behind Islamic banking are the sharing of profit and loss and, significantly, the prohibition of the collection and payment of interest. Collecting interest is not permitted under Islamic law.

During the past several decades hundreds of valuable books and research papers have been published on the justness and completeness of Islamic economic system and about two hundred Islamic banks have been established and many web sites have been opened for dealing with Islamic finance. But most unfortunately for the Muslim ummah professional Islamic economists and bankers have not yet come up with any practicable Islamic alternative of interest with the result that in spite of having mobilized billions of dollars of Muslim ummah Islamic banks do not have any system of advancing interest-free loans which should be their main function and therefore for meeting their own short-term needs of liquidity they get loans on interest from conventional banks.Fortunately for the Muslim ummah, a non-professional and little known but most outstanding economist and Islamic research scholar late Professor Shaikh Mahmud Ahmad devised a financial instrument based on Qard Hasan and named it Time Multiple Counter Loan-TMCL which can perform in Islamic way all the financial intermediation functions as are performed by interest in the modern banking system. He pleaded for eliminating interest by replacing it with TMCL in the banking system.explains 'Islamic Banking'Here's an example of how the Islamic banking system uses methods of profit/loss sharing to facilitate financial transactions: for some types of loans, the borrower only needs to pay back the amount owed to the lender, but the borrower can choose to pay the lender a small amount of money to serve as a gratuity.

Since this system of banking is grounded in Islamic principles, all the undertakings of the banks follow Islamic morals. Therefore, it could be said that financial transactions within Islamic banking are a culturally distinct form of ethical investing (for example, investments involving alcohol, gambling, pork, etc. are

prohibited). The Dubai Islamic Bank has the distinction of being the world's first full-fledged Islamic bank, formed in 1975.

Describing the Islamic financial systemsimply as "interest-free" does not provide a true picture of the system as a whole. While prohibiting the receipt and payment of interest is the nucleus of the system, it is supported by other principles of Islamic teachings advocating individuals' rights and duties, property rights, equitable distribution of wealth, risk-sharing, fulfilment of obligations and the sanctity of contracts. Similarly, the Islamicfinancial system is not limited to banking but covers insurance, capital formation, capital markets, and all types of financial intermediation and suggests that moral and ethical aspects in the regulatory framework are also necessary in addiiton to prudent and sound controls.

Islamic finance may be viewed as a form of ethical investing, or ethical lending, except that no loans are possible unless they are interest-free. The general objectives (maqsid) of Islamic finance transactions may be summarised as below:· To be true to the Shari’ah principles;· Should be free from unjust enrichment;· Must be based on true consent of all parties; must be an integral part of a real trade or economic activity such as a sale, lease, manufacture or partnership.

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