Commercial banking has been a part of the Western business world for hundreds of years. It is common for Westerners to deposit money into an institution and receive interest on that money. The financial institutions loan or invest the money at higher interest rates than they pay, which is how they are able to make a profit. Traditionally, lending is done with collateral, often the thing being purchased, so that a bank might lend money to a consumer to purchase a home at eight percent interest, and the home itself is collateral. If the borrower fails to make the payments, the home is taken by the bank. Islam prohibits the paying and receiving of interest, and also prohibits the types of investments that can be made--Muslims are forbidden from investing in gaming establishments, for example. As Islamic countries and individuals have become interwoven with Western financial institutions, conflicts have arisen--Muslims must either live outside the Western financial realm, or find ways in which they can abide by the religious precepts within the financial world. Islamic banking has gained attention as the market for such institutions has grown in recent years, and this research considers the basis for Islamic banking, the religious laws that govern it, and one institution in particular--Noriba--and its application of Islamic banking principles.
Islamic law (sharia) specifically prohibits both the paying and the receiving of interest. Demanding interest from a borrower is considered taking something without giving something in return, according to some Islamic scholars. Paying back the amount borrowed settles the debt; any amount above that is unearned by the lender. Interest also goes against the Islamic belief in work. The Qu'ran exhorts the faithful to participate in lawful and honest work; if someone can receive interest--that is, make money without working--there is less incentive to work. Prohibiting interest also encour...