Interest Free Banking

“Interest Free Banking” is a fundamental concept derived from the Islamic form of banking. It operates with the primitive professional and ethical standards that exclude the “Muslims” from paying or receiving any kind of interest. This certainly does not mean that the revenue generating activities or money raving businesses are not encouraged. All of these business forms are greatly appreciated as far as they do not involve interest in any kind. There are a lot of financial tools introduced by the Islamic financial bodies to fulfill these business or profit making requirements. For a clear understanding, they deal with equity financing rather then reflecting on debt financing. In addition, as a replacement of fixed interest rates on the savings account, these interest free banks give a small percentage of return on deposits on an annual basis.

Now looking at the inception of interest free banking, it all started around the later part of the nineteenth century when the Muslim countries were doing well, both politically as well as economically. These banks started establishing their centers in the major cities of Islamic as well as non-Islamic countries to cater their comprehensive business needs. Conversely, the branches of such interest free banks turned out to be scarce and the regions apart from the major cities were totally ignored by such a banking system. But however, a lot of local businesses engaged with these financial entities rather than other commercial banks only due to religious reasons. The only reason behind this is, Islam completely forbids the concept of paying or receiving interest. With increasing time and business, it also became exigent to stay away from commercial banks. The commercial banks evolved with the most convenient user-friendly practices like faster money transfer and effortless current accounts but even then, lending money and starting deposit accounts were outlawed due to the forbidden interest banking. Coming to the present moment, it has been obvious that any financial transaction in the most cases involves a bank and for that reason avoiding the modern banking has become impossible. Thus we find a greater indulgence of banks in our local communities. Looking at this inevitability, interest free banking came into existence to serve all the business needs of Muslims and in turn taking utmost care of the rules of Islam. The interest free banking works on some simple rules in the Quran and those who do not follow these rules or deviates from following them correctly is termed as “non-Islamic”.

Interest free financial institutions have been into existence for quite sometime now. By and large, nearly all interest-free banks concur on the indispensable values of Islamic banking. Nonetheless, individually all the banks differ from the services and benefits. These differences occur due to the country rules, needs of the inhabitants and the customized bank’s experiences and objectives.

In spite of being successfully implemented, interest free banking module has some problems when it comes to the areas of financing. However, there are alternatives to such problems, like putting up loans with a service charge and introducing the participatory financial model. It can still be concluded that interest free banking does have a competitive advantage to co exist with the other business models in the financial industry. Such a concept is becoming widely popular with the Non-Islamic countries too. The basic principle that helps a person become debt free at the earliest can be called the most outstanding feature of these kinds of banks. The interest free banks work with the rule that the lender must have a share from the profits or the losses that occur to the borrower or the borrowing enterprise. Thus it is mandatory to share the profits as well as the losses. The lender and the borrower are more of partners and that plays a major role in characterizing the social order. In turn it helps remove the discrimination between the modern day “rich” and the “poor”. The traditional banking system on the other hand collects huge amounts of interest from the borrower regardless of the success or the failure issue. It places a huge amount of risk on any entity that is borrowing the money and is proved to be merciless with Islam.

With the rules that help humanity, Interest free banking is on its way to leave a long lasting impact on the financial institutions around the world.