An Analysis Of The Islamic Financial System Finance Essay

Islam considers the job of economic development really earnestly and see this as an of import portion of entire human development. The cardinal purpose of Islamic faith is to take human development in the right way. Islam trades economic development as portion of entire human development and ne’er deviated from this position[ 1 ]. Muslimism does non promote obstruction of wealth and respects circulation of wealth as of import to an economic system. The advocates of Islamic Banking argue that the system based on involvement has resulted in concentration of wealth in a little figure of custodies therefore widening the spread between rich and hapless. The fact is that the 10 richest work forces in the universe have more wealth than 48 hapless states of the universe.[ 2 ]Dr Usmani records, “ Merely as curdling of blood paralyzes the human organic structure ; concentration of wealth paralyzes the economic system ” .[ 3 ]

1.1 Islamic Financial System:

The Islamic fiscal system by and large refers to an establishment for fiscal market traffics, operations and services that does non conflict with Sharia Law. In Islamic law all regulations relate to the allocation of resources, rights on belongings, production and use, and the allotment of income and wealth as specified by the sharia law ( Islamic Law ) .[ 4 ]As per the regulations and ordinances stipulated by Shariah hazard or wages can non be prohibited or promoted.[ 5 ]The Islamic fiscal system is frequently referred to as ‘interest-free ‘ , but this is non the instance. The nucleus values in conventional banking system such as publicity, saving and holiness of entrepreneurship, belongings rights and contractual duty are besides portion of the Islamic fiscal system. It is hard to mensurate the existent size and rate of growing in the universe broad Islamic funding pool.[ 6 ]Today, the assets of Islamic fiscal and banking activities have been estimated to the melody of over US $ 750bn, which is a mark of the impressive growing in this sector since 1980s.[ 7 ]The possible and widespread chances within Islamic banking are acquiring attending from market participants and policy shapers.[ 8 ]Although there are no obstructions present to the continued development of Islamic finance, this does non intend an absence of challenges.[ 9 ]The deficit of investing mercantile establishments with profit-loss sharing understandings is one of the chief hinderances to the continued growing of this sector.[ 10 ]

Islamic finance operates in conformity with Sharia ( Islamic Law ) . It is derived from the Qur’an ( The Holly book of Muslims ) and Sunnah ( the traditions of the Prophet Muhammad ) .[ 11 ]One of the basic pillars of Islamic fiscal system is economic freedom.[ 12 ]But it is non the same as under a capitalist economic system.[ 13 ]One of the chief differences between the capitalist economic system and Islamic fiscal system is that while the capitalist system advocates absolute freedom in the market without any moral duty, the Islamic Bankss advocators for the morality in the market.[ 14 ]Islamic finance allows an person to gain wealth and ain it. Even though the person has absolute discretion to pass his wealth, it should in conformity with Islamic regulations that apply to everyone.[ 15 ]For case: duty to pay revenue enhancement for the hapless.[ 16 ]

1.2 Muslim Banks:

An Islamic bank is a fiscal mediator located in assorted sectors of an economic system that mobilise nest eggs from the populace based on different tools within the Islamic fiscal system and administer the money to enterprisers and other clients by following with Sharia.[ 17 ]It is believed that the system of bear downing inordinate fixed-interest debt led to the creative activity of a hapless economic environment that resulted in the recent planetary fiscal crisis.[ 18 ]But risk-sharing instruments in Islamic banking purpose to advance economic development.[ 19 ]

The followers are considered as nucleus values of Islamic banking rules:

Interest as a return for salvaging does non hold any moral foundation

Self-restraint from disbursement of present income does non be worthy of a fiscal wages

Gross is gained merely by taking hazards so hazards have to be incurred to derive money.[ 20 ]

The basic rule of Islamic Banking relates to humanity, moralss and morality such as justness, equity, world and Human nature.[ 21 ]Islamic jurisprudence influence the construction and activities of Islamic Bankss in several ways, the most of import being the replacing of Riba ( the reception and payment of fixed or predetermined involvement ) with net income -loss-sharing agreements.[ 22 ]In profit-loss sharing rule, the rate of return on an investing is non fixed or non known prior to the dealing.[ 23 ]For avoiding Riba, Islamic Bankss had to develop fiscal merchandises which were in conformity with Sharia’h.[ 24 ]To achieve this mission, a figure of particular Islamic fiscal merchandises that comply with Sharia have been created by Muslim Bankss.[ 25 ]The most widely used merchandises which have been developed by Islamic Bankss are Murabaha, Musharakah and Mudharabaha[ 26 ].

1.3 Decision:

In a nutshell, Islamic commercial jurisprudence is a complex system and covers many countries. Islamic banking is merely one of the countries within the Islamic fiscal system. In this chapter merely a selective and general overview is given sing Islamic finance. All regulations and ordinances of Islamic banking are derived from The Quran and the instructions of Prophet Muhammad. The purpose of Islamic fiscal system is to give economic justness to mankind. Although Islamic finance purposes to give economic freedom to the proprietor of a belongings it can be argued that the economic freedom is non absolute freedom since there are regulations, ordinances and moral moralss that are to be observed.


The Nature, Definition and Evolution of Islamic Banking Law

Giving an lineation of the fiscal establishments is utile for understanding the construct and operations of Islamic banking. This will assist in understanding how fiscal establishments and merchandises affect and fulfil the demands of assorted sectors in an economic system

2.1 Banking:

Let us analyze what is banking or a bank? The word “ bank ” is derived from the Italian word “ banco ” , which means shelf or bench.[ 27 ]“ A bank is an establishment authorized to take sedimentations for the intent of widening long and short-run finance installations ” .[ 28 ]The royal castles and temples in ancient Mesopotamia were considered as the ancient Banks where the trade goods were kept for security.[ 29 ]

The modern banking system operates as fiscal mediators between assorted sectors in an economic system and they offer a figure of other services such as safe sedimentations, overdrafts, easy transportation and bureau maps etc.[ 30 ]Historically, Bankss have carried out all their maps oA­n the footing of fixed involvement payment which is the footing of all their traffics.[ 31 ]

2.2 Why Islamic banking?

Islamic banking and finance has received attending as an alternate theoretical account. Interest or vigorish is considered as a beginning of development. By and large the highest rates of involvement were charged to lower earners in the instance of sub premier loaning. Such an unjust attitude by conventional banking was one of the grounds which led to the idea of an alternate banking system.[ 32 ]More over, the conventional banking system based on involvement is unqualified of apportioning available liquid financess among the assorted sectors in an economic system irrespective of their efficiency, productiveness and growing position.[ 33 ]It is besides presumed that irrespective of rational economic considerations sing income distribution, conventional banking is biased towards affluent people. Therefore, profit-loss sharing system in Islamic banking is considered as a competent option.[ 34 ]When the Bankss move frontward from development and pitilessness, the relevancy of Islamic banking, which is marked by kindness and fondness, is increased. More over it is believed that Islamic economic system should take to freedom from economic bondage.[ 35 ]

2.3 Beginning of Islamic Banking:

Harmonizing to Lieber “ Among Muslims, international trade was peculiarly stimulated by the pilgrim’s journey to the holy topographic points of Arabia, in which a great organic structure of work forces converged each twelvemonth from all over the universe. Many of these pilgrims fulfilled their spiritual duties and at the same clip, marketed their local merchandises along the path, returning place with foreign goods on which they hoped to do a fine-looking net income ” .[ 36 ]With the development of trade operations such as loaning, adoption, reassigning, vouching and safeguarding comes the development of banking operations in Islamic community[ 37 ].

The operations of Islamic banking started from the clip of the Prophet of Islam who introduced the systemA ofA Bayt al-Mal ( State Bank of Muslims ) A for the aggregation and distribution of grosss.[ 38 ]The supervisor and manager of Bayt al-Mal was called as Khazin al -Mal who was a authorities officer under the section of cardinal secretariat.[ 39 ]TheA Bayt al-MalA was non onlyA A A the propertyA A A of the Muslims aloneA but of non-Muslims besides. It was the responsibility of the Islamic province to back up needyA non-MuslimsA every bit good as indigentA Muslims out of the financess of theA Bayt al-Mal.[ 40 ]The public exchequer ofA Bayt al-MalA played the function of an agriculturalA recognition bank and besides a commercial bank.[ 41 ]During the period of 844-848 A.D. , it lent to the provincials two million dirhams.[ 42 ]

From the historical Hagiographas of some bookmans we can understand that there were bankers in mediaeval Islamic universe called sarraffeen or sayarifah or jahabidhah and Bankss called dawawin al-jahabidhah.[ 43 ]It is to be noted that in 913 AD, the province established diwan al-jahabidhah with subdivisions in the chief trade metropoliss which were carry oning about all modern banking maps without entree to involvement.[ 44 ]After the thirteenth century a figure of Islamic establishments, including the Islamic system of fiscal intermediation had been displaced by Western establishments due to assorted internal and external factors.[ 45 ]

2.4 Development of Modern Islamic Banking:

From the center of the 19th century, about every Muslim state, under direct or indirect force per unit area from the freshly dominant west power, adopted Torahs and legal systems based on Western theoretical accounts in both civil and condemnable countries.[ 46 ]After freedom from colonisation, the demand for Islamic laws based economic system had been increased in most of the Muslim dominated states.[ 47 ]Because of the increasing demand from the people in many Muslim states, single Islamic Bankss were established.[ 48 ]They were runing under the economic and legal controls from the authoritiess in the state in which they were established.[ 49 ]Furthermore, they faced competition from already established interest-based Bankss in the system.[ 50 ]

The first modern test of Islamic banking was established in Egypt at Mit Ghamr without projecting an Islamic image, because of some political grounds, in 1963.[ 51 ]It was the first interest-free establishment with ‘bank ‘ , Nasser Social Bank, as its name.[ 52 ]It was a nest eggs bank based on Profit-Loss sharing established by Ahmad El Najjar.[ 53 ]This test lasted until l967.[ 54 ]Although the first experiment lasted merely four old ages, this thought received attending from rich people with excess wealth. After four old ages, in 1975, Dubai Islamic Bank was established in Dubai, UAE.[ 55 ]Even though it was a private enterprise ; the authoritiess of UAE every bit good as Kuwait invested 30 % of the entire portion.[ 56 ]It is the first fully fledged Islamic Bank in modern history.[ 57 ]However, in 1975 the IDB ( Islamic Development Bank ) was established. It is the most of import development in Islamic Banking history.[ 58 ]

With the development of several Islamic Bankss and the willingness of some states like Pakistan, Iran and Sudan to implement the Islamic fiscal system, has boosted the growing of the Islamic banking sector.[ 59 ]One of the mileposts in the development of modern Islamic banking is that, its merchandises have been recognised as echt tools of fiscal intermediation by IMF and World Bank.[ 60 ]Islamic banking has grown by about 15 per cent a twelvemonth since its modern induction in the 1970s.[ 61 ]Presents Islamic fiscal services establishments have spread worldwide totaling about 500[ 62 ]and the entire plus value of Islamic Bankss have reached about US $ 750 billion.[ 63 ]

2.5 Definition and characteristics of Islamic Banking:

We have already discussed the beginning and development of Islamic Banking. Let us analyze the nature and characteristics of Muslim Banks.

2.5.1 Definition of Islamic banking:

An Islamic bank is as an mediator between the salvaging excess and the shortage units like any conventional bank with the difference that the instrument of involvement is replaced by a figure of other instruments. It mobilizes financess on the footing of a Mudarabha or Wakalah ( bureau ) contract. It advances financess on a profit- and-loss sharing understanding in conformity with the rules of Islamic law.[ 64 ]However in pattern, in footings of organizational set-up, Islamic Bankss barely look any different from its conventional opposite number.[ 65 ]An Islamic Bank has been defined in the undermentioned manner harmonizing to general secretariat of the Organisation of Islamic Conference ( OIC ) “ A fiscal establishment that expressly states its committedness to the rules of Islamic Islamic law in all of their statues, regulations and processs and that which prohibits reception and payment of involvement in all its operations is an Muslim Bank ” .[ 66 ]In simple footings it can be defined as banking operations in conformity with the beliefs that fit with the value system within Islam.[ 67 ]A

The Islamic Banking system is based on the construct of sharing net incomes every bit good as loss. The general rule of Islamic banking is that merely those who are willing to presume hazard have the right to acquire a return on their nest eggs.[ 68 ]From the above definition it is understood that Islamic banking neither receives nor pays involvement in its minutess. Alternatively, this system operates based on Islamic Law of minutess which is advancing net income and loss sharing ( PLS ) .[ 69 ]Because of Profit-Loss sharing rules in their pattern, Islamic Banks are called as PLS-Banks.[ 70 ]

2.5.2 Basic characteristics of Islamic Banking:

There are rigorous regulations using to finance under Islamic jurisprudence. The economic rule of Islam is based on unfastened markets, without monetary value controls and forbiding riba, gharar and maysir[ 71 ]Let us analyze the distinguishing characteristics of Islamic banking.

A ) Freedom from Riba:

Riba is an Arabic word that means “ growing ” or “ addition ” and denotes the payment or reception of involvement for the usage of money.[ 72 ]The prohibition of “ riba ” ( involvement ) at Islamic Shari’a on monies Lent is ordained by the Quran, Sunna, i.e. the prophetic tradition and Ijmma ( unanimity of the multitudes of ancient legal experts ) .[ 73 ]The Quran expressly forbids riba, and gives warning against those who are non ready to give up riba. The sanctum Koran declares that “ aˆ¦aˆ¦ . if you do non give up your demand for the involvement due to you ) so take notice of ( a declaration of ) war from Allah and His Messengeraˆ¦ ”[ 74 ]There is a stating from the prophesier to forbid riba even if it is a smaller sum. For illustration “ From Abu Burdah ibn Abi Musa: I came to Madinah and met ‘Abdallah ibn Salam who said, “ You live in a state where riba is rampant ; hence if anyone owes you something and nowadayss you with a burden of hay, or a burden of barley, or a rope of straw, do non accept it for it is riba. ”[ 75 ]

Riba has been interpreted as any predetermined or assured involvement payment on hard currency progresss or on sedimentations.[ 76 ]One erudite comrade of Prophet Mohammed ( peace be upon him ) was reported to hold said “ He who lends should non qualify more than what he has Lent, even a smattering of fresh fish ; for it is riba. ”[ 77 ]

The cosmopolitan nature of these rules is seen even in non-Muslim literature. Some of the Major faiths like Hinduism, Judaism and Christianity have prohibited Usury in rule.[ 78 ]It is to be noted that both Old and New Testaments in the Bible prohibits Usury.[ 79 ]For illustration, The Old Testament clearly says that “ If you lend money to my people, to the hapless among you, you are non to move as a creditor to him ; you shall non bear down him involvement ” .[ 80 ]Shakespeare and many other authors have expressed their choler against this unfair pattern through their plants.[ 81 ]Even though there are no specific poetries in the Quran or messages from the Sunna providing grounds for the prohibition of Riba, some surveies argue that Riba contradicts the rules of profit/loss sharing which aims to make a proper balance between the loaner and the borrower.[ 82 ]

Different bookmans have given different grounds for the prohibition of Riba ; the undermentioned grounds given by Siddiqi are notable ;

Riba is a signifier of societal corruptness referred to by Arabic bookmans as Fasad.

Riba implies the unlawful appropriation of other people ‘s belongings without justification.

Riba decreases the resources of provinces through negative consequence on the growing of economic systems.

Riba demeans and diminishes the humanity of persons.

Riba leads to money being made from money: an unacceptable pattern in Islamic finance.

If people chiefly depend on involvement for their lively hood so they may be discouraged from working to gain money.[ 83 ]

Difference between Riba and Net income


Net income

Any income or net incomes is collected above the rule sum of money Lent which is fixed and does n’t affect any hazard.

The income and net incomes are above the rule sum, but is non predetermined and ever bear hazard.

A compulsory predetermined sum has to be paid by the client as involvement to the bank for the money Lent.

No mandatory returns policy exists since net income is non known in progress.

Interest is predetermined and so known to both of the parties therefore avoiding eventualities.

The component of eventuality is present since net income from the concern activity is non known to the parties until the terminal of the activity.

Losingss ne’er occur since returns are pre determined.

Losingss are likely to happen since returns are station determined.

Beginning: ‘concept and Ideology Islamic banking some conceptual issues ‘ . Onlinearticle & lt ; hypertext transfer protocol: // & gt ; accessed on 20/05/2011.

B ) Prohibition of Gharar:

Literally Gharar means Risk or Hazard.[ 84 ]The term Gharar has been defined by many bookmans but the followers is notable “ Gharar as the sale of likely points whose being or features are non certain, due to the hazardous nature which makes the trade similar to chancing ” .[ 85 ]Al-Dareer defines Gharar in jurisprudential footings under the undermentioned three headers: First, Gharar applies entirely to instances of uncertainty or uncertainness, as in the instance of non cognizing whether something will take topographic point or non. Therefore, Gharar is uncertainness over the being of the capable affair of sale.[ 86 ]

Second position holds that Gharar applies merely to the unknown, to the exclusion of the doubtful. Therefore, Gharar in gross revenues occurs when the buyer does non cognize what he has bought and the marketer does non cognize what he has sold.[ 87 ]The 3rd position is a combination of the two classs supra ; as per this position Gharar finds where effects are concealed. This is the position favoured by most bookmans.[ 88 ]However Muslim Jurists disagree on the grade of uncertainness in a dealing to be considered Gharar dealing.[ 89 ]It is noted that there is no expressed statement known in the Quran ban Gharar, it is well-accepted that it is out.[ 90 ]But amour propre ( albatil ) is out in many poetries. The Holy Quran says that ;

“ And do non eat up your belongings among yourselves for amour propres, nor use it as come-on for the Judgess ” .[ 91 ]“ O ye who believe! Eat non up your belongings among yourselves in amour propres ; but allow these be amongst you traffic and trade by common good will ” .[ 92 ]

There is a consensus among translators of these poetries that Gharar is amour propre. Ibn Al-Arabi explains that amour propre ( al-batil ) is improper because it is prohibited by Sharia such as vigorish and Gharar.[ 93 ]For avoiding Gharar Islamic Banks shall non to prosecute in bad trade of portions, discounting of measures and trading in unidentified points.[ 94 ]

The implicit in rule behind the prohibition of Gharar is to do certain full acquiescence and satisfaction of the parties in a contract. It can be achieved merely through full revelation and transparence. The prohibition of Gharar protects unanticipated losingss and the possible dissensions among the parties.[ 95 ]

C ) Free from Maysir:

The term maysir is defined as gaming, stakes and bet.[ 96 ]There is consentaneous sentiment from Islamic bookmans that maysir ( chancing ) and gharar are inter-related. So, wherever elements of gharar are present so maysir will besides be at that place.[ 97 ]The kernel of gaming is taking a hazard intentionally created or invited to derive in that manner.[ 98 ]In simple Maysir is an easy attainment of agencies by opportunity.[ 99 ]The Holy Quran clearly says that “ They ask you ( O Muhammad ) refering alcoholic drink and gaming. Say: “ In them is a great wickedness and ( some ) benefit for work forces, but the wickedness of them is greater than their benefit. ”[ 100 ]

The component of Maysir is involved in a figure of conventional minutess and bank strategies or merchandises which Islamic Bankss have to avoid. For illustration some Bankss and corporations mobilize resources on the footing of lottery draws and awards which come under the streamer of gaming and are hence prohibited.[ 101 ]Furthermore for avoiding Maysir Islamic Bankss should non cover with any instrument where vouchers or checks are given and inducement or inducements are provided by an unsure and unknown event depending on opportunity.[ 102 ]

Islam does non advance a society where gaming and other similar activities support lively goon of the society. Islam aims to advance merely a well- developed and healthy society where the difficult work and existent parts of the person in footings of quality, creativeness, and service is acknowledged. It is because of the above grounds that Islam prohibits maysir.[ 103 ]

D ) Prohibition of utilizing or covering in out trade goods:

By virtuousness of Islamic law people are allowed to put money wherever they like capable to conformity with Islamic law. Harmonizing to Sharia some trade goods are prohibited which is considered as anti-social. So, Islamic fiscal establishments can non prosecute any covering with these trade goods such as intoxicant, drugs, porc etc.[ 104 ]

The principle behind this is to advance ‘ethical ‘ investings and to forestall the handiness of anti-social trade goods.[ 105 ]

Tocopherol ) Hazard and Net income Sharing:

The of import Shariah axiom: “ Al Kharaj bi-al-Daman ” or “ Al Ghunm bil Ghurm ” means that one has to be prepared to bear loss if he wants to acquire any net income over his investing or net income has to be earned by sharing hazard and wages.[ 106 ]The above axiom which legitimize one of the cardinal rules of Islamic banking is known as hazard and net income sharing. This rule is alone to Islamic Banking. Under conventional banking systems based on involvement, the catching parties portion neither net income and loss nor hazard.[ 107 ]The rule behind this construct is that the hazard of related loss can non be separated from the ownership.[ 108 ]Under this rule transacting parties make a contract and put their resources in a undertaking in which they portion the net income and loss. In most instances the net income shall be shared in a pre-agreed ratio while the loss is borne in proportion to the degree of investing by the transacting parties.[ 109 ]

The risk-sharing between the investor and enterpriser is promoted by Islamic Banks.[ 110 ]Under Islamic law investing is considered as a existent activity in footings of the net income loss sharing understanding non merely confined to a mere fiscal or pecuniary dealing in which transportation of financess is the lone activity[ 111 ]. Even though extinguishing the hazard sharing is prohibited by Islamic Law, it promotes the extenuation of known hazard by taking equal safeguards.[ 112 ]

One of the chief unfavorable judgments on profit- loss sharing system is that because of the trouble to determine its plus value the bank can non be quoted by the stock exchanges.[ 113 ]The other unfavorable judgment on this rule is that it is impossible for depositors who are so investors to measure the outstanding balance of the bank at the clip of lodging their money therefore exposing them to either net income or loss depending on the Bankss public presentation.[ 114 ]

The principle behind this rule is that the consequences of any undertaking ca n’t be known with absolute certainty since there is a hazard involved in any undertaking given the unsure nature of this universe. In conventional banking system, whether the undertaking succeeds or fails the proprietor of capital gets a preset return. By virtuousness of Islamic Law this sort of unfair distribution is non acceptable. In Islamic banking the consequences of the undertaking shall be shared in an just manner between investor and enterpriser.[ 115 ]

2.6 Difference between conventional banking and Islamic banking:

Under this heading allow us analyze the important characteristics of Islamic banking system compare to conventional banking systems.

Major difference between Islamic and Conventional Banking system

Conventional system

Islamic System

The conventional system maps and operates based on secular rules.

The Islamic system maps and operates based on Shari’a regulations.

Interest on capital will bear down on the footing of clip value on capital.

Interest is non charged as per Sharia regulations. However net income on exchange of goods and services are shared based on a pre-agreed ratio between bank and client.

Money is considered as a merchandise.

Money is considered as a medium of exchange.

Because of non-existence of goods and services rising prices may be created.

Because of being of goods and services no rising prices is created.

Interest will be charged by the bank even if the client suffers loss.

When the client suffers loss, the loss will be shared between client and bank.

Bridge funding and long-run loans imparting are disbursed on the footing of Wando Dressed undertaking feasibleness and credibleness of the enterpriser.

Before pay outing financess for a capital undertaking, the capital good should come in to existence.

Hazard sharing is non available.

Muslim Bankss offer equity funding with hazard sharing for a undertaking or venture. Losingss are shared on the footing of the equity engagement, whereas net income is shared on the footing of a pre-agreed ratio.

If the undertaking has failed so the loan may be written off as non-performing loan.

If the undertaking has failed so the undertaking can be taken over by the bank for a better direction.

Conventional Bankss may finance any lawful merchandise or service.

Muslim Bankss are allowed to take part merely in those economic activities which are lawful as per Shari’a.

Conventional Bankss usually charge extra money ( compound involvement ) in instance of late payments or defaults randomly.

Muslim Bankss are non allowed to bear down punishments for late payments or defaults.

In conventional banking system the relation between bank and client is that of a creditor and debitor.

In Islamic banking the relation between bank and client is that of a spouse and investor.

Conventional Bankss do n’t hold any spiritual supervisory boards.

Each Islamic bank must hold a supervisory board to guarantee that all its concern activities are in conformity with Shari’a.

A conventional bank must be in conformity with the statutory demands of the cardinal bank of the state in which it operates.

An Islamic bank must be in conformity with both the statutory demands of the cardinal bank of the state in which it operates and Sharia besides.

Beginnings & lt ; hypertext transfer protocol: // % 20 ( 26 ) .pdf & gt ; accessed on 13/05/2011.

2.7 Decision:

To reason, Islamic banking is considered as an option to conventional banking system. Interestingly the construct and operations of Islamic banking system originated from 6th century AD nevertheless the modern banking system came into being merely 30 old ages ago. Therefore Islamic banking has shown continued growing since its constitution old ages ago nevertheless the cardinal construct that all traffics are in conformity with Islamic Law remains unchanged. There are some cardinal rules within Islamic banking which should be followed in all traffics. It is a fact that most of the faiths and many great personalities clearly opposed the pattern of Usury in rule. But it is to be noted here that merely Islamic Law is purely prohibiting Usury both in rule and pattern. Islamic finance non merely prohibits Usury but it puts frontward a construct called hazard wages sharing alternatively. Profit- Loss sharing under Islamic banking system is a alone characteristic of Islamic banking. Islamic banking has widespread difference in comparing with the conventional banking system.