Islamic banking: state of the art

Islamic banking' is banking conforming to the shari`a. Islamic banking is based on the prohibition of riba, an unnecessary and undesirable feature of traditional banking. Banks as institutions are in consonance with Islamic teachings because they provide benefit to society, but interest-based banking is repugnant in shari`a. Islam prohibits interest but allows trade and profit. Instead of interest, Islamic banking uses profit and loss sharing as a means of financial intermediation. Although banking as such did not exist in classical Islam, private financing was available primarily on the basis of mudaraba and musharaka . The core of Islamic banking developed thus far is a two-part mudaraba contract, between depositors and the bank and between the bank and the recipients of financing. Unlike in conventional banks, loans are relatively unimportant features in Islamic banks.