Historically, the Islamic principles are often applied to the economies operated under the Muslim rules but it is also a fact that proper Islamic banking was initiated in the late 20th century when several Islamic Banks were established in order to implement Islamic principles of economics to the private and semiprivate financial institutions operating within the Muslim communities. There are some basic modes of Islamic banking that guide different financial and commercial activities like mud area (limited partnership), mufawada (partnership) and trusts, etc. (Siraj and Hilary, 2006)
At present, there are numerous Islamic banks operating across different Muslim countries of the world that are promoting the practice of Islamic banking principles to support the creation of an economic system based upon Islamic rules. The following essay aims to examine the current practice of Islamic banking principles in the modern-day economic system.
The Islamic banking system differs from the other banking system on the basis of some basic principles that act as the foundation stone of the Islamic economy. At first, Islamic banking is based upon the same purpose as the conventional banking system. It is meant to make money for the banking institution by landing out the capital money.
However, Islam prohibits lending money at fixed interest and there have been some Islamic rules formed to avoid the practice of fixed interest for lending money. There is a basic technique applied to avoid fixed interest according to which the lander gets sharing in the profit as well as loss received through the business done from that money (Mahlknecht, 2009). .The profit-sharing is promoted by Islamic Banking on a percentage basis rather fixing an amount regardless of accumulation of profit or loss. .This process of lending money on the basis of sharing the profit and loss could be done through different modes of finance including Mudharbah.