Islamic finance is a relatively new banking system, particularly outside of the Islamic world, but many of its principles are as old as the religion itself. There are also clear signs that this novel way of carrying out transactions - according to principles of Islamic Sharia law - is growing at a rapid rate, and that Islamic banking is becoming a major global financial force that cannot be ignored.

Many people may associate Islamic banking with 'interest-free banking,' but this limiting generalisation is not entirely true. Islamic Sharia law teaches against Riba - the process of charging for lending money when people urgently need it - but this goes far beyond interest-free loans.

To understand the core principles of Islamic banking, it is essential to appreciate the firmly-held notion in Islamic teachings that money has no intrinsic value, but is only a system used for ascribing value to things. Because money has no intrinsic value, Islamic finance practitioners do not believe in charging for its use in the form of interest and other penalising bank charges.

This important principle can be seen throughout Islamic finance, particularly when it comes to investments. Rather than being currency based, all Islamic finance transactions are necessarily asset based, relating to physical, tangible properties such as business equity. Rather than dealing in currency based bonds, Islamic finance utilises Sukuk certificates which relate to specific assets, this can make it much more financially secure and lower the risk involved than many other forms of banking.

As its name suggests, Islamic finance is based on teachings found in the Holy Book of the Islamic faith, the Quran. Other principles come from Sunnah, which refers to the teachings of Muhammad as to how Muslim people should live their lives and treat others. Islamic finance is more than just a banking system for Muslims however, as many non-Muslims living elsewhere in the world have praised its more ethical ways of carrying out transactions compared to many Western banks.

These ethical banking practices extend to charitable donations, which are again carried out in accordance with Islamic beliefs. Just as Muslims are expected to make donations to deserving causes each year, so too are Islamic banks required to make generous offerings to needy causes. These charitable causes have traditionally been related to the Islamic faith, but the expansion of Islamic finance into other parts of the world has made it equally acceptable for donations to be made to help with international projects.

The author of this article is a part of a digital blogging team who work with brands like Fidomes. The content contained in this article is for information purposes only and should not be used to make any financial decisions.