The Salient Characteristics of Islamic Finance and Banking Law

Islamic finance and banking have been burgeoned throughout the world and many countries want to have a stake in it. Islamic banks connote to prohibition of payment or receipt of pre-determined interest rate. Payment or receipt of pre-determined interest rate is regarded as usury (<I>riba</I>). The Islamic system substitutes pre-determined interest rate by the principle of profit-loss sharing, which aim to transform the banks into equity-based firms. The principle of profit-loss sharing seems to be a possible cure for instability. This research wants to stress that the payment to depositors of a fixed interest impacts negatively on banks. This inhibits the banks from instantaneously adjusting to the financial crisis. It is obvious that such rigidity can lead to possible financial instability. Debt-financing of the conventional banking system protects only the financier. The real investor (equity holder) has to bear the entire risk of the enterprise. Under Islamic banking and finance both the financier and the investor are subjected to the same risks - this stratagem would promote stability and will accord an element of justice to the Islamic model. The research adumbrates the notion that Islamic interest-free banking systems make provision for immunity against bank failure and financial instability.