Banking is a sector on which the economy of a country depends. No country can achieve glory without having a sound banking system. Islam has given us all the guidelines to follow in every aspect of life. It is the case in banking. Islam has put in front of us certain conditions that are to be followed while doing banking.

Islam is the set of most beautiful and balanced principals for life of any individual. According to the true Islamic faith, accumulation of wealth is not at all supported. Islam believes in keeping the funds or money in circulation and there are many golden rules that one can follow for the creation of perfect society that is free of poverty and discriminations. One of the aspects of this beautiful religion is Islamic way of investing in business and earning profit. On all the profit one earns and all of his possession including gold and silver there is 2.5% obligatory deduction called zakat. Every earning person is liable to pay zakat to the needy and poor. In this way, the foundation of healthy society is laid where everyone is happy, fed and at peace. Another beautiful aspect of Islamic thought is to invest in interest free system and lay the stone of interest free banking.

The first thing that should be kept in mind is the involvement and use of interest in banking. In Islamic banking, it is totally forbidden and the banking is done according to the principles laid down by Islam. All the products and also the lending and borrowing activity is free of interest in Islamic banking. Other concepts were evolved to ease the customers, which include the concept of partnership in which a person gets entitled to the property as a legal partner rather than earning interest on that. This is useful for both the lender and the borrower and the cycle continues in a precise way.

Before the introduction of Islamic banking, many Muslims were quite reluctant to use the banking system for doing investment as it involves the phenomenon of interest. So to cater and handle the needs of the Muslims Islamic banking was introduced, which has now become popular not only among the Muslims but also among non-Muslims as well. The reason for this is that it works on the golden principles of equity and fair play, which inspires everyone regardless of the cast and creed.
Various forms of partnerships have been launched under the scheme of Islamic banking, which includes “Mufawada” and “Mudaraba”. Mudaraba is the form of partnership, which provides the person with limited entitlement of the asset. Therefore, this type of partnership in Islamic banking is sometimes called as the partnership of limited liability.