What is Islamic banking?

Islamic banking is a financial system based on the principles of Islam. It differs significantly from conventional banking systems, particularly in its avoidance of interest (riba) and its commitment to ethical investment. In Dubai, one of the leading financial centres in the Middle East, Islamic banking plays a central role in economic and social life.

Basic principles of Islamic banking

Islamic banking follows several basic principles:

• Avoidance of interest (riba): receiving interest is considered unethical in Islam. Instead, Islamic banks focus on profit and loss sharing.
• Ethical investments: Investments must not be channelled into businesses that go against the principles of Islam, such as alcohol, gambling or arms deals.
• Partnership: Islamic banking promotes financing models based on partnerships, such as Musharaka (partnership) and Mudaraba (profit sharing).

Financial products in Islamic banking

Islamic banks offer a variety of financial products that comply with Islamic law. Among the most common are:

• Murabaha: A financing model based on the sale of goods with a market-based profit mark-up.
• Ijarah: A leasing structure that functions similarly to a lease but involves ownership of assets.
• Wakalah: An agency model where the bank acts as an agent for the customer.

Islamic banking in Dubai

In Dubai, Islamic banking is extremely dynamic and growing steadily. Numerous Islamic banks, including Dubai’s largest institutions, offer a wide range of services. Dubai Islamic Bank and Emirates Islamic Bank are leading players in this sector, offering products that cater to the needs of individuals and businesses.

Advantages of Islamic banking

Islamic banking offers numerous advantages:

• Ethical standards: As investments are based on ethical principles, many customers feel morally better off.
• Stability: Avoiding speculative transactions can contribute to greater financial stability.
• Community orientation: Projects financed by Islamic banks often aim to help the community and promote social welfare.

Challenges and regulatory aspects

Despite the many benefits, Islamic banking in Dubai faces some challenges. These include:

• Regulatory issues: the necessary legal framework is considered immature, which can lead to uncertainty.
• Market understanding: Many customers are not familiar with the principles and products of Islamic banking, which could inhibit acceptance.

Illustrative example on the topic: Islamic banking

A fictitious example to illustrate Islamic banking could look like this: Ahmed wants to buy a new home in Dubai, but does not have enough equity. He decides in favour of the ‚Murabaha‘ financing model and turns to an Islamic bank.

The bank buys the house in advance and sells it to Ahmed at a premium. Ahmed will repay the bank in monthly instalments without incurring interest. This method offers Ahmed the opportunity to acquire property while preserving the principle of avoiding riba (interest).

For more information on financing models, you can also read our article on property valuations.

In addition, the property market in Dubai with its various facets is of great interest to investors and buyers.