How Islamic Banking Works In Singapore | Smart Towkay

Singapore has been one of the top countries for Islamic banking despite not having a Muslim majority. In Singapore, many banks offer Islamic services as well as conventional ones for their customers. However, outside of our Muslim brethren, a lot of Singaporeans might still be unfamiliar with the concept of Islamic banking.

What is Islamic banking?

It is a type of financial service that is focused on lending and investing without charging interest, which deviates from traditional banking practices. That is because Islamic banking upholds Sharia principles, and the concept of interest or “riba” is considered unethical and is therefore forbidden to be utilised.

This type of banking has been around since sometime during the 20th century when it first started appearing in Malaysia and Indonesia. Islamic banks make their profits by investing with trading partners throughout the world, which means that they don’t rely on high-interest rates from lending out money like other types of banks do.

Another thing that makes Islamic finance different from conventional finance is its focus on profit sharing rather than strict return on investments like most traditional forms of financial services.

Islamic banks do come with certain restrictions, namely they cannot invest in businesses or industries that are “haram” or not allowed in Islam. This includes the pork, alcohol and pornography industries.

Islamic banking also rejects “maysir” and “gharar”, which are concepts referring to gambling and speculative behaviour respectively. These are considered excessively risky behaviour, which may lead to the possibility of immoral practices like fraud or scams.

As one can imagine, a system which prohibits speculative activities and disallows interest bearing loan facilities really differs greatly from what is considered to be conventional banking and finance.