Islamic banking

The simplest example would be a fixed deposit. Say a client invest for a year in an Islamic Bank. The bank would utilise funds in profit and loss sharing ventures, investment in approved stocks and buying and selling in cost plus agreements. The profit on these endeavours would be shared amongst the depositors/bank on a pre-agreed upon ratio. Should there be no profits the depositor would not gain anything and only the deposited amount would be returned.

Important to note if we use the Malaysian banking system that on average interest rate returns are only 1% point above their Islamic banking counterparts.

Fractional reserve banking is counter to the Shariah. Islamic banking operates on a 100% deposit backing system.

All banks also the Islamic ones are based on fractional reserve banking, i.e printing a piece of paper and calling it money. In terms of interest which is forbidden, Islamic banks use many different instruments like lease, Mudaraba, tawarruq, joint venture etc. Some are based on asset and the real economy, others are controversial and just mimicks conventional interest bearing instruments.