Islamic banking basics

Islamic banking is a major part of the UAE's financial system, used by Muslims and non-Muslims alike. Understanding its core ideas helps you compare products clearly and talk about them with respect and accuracy.

The core principles

• Islamic financial institutions avoid riba, usually understood as interest, and gharar, meaning excessive uncertainty or ambiguity in a contract.
• Instead of lending money for interest, Islamic finance uses trade, leasing and partnership contracts linked to real assets or activities.
• There is no single worldwide religious authority on finance, so scholars' interpretations can differ between countries and institutions.
• For a personal religious question, speak to a qualified scholar; this lesson explains structures, not rulings.

How Islamic banking is governed in the UAE

• The Higher Shari'a Authority (HSA), established at the CBUAE, is the supreme Shari'a reference for the UAE financial sector. Its standards are final and binding on Islamic financial institutions.
• Every Islamic bank must also have an internal Shari'a supervision committee of qualified scholars, whose appointments the HSA approves.
• These committees must be independent of the bank. They approve products, monitor compliance and publish an annual Shari'a report.
• In 2022, Islamic banking made up 23% of UAE banking assets.

Murabaha: cost-plus sale

• In murabaha, the bank buys an item and sells it to you at a disclosed, agreed markup, which you pay in instalments.
• Example: the bank buys a laptop for AED 4,000 and sells it to you for AED 4,320, payable in 12 monthly instalments of AED 360 (4,320 / 12). The profit of AED 320 is fixed at the start.
• Because the price is agreed up front, the total you pay is known in advance.
• Murabaha is commonly used for personal finance, cars and goods.

Ijara: leasing

• In ijara, the bank or finance company buys an asset and leases it to you for rent.
• The bank owns the asset during the lease, which is the key difference from a loan.
• Leasing structures are used for cars, equipment and some home finance.
• Read the contract to see what happens at the end of the lease, for example whether ownership can pass to you.

Mudaraba and musharaka: sharing profit

• Mudaraba is a partnership in which one party provides capital and the other provides expertise, and profits are shared. Many Islamic bank deposits use this structure.
• Because returns depend on profits, the return on a mudaraba deposit is not a fixed interest rate.
• Musharaka is joint ownership: the bank and customer co-own an asset or project, and the bank can gradually transfer its share to the customer, as in some home finance.

Takaful and sukuk

• Takaful is the Shari'a-compliant alternative to conventional insurance: participants pool contributions in a fund, managed by a takaful operator, that pays claims, sharing risk among themselves.
• Sukuk are the Shari'a-compliant alternative to bonds: tradable certificates that represent ownership in underlying assets rather than a debt.
• Takaful companies also report data to the AECB, so takaful payments are part of the UAE credit picture.