Sharia, or Islamic law, strictly forbids the lending of money for fees or interest. Today, many modern Muslim countries (such as Saudi Arabia, Pakistan, and Malaysia) still rule according to elements of Sharia law. So, in order to bring banking to the Islamic world, investors have created products and services that are Sharia-compliant, or that follow the principles of Islamic law.

In order to be Sharia-compliant, an institution cannot offer or receive interest, nor can it profit from any activities considered illegitimate, such as gambling, tobacco, drinking, or pornography. But how can Sharia-complicit banks profit if they can’t offer loans at a rate of interest? So far, there are several varieties of transactions that produce profits without breaking Islamic principles, but the most basic method is through risk sharing. According to this model, a Sharia-compliant bank shares the risk of an investment with a customer, and the two split any profits. There are also mortgages, current accounts, and even personal loans that are Sharia-compliant.

The goal of all these modified products is to attract Muslims who don’t currently use established banking because they want to live according to their religious principles. This is an incredibly valuable target demographic because Islam is the largest religion in the world, and for a long time the Western business world wasn’t catering to the needs of this group. So financial institutions think it’s worthwhile to tweak their established methods if it means securing an untapped market.

Tags: banking, investing, Islam, sharia, sharia-compliant