Islamic finance is a system activities consistent with shariah based on islamic principles which at the core refuses collecting interest, transactions involving uncertainty and speculation. Furthermore, it is based on islamic economic system and it is not restricted to muslims only. Furthermore, islam as a religion clearly prohibits the ribah interest hence the basic principal of islamic banking is the prohibition of ribah base transactions. Those who devour riba will not stand especially for judgement before allah except as stands one whom satan by his touch has driven to madness. Those who after receiving this warning concerning the haram of riba from their lord, now desist from riba.

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May keep whatever they had previously earned as riba and their case will now be judged by allah alone ,i.e. The islamic state will not deal with that matter but those who return to riba even after this revelation of the quran are companion of fire of hell they abide therein forever. Holy quran surah 02 al baqarah verse 275 ''ribaâ interest,â usury is primarily an economic issue in view of the fact that all religions and mythologies have prohibited, restricted, discouraged, disliked, or degraded riba in one way or the other since the inception of human interaction. Islam, christianity, and judaism have strongly condemned and prohibited riba in its original versions. Later, the clerics of jews and christian church abandoned the prohibition of riba interest,â usury that led the mankind into the economic anarchy of the present era. Islamâ the most modern revealed religion is still upholding the righteous prohibition of riba interest although not in practice in any of the islamic country at governmental level but there is immense enthusiasm for riba free financial system in muslims. The western economists have discussed the issue at large in the twentieth century and many of them are also of the view that the religious prohibition should be brought back into the conscious of the people.

As long as reba interest prohibition was enforced with religious zeal, people were prosperous and the wealth distribution was not abnormal as it is today, and obviously there was not much debate on the subject but since the riba interest was made legal by judo christian amendments in the divine law its destructive fallouts earthed at large. The debate started on riba interest for its literal interpretation to economic implications. No clear concept and universal definition of riba exists, different views and explanations have created much confusion in muslims in the understanding of riba interest. Unless, it is not found that why riba was declared haram prohibited , the definition of riba interest is not possible.'' hazaribah.com the literal meaning of ribah interest as it is used in the arabic language means to excess or increase. In the islamic terminology interest means effortless profit or that profit which comes free from compensation or that extra earning obtained that is free of exchange. Hazrat shah waliullah dehlvi a great scholar and leader have given a very concise and precise definition of interest.

He says, riba` interest â is a loan with the condition that the borrower will return to the lender more than also better than the quantity borrowed. ùˆùžø£ùžøùžù„ù‘ùž ø§ù„ù„ù‘ù ù ø§ù„ù’ø¨ùžùšù’ø¹ùž ùˆùžøùžø±ù‘ùžù…ùž ø§ù„ø±ù‘ùø¨ùžø§ 5 allah has permitted trade and has forbidden interest quran explicitly prohibits riba interest and since quran is an undisputed source of guidance, all muslims unanimously agrees on prohibition of riba interest. There is no difference of opinion among any school of thought on prohibition of riba interest in islamic shariah. One must refrain from making a direct comparison between islamic banking and conventional banking apple to apple comparison. Thus, all dealing, transaction, business approach, product feature, investment focus, responsibility are derived from the shariah law, which lead to the significant difference in many part of the operations with as of the conventional the foundation of islamic bank is based on the islamic faith and must stay within the limits of islamic law or the shariah in all of its actions and deeds. The original meaning of the arabic word shariah is 'the way to the source of life' and is now used to refer to legal system in keeping with the code of behaviour called for by the holly qur'an koran. Amongst the governing principles of an islamic bank are: this essay has been submitted to us by a student.

Interest is considered to be the price of credit, reflecting the opportunity cost of money. Islamic law considers a loan to be given or taken, free of charge, to meet any contingency.â thus in islamic banking, the creditor should not take advantage of the borrower when money is lent out on the basis of interest, more often that it leads to some kind of injustice. The first islamic principle underlying for such kind of transactions is deal not unjustly, and ye shall not be dealt with unjustly 9 which explain why commercial banking in an islamic framework is not based on the debtor creditor relationship. The other principle pertaining to financial transactions in islam is that there should not be any reward without taking a risk. As no payment is allowed for labour, unless it is applied to work, there is no reward for capital unless it is exposed to business risk.

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Thus, financial intermediation in an islamic framework has been developed on the basis of the above mentioned principles. Lastly, for the interest of the readers, the unique features of the conventional banking and islamic banking are shown in terms of a box diagram as shown below: conventional banking islamic banking 1. The functions and operating modes of conventional banks are based on fully manmade principles. The functions and operating modes of islamic banks are based on the principles of islamicâ shariah 2. In contrast, it promotes risk sharing between provider of capital investor and the user of funds entrepreneur. In the modern islamic banking system, it has become one of the service oriented functions of the islamic banks to be aâ zakatcollection centre and they also pay out theirâ zakat. Lending money and getting it back with compounding interest is the fundamental function of the conventional banks 5.

Participation in partnership business is the fundamental function of the islamic banks. It can charge additional money penalty and compounded interest in case of defaulters. The islamic banks have no provision to charge any extra money from the defaulters.

For interest based commercial banks, borrowing from the money market is relatively easier. For the islamic banks, it must be based on a shariah approved underlying transaction. Islamic bank can only guarantee deposits for deposit account, which is based on the principle ofâ al wadiah,â thus the depositors are guaranteed repayment of their funds, however if the account is based on the mudarabah concept, client have to share in a loss position. According to the dictionary.com sharia mean 'islamic canonical law based on the teachings of the koran and the traditions of the prophet hadith and sunna , prescribing both religious and secular duties and sometimes retributive penalties for lawbreaking.