Shari’ah principles in Philippine Islamic banking

ISLAMIC BANKING has become one of the fastest developing financial systems, serving millions of Muslims and non-Muslims who are drawn to its ethical principles.

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For Muslim-majority nations in the Middle East and Southeast Asia, Islamic banking is already deeply entrenched. However, in the Philippines, it continues to take shape.

What separates Islamic banking from conventional banking, which primarily revolves around interest-based lending and profit maximization, is that it operates on the Islamic law or the Shari'ah. Rooted in the Quran, the Sunnah (teachings of the Prophet Muhammad), and centuries of jurisprudential development — Shari'ah principles ensure that financial transactions are not only profitable but also transparent and socially responsible.

RISKAND REWARD-SHARING

The most prominent feature of Islamic banking is the absolute prohibition of riba (or interest). In Shari'ah, money is considered a medium of exchange rather than a commodity that can generate profit. Therefore, earning money through lending with a predetermined interest rate is seen unjust and exploitative.

Instead, Islamic banks make money through trade, investments, and partnerships where involved parties share rewards and risks rather than shouldered disproportionately. This principle is seen in Mudarabah (profit-sharing) and Mushakarah (joint ventures) contracts.

In Mudarabah, one party provides capital (the Rab-ul-Maal) while the other (the Mudarib) manages the business. Profits are shared on an agreed ratio. The Rab-ul-Maal shoulders the entire financial risk of the venture unless the losses are due to the Mudarib’s negligence.