Hello!
To the best of my knowledge, I think all banks operates by considering interest rates as returns/cost. But according to Islamic Sharia, interest is illegal.
How does it perform??
See here for Islamic banking in detailed.
https://en.wikipedia.org/wiki/Islamic_banking_and_finance
There is no interest rate in Islamic Banks. They are using Islamic tools such as Musharkah ,Mudharbah,Ijarah and Salam.Since coventional banks using interest rate that decided by central bank.
salam
the most tools uses in islamic banks are : Murabaha and Speculation.
but there are mani tools such as Murabaha and Mudaraba There are farms , Istisna'a, selling the ladder, sharing, etc.
thank you.
Simply, traditional banks deal at an interest rate
As for deposits: It is a percentage of the deposit amount.
For loans: It is a percentage of the loan amount
Islamic banks do not have what is called an interest rate but rather there is a so-called ( ratio of profit)
As for deposits: It is a percentage of the amount of profit that the bank gets from investing the deposit.
In loans: there are no cash loans in Islamic banks, but rather a percentage of the profit. Here, also here is a percentage of the profit according to the agreement, so the amount of profit is variable due to the change in profits.
As for murabaha, it is similar to the interest rate on loans to traditional banks, but it is not cash loans, but it is commodity loans, so the Islamic bank buys a commodity and resells it to the customer for a higher amount to achieve. Profits according to the contract form between the customer and the bank.
big difference ...Islamic banks do not operate on interest rate.
the only loan is on Qardhul Hassan, benevolent loan and this loan has no interest what so ever. Islamic Banks use contract based financial transactions such as musharakah, mudharabah, tawarruq etc etc.
@Thank you all for your comments, they are helpful in such though how about the reserve ratio maintained by the Central Bank.
I think it does it involve interest.
It is theoretically expected that the Islamic banks, relying on interest-free banking, shall not be affected by the interest rates; however, in concurrence with the previous studies, the article finds that the Islamic banks in Turkey are visibly influenced by interest rates.
Ergeç, E. H., & Arslan, B. G. (2013). Impact of interest rates on Islamic and conventional banks: the case of Turkey. Applied Economics, 45(17), 2381-2388.
All in all, not only does Islamic banks' profitability seem less volatile than that of conventional peers...
Hassoune, A. (2002). Islamic banks’ profitability in an interest rate cycle. International journal of Islamic financial services, 4(2), 1-13.
Suleyman Abas Conventional banks earn their money by charging interest and fees for services, whereas Islamic banks earn their money by profit and loss sharing, trading, leasing, charging fees for services rendered, and using other sharia contracts of exchange. Still, there are many factors that also can give in depth differences between the two.
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