In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum, at a particular rate. It is distinct from a fee which the borrower may pay to the lender or some third party. It is also distinct from dividend which is paid by a company to its shareholders (owners) from its profit or reserve, but not at a particular rate decided beforehand, rather on a pro rata basis as a share in the reward gained by risk taking entrepreneurs when the revenue earned exceeds the total costs.
Islamic banking, Islamic finance, or Sharia-compliant finance is banking or financing activity that complies with Sharia and its practical application through the development of Islamic economics. Some of the modes of Islamic finance include mudarabah, wadiah (safekeeping), musharaka, murabahah (cost-plus), and ijarah (leasing).
In finance, a loan is the transfer of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money.
Usury is the practice of making loans that are seen as unfairly enriching the lender. The term may be used in a moral sense—condemning taking advantage of others' misfortunes—or in a legal sense, where an interest rate is charged in excess of the maximum rate that is allowed by law. A loan may be considered usurious because of excessive or abusive interest rates or other factors defined by the laws of a state. Someone who practices usury can be called a usurer, but in modern colloquial English may be called a loan shark.
A merchant bank is historically a bank dealing in commercial loans and investment. In modern British usage it is the same as an investment bank. Merchant banks were the first modern banks and evolved from medieval merchants who traded in commodities, particularly cloth merchants. Historically, merchant banks' purpose was to facilitate and/or finance production and trade of commodities, hence the name "merchant". Few banks today restrict their activities to such a narrow scope.
Riba is an Arabic word used in Islamic law and roughly translated as "usury": unjust, exploitative gains made in trade or business. Riba is mentioned and condemned in several different verses in the Qur'an. It is also mentioned in many hadith.
Lombard banking refers to the business of Italian moneylenders generally referred to as "Lombards", even though many originated from Northern and Central Italian regions other than Lombardy. The term was often used in a derogatory sense, as Lombard banking was associated with the sin of usury.
The history of banking began with the first prototype banks, that is, the merchants of the world, who gave grain loans to farmers and traders who carried goods between cities. This was around 2000 BC in Assyria, India and Sumer. Later, in ancient Greece and during the Roman Empire, lenders based in temples gave loans, while accepting deposits and performing the change of money. Archaeology from this period in ancient China and India also shows evidence of money lending.
A discretionary deposit is the term given to a device by medieval European bankers as a method of circumventing Catholic canon law edicts prohibiting the sin of usury. At the time, most Christian nations heavily incorporated Biblical scripture into their laws, and as such it was illegal for any person to charge interest on a loan of money.
Murabaḥah, murabaḥa, or murâbaḥah was originally a term of fiqh for a sales contract where the buyer and seller agree on the markup (profit) or "cost-plus" price for the item(s) being sold. In recent decades it has become a term for a very common form of Islamic financing, where the price is marked up in exchange for allowing the buyer to pay over time—for example with monthly payments. Murabaha financing is similar to a rent-to-own arrangement in the non-Muslim world, with the intermediary retaining ownership of the item being sold until the loan is paid in full. There are also Islamic investment funds and sukuk that use murabahah contracts.
Vix pervenit is an encyclical, promulgated by Pope Benedict XIV on November 1, 1745, which condemned the practice of charging interest on loans as usury. Because the encyclical was addressed to the bishops of Italy, it is generally not considered ex cathedra. The Holy Office applied the encyclical to the whole of the Roman Catholic Church on July 29, 1836, during the reign of Pope Gregory XVI.
A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets.
The New York State Banking Department was created by the New York Legislature on April 15, 1851, with a chief officer to be known as the Superintendent. The New York State Banking Department was the oldest bank regulatory agency in the United States.
Islamic finance products, services and contracts are financial products and services and related contracts that conform with Sharia. Islamic banking and finance has its own products and services that differ from conventional banking. These include Mudharabah, Wadiah (safekeeping), Musharakah, Murabahah, Ijar (leasing), Hawala, Takaful, and Sukuk.
The economic policies proposed under the banner of "Islamisation" in Pakistan include executive decrees on Zakāt (poor-due), Ushr (tithe), judicial changes that helped to halt land redistribution to the poor, and perhaps most importantly, elimination of riba. Perhaps the foremost exponent of Islamisation among Pakistan's rulers—General Muhammad Zia-ul-Haq—advanced a programme in 1978 to bring Pakistan law in line with the principles of Sharia law.
Profit and Loss Sharing refers to Sharia-compliant forms of equity financing such as mudarabah and musharakah. These mechanisms comply with the religious prohibition on interest on loans that most Muslims subscribe to. Mudarabah (مضاربة) refers to "trustee finance" or passive partnership contract, while Musharakah refers to equity participation contract. Other sources include sukuk and direct equity investment as types of PLS.
Ijarah,, is a term of fiqh and product in Islamic banking and finance. In traditional fiqh, it means a contract for the hiring of persons or renting/leasing of the services or the “usufruct” of a property, generally for a fixed period and price. In hiring, the employer is called musta’jir, while the employee is called ajir. Ijarah need not lead to purchase. In conventional leasing an "operating lease" does not end in a change of ownership, nor does the type of ijarah known as al-ijarah (tashghiliyah).
The Islamic banking and finance movement that developed in the late 20th century as part of the revival of Islamic identity sought to create an alternative to conventional banking that complied with sharia (Islamic) law. Following sharia it banned from its practices riba (usury) – which it defined as any interest paid on all loans of money – and involvement in haram (forbidden) goods or services such as pork or alcohol. It also forbids gambling (maisir) and excessive risk.
Challenges in Islamic finance are the difficulties in providing modern finance services without violation of sharia. The industry of Islamic banking and finance has developed around avoiding riba by avoiding interest.
Valid when made is a United States legal doctrine that holds that the terms of a loan, if legally valid when the loan was made, remain valid after the loan is sold or assigned to a third party. Historically, the doctrine has often been applied to loans made by national banks and then transferred to secondary lenders. Under this doctrine, debt buyers may purchase loans from national banks and collect interest at the same rate as the original lender, regardless of the usury laws of the state they operate in.
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