Islamic banking surreal illustration

Sharia Banking: Unlocking Ethical Finance

Soraya Malik in Business & Economy December 2025 • 4 min read.

"Explore how Islamic banking principles offer a unique approach to financial transactions, emphasizing fairness, risk-sharing, and community welfare."

Indonesia, despite having the world's largest Muslim population, still faces challenges in fully implementing Islamic values in all aspects of life. This is particularly evident in the financial sector, where Sharia-compliant banking emerged relatively recently in 1992. These banks operate under the principles of Islamic law, striving to offer an alternative to conventional banking practices that are based on interest.

At the heart of Islamic banking lie the principles of risk and profit-sharing, aiming for transparency, fairness, and financial inclusion. Unlike conventional banking, which relies on interest-based transactions, Sharia-compliant finance emphasizes ethical considerations and community well-being. The key is to understand how these values translate into real-world financial products and services.

This article explores the implementation of Sharia principles in banking, particularly focusing on the case of Perbankan Syariah Cabang Mataram. It examines how these banks manage deposits, provide financing, and navigate the operational challenges inherent in adhering to Islamic financial ethics. We'll uncover the core values, practical applications, and potential benefits of this unique approach to finance.

How Does Sharia Banking Differ From Conventional Banking?

The fundamental difference lies in the prohibition of interest (riba) in Islamic finance. Instead, Sharia-compliant banks use profit-sharing and risk-sharing models. This means that instead of charging or paying interest, the bank and the customer agree to share any profits or losses generated by the investment.

In deposit-taking, Sharia banks primarily utilize two principles: wadiah (safe-keeping) and mudharabah (profit-sharing). Wadiah accounts are similar to current accounts, where the bank guarantees the safety of the funds but doesn't promise any returns. Mudharabah accounts, on the other hand, are investment accounts where the customer shares in the profits (or losses) of the bank's investments.

Wadiah: Essentially a safekeeping agreement. Customers entrust their funds to the bank, and the bank guarantees their return. Think of it like a secure vault where your money sits safely. The bank may offer a bonus (hibah) at its discretion, but it's not guaranteed or predetermined.
Mudharabah: This is a profit-sharing partnership. The customer provides the capital, and the bank manages the funds, investing them in Sharia-compliant activities. Profits are shared according to a pre-agreed ratio (nisbah). If there are losses, they are borne by the capital provider (customer), provided the bank hasn't been negligent.

For financing, Sharia banks offer various products based on principles like mudharabah (profit-sharing), musyarakah (joint venture), murabahah (cost-plus financing), and ijarah (leasing). These methods ensure that the bank and the customer share the risks and rewards of the underlying transaction, promoting ethical and responsible lending practices.

The Future of Ethical Banking

Sharia-compliant banking offers a distinct approach to finance, prioritizing fairness, shared risk, and community welfare. While it faces operational challenges and requires ongoing efforts to enhance understanding and acceptance, its potential to foster ethical financial practices is significant.

For consumers, understanding the principles behind Sharia banking can empower them to make informed choices that align with their values. For financial institutions, embracing these principles can lead to more sustainable and responsible business practices.

Ultimately, the growth and development of Sharia banking contribute to a more diverse and inclusive financial landscape, offering viable alternatives that prioritize both financial success and ethical conduct.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.14710/lr.v3i2.594, Alternate LINK

Title: Implementasi Prinsip Bagi Hasil Dan Risiko Di Perbankan Syariah

Subject: General Medicine

Journal: LAW REFORM

Publisher: Institute of Research and Community Services Diponegoro University (LPPM UNDIP)

Authors: M. Fatahullah

Published: 2010-12-03

Everything You Need To Know

What are the key differences between Sharia banking and conventional banking?

Sharia banking fundamentally differs from conventional banking due to its prohibition of interest (riba). Instead of interest-based transactions, Sharia-compliant banks use profit-sharing and risk-sharing models like Mudharabah and Musyarakah. In deposit-taking, Sharia banks utilize principles like Wadiah (safe-keeping) and Mudharabah (profit-sharing), while conventional banks primarily rely on interest-bearing accounts. For financing, Sharia banks use methods like Murabahah (cost-plus financing) and Ijarah (leasing) to ensure shared risks and rewards.

Could you explain the concepts of 'Wadiah' and 'Mudharabah' in Sharia banking? How do these models function in practice?

In Sharia banking, Wadiah is essentially a safekeeping agreement where customers entrust their funds to the bank, and the bank guarantees their return. It's like a secure vault. The bank may offer a bonus (hibah) at its discretion, but it's not guaranteed. Mudharabah is a profit-sharing partnership where the customer provides the capital, and the bank manages the funds. Profits are shared according to a pre-agreed ratio (nisbah), but losses are borne by the customer, provided the bank hasn't been negligent. Both models provide avenues for Sharia-compliant deposits, an alternative to interest bearing deposits.

What specific financing products are utilized in Sharia-compliant finance, and how do they align with Islamic principles?

Sharia-compliant finance uses several financing products based on specific principles. Mudharabah is profit-sharing where one party provides capital and the other manages the investment, splitting profits according to a pre-agreed ratio. Musyarakah is a joint venture where all parties contribute capital and share profits and losses. Murabahah is cost-plus financing where the bank buys an asset and sells it to the customer at a markup. Ijarah is leasing where the bank leases an asset to the customer for a fixed period.

What are the core ethical values that underpin Sharia banking, and how are these values reflected in its financial products and services?

The core values include the prohibition of interest (riba), promotion of risk and profit-sharing, emphasis on transparency and fairness, and consideration of community welfare. These values translate into financial products by ensuring that transactions are not exploitative and promote ethical and responsible lending practices. For example, instead of charging interest, Sharia-compliant banks use profit-sharing models where the bank and the customer share the profits or losses generated by an investment, fostering a sense of shared risk and reward.

What are some of the current challenges facing Sharia-compliant banking, and what steps can be taken to address them and promote its wider adoption?

While Sharia-compliant banking offers a unique ethical framework, it faces challenges such as the need for greater public understanding, standardization of Sharia rulings, and development of more innovative products. Further research and development are needed to address these challenges and promote the growth and acceptance of Sharia-compliant banking on a wider scale. These challenges could include the limited number of qualified Sharia scholars and the need for robust regulatory frameworks to ensure compliance and prevent misuse of these principles.