Islamic bank
Islamic banking refers to a system of banking which is consistent with Islamic law and guided by Islamic economics. In particular, Islamic law prohibits the collection of interest, also commonly called riba in Islamic discourse. One form of the argument against interest is that money is not a good and profit should be earned on goods and services only; not on control of money itself. (profit, is allowed as long as the business is lawful.
Islamic Mortgages
In an Islamic mortgage transaction, instead of loaning the buyer money, a bank might buy an item from the seller, and sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. The higher cost might include what would in non-Islamic arrangements have been charged as interest, but there could not be additional penalties for late payment. This arrangement is called "Murabaha". Another approach is Ijara wa Iqtina, which is similar to real estate leasing.
In business deals there are several other approaches to handle a lack of interest. Most important is Musharaka, which is equity financing. Further Mudaraba means if one entrepreneur is doing the work and the other is giving the funds to finance it then both profit and risk must be shared. Such participatory arrangements between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, as it is Allah who determines that failure, and intends that it fall on all those involved. So venture capital and even micro-venture capital are fine, but not loans.
Last not least, Islamic Banking is restricted to Islamically acceptable deals, which exclude e.g. alcohols, pork, gambling etc. Thus ethical investing is the only acceptable investing, and moral purchasing is encouraged.
Islamic banks have grown recently in the Muslim world but are a very small share of the global economy compared to the Western debt banking paradigm. Micro-lending institutions such as Grameen Bank use conventional lending practices, and are popular in some Muslim nations, but are clearly not Islamic banking.
See also: Islamic economics, Islamic bank, green economics, creditary economics, list of Islamic terms in Arabic
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