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They are sharing profit/(loss) at least theoriticaly. Islamic banks are partners not lenders.
Profits are made through legitimate source which are incompliance with the SHARIAH Law. Like Musharaka, Mudariba, Islamic Bonds and etc Like any buisiness not involving drugs, alcohole, interest and other tabbooed items.
To answer such tricky question, we should go to basic characteristics of Islamic banks. Actual, and theoretical, Islamic banks are traders, agent or partners in business but not the lending institutions. Regardless of the type of institutions (Islamic or conventional), the profit is considered the incentive of doing business.
Although, Islamic banks is adopting the conventional interest rate as benchmark but the profiting mechanism of it is different from the conventional due to using different contracts ( sale, agency, partnership... etc).
People will continue raising such question until a unique rate of return is developed and adopted by the Islamic banks. Thus, it is important to these institutions to look for a benchmark stimulating the real economy rather than movement of the cost of capital among international institutions.
Islamic banks works in the capacity of partners not lenders and share profit and loss on fairly..
Islamic bank lends money to people. But it is kind of a business agreement between the bank and the borrower. The borrower will run the business while bank will look over. The profit of that business will be shared between the bank and the borrower in a prefixed rate documented earlier in the agreement. Islamic bank also provide services and charge money.
When people keep money in an Islamic bank, they become kind of share-holder of the bank's overall business. And share profits in a prefixed rate. Sometimes, a person can invest in a specific project and profits will be calculated specifically for that project.
islamic bank concept is buyer & seller as example opening islamic lc which is called "morabhaa or modarbaa" you & bank signed contract that bank buy good so and so by value of performa invoice then the bank sell this good to u by same value plus his profit which do u agree with each other before this profit consider as on of important source of revenue for bank
The Islamic economic system is concerned with social justice to ensure that none of the parties involved in a transaction is being exploited without at the same time inhibiting individual enterprise. Extended to the Islamic financial system, this means that the funds individuals and/or companies put at risk share the profits or losses resulting from the enterprise.
