Global Islamic Finance Magazine

What exactly is banking? The simple answer is that it is a process by which funds are transferred to one party from another in exchange for a future payment from the first party. A bank is basically a financial establishment that takes deposits from the general public and then makes a demand loan while simultaneously creating an investment account.

Borrowing activities can also be done both directly or indirectly through various financial markets. Banks, therefore, are the central clearinghouse for most financial transactions on the national level. As we look at what is banking, the term ‘money' is the first thing that comes to mind.

Money comes in many different terms. In common parlance, money is the currency in which most transactions take place, and it is also the asset with the greatest potential for gain. In some instances, a particular country's currency is referred to as the ‘base' currency that acts as the universal currency of trade on the planet.

In terms of a general concept, all money is created equal. It is created through a process known as ‘creative accounting'. This process involves the creation of new financial instruments (deposits) based on transactions that already have occurred. For example, if you deposited $100 into your checking account, the amount you deposited was an ‘out-of-pocket expense' that was recorded on your account, not because of any ‘creative accounting' activity by the bank.

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