I know that Islamic Banking involves the prohibition of interest based loans. But how do Islamic Banks make profit if they charge no interest?
A traditional bank makes money by lending people money and charging interest on that. And they provide various services and charges money for that also. Again they take money from other people and pay them interest, with lesser rate.
An Islamic bank also 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.
the idea behind progibiting usary primarily was to discourage the holding power of money. to be really honest i find islamic banking as more or less the same thing its just playing with the concepts to do exactly the same thing " considering that compond interest is not prevalent any more .....conventional banking and islamic banking are doing the same thing- Al azhar university therefore has made conventional banking as halal - i we really think if we need to have a purely islamic economic system we have to follow the model Col gaddafi formulated for african union - only then an islamic bank can exist ....in a haram economic system a halal institution can not be established!
As far as major principals of Islamic Banking Framework are concerned, other answers may be correct because the framework designed by the Sharia board of a bank may differ with the other one. Some scholars may agree with Sharia board's guidelines and some may not and even some consider it Haraam at all, see this. So one can not consider all Banks(labelled as Islamic) as Islamic Bank on the basis of one Islamic Bank's guidelines/framework. If you believe in the scholars of Sharia Board you may believe in the Bank as Islamic otherwise you won't.
Having said that, Yes, Islamic Banks make money via Mudharabah, Wadiah, Musharakah, Murabahah and Ijarah and other services. They don't deal in Interest at all based on their framework.
But, Islamic Banks may make money via Illegal and/or Haraam businesses.
[Disclaimer: I don't have any proofs]
Why would i even think of it? Just because i believe in that Banks are involved in Money Laundering, playing dirty games in poor countries, funding wars, doing interest related businesses without telling their business partners i.e. Us, etc.
Moreover, they don't provide any sort of facilities that a Business partner/I/Account holder could acquire all their transactions and business deals documents to ensure their money-making-means are legal and halaal.
One may not agree with my personal believes, otherwise, doing business with such banks under the label of Islamic Banking would make his/her profits Haraam.